Stablecoins Revisited
If there was ever a time for a boring company with no reputation issues to introduce a vanilla single-currency stablecoin, now would be it. The push back that Libra’s far more ambitious plans have gotten reminds me of an old joke:
A college student calls her parents to deliver shocking news of having fallen in love, being pregnant and dropping out of school. Once her parents stop yelling, she tells them that she was just kidding and none of those things are true, but that she did get a C in math, which in light of all that could have gone wrong is not that bad.
I like the design of Libra and think its governance model is a good one. But even I have to admit that it’s too ambitious, even if there wasn’t the Facebook reputation issue. This technology greatly challenges the status quo and that has a lot of people reaching for the worst case scenario. I’m already tired of having to explain to otherwise intelligent people why this isn’t some nefarious private currency and more akin to a money order or travelers cheque. (don’t even get me started on JPM Coin not being a coin).
None of this is anyone’s fault but mine, as I made the classic expert mistake of underestimating how ready the world was for a big change, and it wasn’t until reading an insightful newsletter article from Ben Thompson that I fully understood why. At issue are the different ways people think about data and money.
Data is already a deregulated and decentralized global phenomenon. Outside of a few authoritarian countries, the internet is an open platform where bits move freely. Money on the other hand is still a tightly controlled national phenomenon. As a US citizen, there are almost no laws that control how or why I send a text message to a friend abroad. But there are many laws that regulate how I can send the same person money.
Pure cryptocoins like Bitcoin are one solution to this dichotomy. Since the data is the money, there is no way for governments to control it. This solution works for some people but is too radical for widespread adoption anytime soon, and prevents regulated financial institutions from engaging.
Libra tries to walk a tightrope in the middle. At the protocol layer — the blockchain itself — it proposes an open global network of data, free and open for anyone to use. At the application layer, which includes regulated entities like Calibra, the system is to comply by national money regulations, as David Marcus repeated ad nausea to congress. It’s a noble attempt, but unlikely to be accepted. If the project were to succeed, then the top layer would inevitably bleed into the bottom one.
What happens at the application layer only really matters at the edges, where people create and redeem new coins via the banking system. If a stablecoin ever becomes ubiquitous, creation and redemption don’t matter anymore as users become comfortable using the proxy itself as cash — no different than being comfortable maintaining a PayPal balance and not constantly draining it to your bank account.
Such a future state would make enforcement of national laws on AML and sanctions difficult as Libra tokens would be digital bearer assets similar to a duffel bag full of cash. I’m not a fan of strict AML/KYC/Sanctions laws as they punish the 99% who are not criminals to catch the 1% who are, but they are the law and the law cannot be ignored. So long as governments get to issue fiat money, they get to set the rules on how people use it.
For over a year now, I’ve been developing my stablecoin thesis around the fact that since money is just data, it should be permitted to move around as freely and cheaply as any other kind of data. I still believe this, but have to admit that it’s too early.
And so, now that Libra has totally freaked out the powers that be about what is technologically possibly, it may be a good time to introduce a less ambitious version. It would still be a net benefit because a transparent and distributed payment network is better for users and regulators, a key-based wallet system means less fraud, and programmability enables new business models.
For Libra itself to launch, it will have to reign in many of its ambitions. I for one don’t see how the powers that be will allow pseudonymous ownership of the tokens, regardless of the wallet being used. It might also have to dump the basket idea as it needlessly complicates things and brings in the awkward economics of negative interest rates.
All of that said, even if Libra never launches, the very attempt will always be remembered as a milestone for the industry, a sort of digital crossing of the Rubicon. Despite all of the controversy, concern and criticism, I can’t help but smile at the fact that the single biggest fear out there is no longer about the technology failing or being pointless. The biggest fear now is what happens if this technology succeeds.
The opinions expressed here are strictly my own and not that of any client, employer or associate
