Facebook’s Libra Cryptocurrency Launch

Facebook’s Libra Cryptocurrency Launch – What Are Their Real Intentions?

The idea in a nutshell

  • As is the case with many keynote announcements from big technology companies, Facebook have attempted to spin positive externalities (term defined below) associated with their idea as their true intent.
  • This week’s launch of their own ‘cryptocurrency’, announced as an intent to ’empower’ people without a bank account, has been pitched as benevolence.
  • A quick consideration of their current problems suggests potentially different motivation.
  • Facebook as a product is declining in relevance, the company has devalued it’s reputation, and it doesn’t pay the tax that many people think it should.
  • This announcement appears designed to address those problems, rather than solve any global poverty issues.

Silicon Valley and Externalities

An externality is an Economic term, typically a negative associated with production, often described as ‘a cost not borne by the supplier’. It’s a market failure in a way. When you buy an airfare, and the price of the ticket doesn’t include the cost of the carbon dioxide which is released into the air by your ‘plane’, that CO2 cost has been externalised.

Some would say that it’s the job of the government to ensure that the full cost is paid, to ensure efficient levels of usage – in this case by taxing plane tickets so they can cover the cost of CO2 removal. Such a tax would raise the price of plane tickets and reduce the volume sold.

However, it is absolutely possible for companies to create ‘positive externalities.’ If a(n) (negative) externality is a cost not borne by a supplier, I guess a positive externality is a benefit not paid to the producer.

In fact, it’s fair to say that Google’s page rank and Facebook’s business models rely on them for their businesses to succeed.

  • Google’s Page Rank algorithm uses others’ activities – specifically inserting a link into an article they put on their website – to determine the value of the destination page. That’s a positive externality.
  • Facebook sell products using patterns in the data they obtain from what you post. That’s another positive externality.

Facebook says it is ‘giving the world the power to form communities’ and ‘bringing the world close together. Google is organising the world’s information. Those statements are true, but they’re positive externalities of the platforms they operate.

Their intent is commercial – to make as much money as they can. Not that there’s anything wrong with that.

So, what is really driving Facebook’s actions?

It’s rarely possible to do more than guess what someone else is thinking. Even if you ask them what they think and they tell you, they could be lying. Motivation can follow need, however. Necessity is the mother of invention. Here are some of the problems Facebook appear to find themselves confronting

  • Concerns over the long term viability of its products:
    Technology products come and go. Technology products are coming and going increasingly quick. Ten years ago, BlackBerry was the only phone business people wanted. Then they forgot all about it and bought iPhones instead.Informed commentators point out that only 10% or so of the companies that constituted the Dow Jones index 100 years ago are still around.Facebook has lost 15 million users over the last 2 years.Additionally, there is a growing amount of information showing mental health damage (itself a negative externality of their platform) which is being caused by social media.

    Recent announcements by governments around the world suggest the very real potential for monopolies like Facebook and Google to be sliced and diced up into smaller competing companies.

    Together, these form just some of the risks Facebook is facing. The same global audience who found Facebook so quickly can turn away from you with equal speed.

  • Reputation damage :
    Axios called 2018 a ‘staggering’, ‘long nose dive’ of reputational damage for Facebook. The Cambridge Analytica scandal and election interference (amongst other things) contributed to the tumble.

Source : Axios

  • A desire to minimize tax:
    While the world reels a decade later from the ramifications of the global financial crisis, Facebook is as notorious as the rest of Silicon Valley for minimizing its tax.

How does Facebook’s Libra announcement assist Facebook in these areas ?

It’s worth noting that the 3 of Facebook’s challenges I’ve listed are each addressed by their recent Libra Cryptocurrency announcement.

  • Improve reputation by partnering with reputable companies :
    If my reputation had suffered, I might want to improve trust in it. The launch of their cryptocurrency is in partnership with 35 of the world’s most trusted brands, including Vodafone and Mastercard. By partnering with those companies, Facebook is borrowing from their Halo.
  • Spread the risk by diversifying my product suite:
    If my product’s fast won success looked like it might be waning, I might want to place some other bets around the table. Facebook might not be here in 10 years but money, in some form, almost certainly will.
  • Avoid tax by creating my own currency:
    How can Facebook be taxed as an International virtual country which has it’s own money?

Good things about the announcement and intent (positive externalities)

It would be wrong to write the idea off altogether before it’s been given a chance. There are some potential benefits. Facebook’s new currency

  • Promotes Blockchains which are a good thing:
    An international Blockchain is a useful thing, especially one which promotes the ideas of smart contracts. Facebook’s brand and newsworthiness will create an international currency which is accepted in new places. It also introduces Blockchain and smart contracts to a more mainstream audience and might give them the impetus they need to progress. Both Blockchains and smart contracts are important and insufficiently understood concepts – in my view.
  • It could solve the major problem associated with Blockchains – energy use:
    If Facebook’s interest and R&D spend sorts out the power consumption problems associated with the technology, that too would be a very good outcome.
  • It could lower international transaction costs:
    It may offer lower international transaction costs (which might be passed on to users). The new currency offers alternatives to what has historically been an industry with fat margins (of the order of 0.5 percent for credit card transactions) run by banks. Facebook have said that International transactions will be free. It’s not clear at this stage what sort of free they mean. Will there be exchange rate margin ‘hidden fees’?
  • It could be ‘safe’:
    If it’s regulated as Facebook in each country the currency operates. The currency will be “fully backed” (term not explained in the white paper). Fully backed could be mean a ‘gold standard’ equivalent or a proportional holding from sovereign countries in Facebook’s currency.

Cons / risks

There are, however, some evident risks, even with the level of information we have already.

  • Who sets the interest rate?
    The interest rate is a key component of the government’s influence over the economy. Who sets monetary policy when Facebook own the currency? Do Facebook?! Central banks use the interest rate to affect imports and exports. China has been accused of holding the yen low to encourage exports for a long time now. It’s one of the things China is right about. Wait, are we saying Facebook can influence the exports of the countries it wants to?
  • Unclear asset holding rate :
    I read the white paper Facebook released on the new currency. It openly states that only one signature (Mark’s?) is required to print more currency. Depending on the asset holding ratio ‘fully backed’, this could be a license for a private company to print money. How much money should a private company print? Infinity.
  • The future is the biggest risk:
    Future plans have not been made clear. Even if they had been disclosed, they may change in the future. Even now, Facebook openly say that they don’t need the 35 partners they now have (those whose reputations are being borrowed). Medium term, this will be a Facebook-only controlled currency.
  • Financial instruments can be used to destabilise and influence:
    Some say the entire Venezuelan economy was mortgaged in the 60s by the USA providing it money it couldn’t repay. The same method is now a risk identified in China’s generosity in the South China Sea. Financial instruments can be used to insert large quantities of debt or risk into countries. Are we giving Facebook these powers?
  • What about regulation in less well known markets like Papua New Guinea (PNG?)
    Facebook were at pains to point out that they would be spending a lot of time sitting down with ‘the regulator’. My concern is: How good is the financial regulator in the worst economy in the world? Because that is the risk we need to manage. What could a gap in thorough financial market regulation do, if Facebook had a back door to operate nefariously in a poorly regulated market?

In conclusion

‘The louder he talked of his honour, the faster we counted our spoons.’ When someone is telling you how honest they’re being – watch out.

However, save the benevolent intent of billionaires AFTER they remove themselves from their businesses, we should be very careful and concerned about their intent and not distracted by the positive externalities they describe. Externalities are the side effects of their real intent. Facebook’s announcement of a new Cryptocurrency seems like a far simpler beast – a strategic component to address some of the material problems they find themselves facing.