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Facebook’s Libra Faceplant: Beware of CEO Bright Ideas

Summary:
The Wall Street Journal tonight, in Inside Facebook’s Botched Attempt to Start a New Cryptocurrency, offers some additional details on how Facebook came up with the barmy idea of Libra, which it set forth in a short document that mouthed a whole bunch of finance and business gimmick-speak without showing much understanding of banking or a clear idea of why customers would change behavior and adopt what would amount to a foreign currency on a large scale. Before we go much further, one of the obvious flaws in the Libra project is that Facebook (and too many members of the press) don’t understand the difference between a cryptocurrency and a payment system. Facebook seems to have naively believed if it could just launch a really big cryptocurrency, with its big customer base, they would

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The Wall Street Journal tonight, in Inside Facebook’s Botched Attempt to Start a New Cryptocurrency, offers some additional details on how Facebook came up with the barmy idea of Libra, which it set forth in a short document that mouthed a whole bunch of finance and business gimmick-speak without showing much understanding of banking or a clear idea of why customers would change behavior and adopt what would amount to a foreign currency on a large scale.

Before we go much further, one of the obvious flaws in the Libra project is that Facebook (and too many members of the press) don’t understand the difference between a cryptocurrency and a payment system. Facebook seems to have naively believed if it could just launch a really big cryptocurrency, with its big customer base, they would easily be persuaded to trade it among themselves.

Ahem, aside from not having considered “Who want to have to trade a volatile foreign currency into what I need to use to pay my bills and incur FX transaction costs and tax issues every time I do so,” payment systems have to do a hell of a lot more things that just create a pile of something people might if you are lucky buy and sell. You need to provide recordkeeping and anti-fraud protections, adhere to Know Your Customer and anti-money laundering rules (unless you want to be a financial outlaw), and provide information to the tax man. That’s only a partial list; Clive can fill in the many points I skipped over.

One of the reason Facebook’s buzzword heavy concept document was treated far more seriously that it should have been was that the social media giant had signed up 27 partners, including, critically, payments systems heavyweights like Visa, Mastercard, PayPal, as well as Famous Big Companies You Heard of like eBay, Uber.

Paypal was first to depart, followed shortly by Visa, Mastercard, eBay, fintech startup Stripe, payments player Mercado Pago, and Booking Holdings. That means more than 1/4 of the original backers have dropped out. More important, virtually all the partners who knew anything about payments are gone (the only one left is European payments processor PayU, which has 1,500 employees versus Visa’s 20,000).

Oh, and Libra has also lost its product head.

Yeteven non-finance types could see through Libra, raising the question as to why big companies were willing to sign on in the first place. As reader bob from Syracuse speculated:

This has to be a Time Warner buys AOL top.

I’m just beginning to look at this scheme and am amazed at the lack of any details at all.

I would have liked to see the pitch meetings from Facebook to their foundation members. It’d be like watching a jackal being pitched by a rat- Sure, we’ll sign on. At the very least we’ll get to eat the rat and he might bring some friends.

Our Clive came to broadly similar conclusions, parsing an earlier Wall Street Journal article:

 I put on, dutifully, my yellow waders.
Let’s start at the top or nearabouts:

[the coin] … which will be pegged to a basket of government-issued currencies to avoid the wild swings that have dogged other cryptocurrencies…

So you can’t avoid currency carry risk. And how do you redeem your coin holding if you want out? Where, and what, is the market? In which jurisprudence and subject to what regulatory oversight? With how much liquidity?

Oh, and I don’t see any mention of FDIC insurance or any other deposit guarantee carrier. So what, if any, rights do you have for institution solvency protection, to what monetary amount? And who is paying for the fund to protect depositors? Or is it like Jack giving his mother’s cow to the guy with the magic beans?

Talks with some of the partners are ongoing, and the group’s eventual membership may change, the people added.

Okay, so this is “talks”. No contracts and not even a Memorandum of Understanding, by the sounds of it. Just a lot of unicorn farting.

Regulatory hurdles in the U.S. and elsewhere are high. Some members have expressed concerns that the token could be used to launder money and finance terrorist organizations, some of the people said, a persistent problem with bitcoin and other cryptocurrencies.

Youbetcha. So, they’ve not solved the old gremlins of Know Your Customer checks (who will do the screening for politically exposed persons, sanctioned entities or individuals and maintain the watchlist for suspicious activity?). Or Anti-money Laundering (how will source-of-funds be monitored and controlled?). Or fraud and loss control (by what rules will scammers, con artists, malicious or criminal activity be identified and blocked, plus rules for chargebacks to protect innocent victims of the aforementioned?). “Likes” on Facebook or a network of Facebook “friends” is not going to be sufficient.

Facebook won’t directly control the coin, nor will the individual members of the consortium—known as the Libra Association. Some of the members could serve as “nodes” along the system that verify transactions and maintain records of them, creating a brand-new payments network, according to people familiar with the setup.

Then, in which case, I’m missing where the revenue stream to pay for all this comes from.

Keeping the cryptocurrency network separate from Facebook’s platform gives the social-media company some cover with users and regulators should problems arise, a big advantage at a time when it is under pressure to address privacy shortcomings. Yet Facebook, as the developer of the underlying technology, could exert considerable influence over it.

The last time I saw that much handwaving was from the back of the State Landau when Prince Harry married Meghan Markle.

Still,

That poor little word had to do so much heavy lifting for this paragraph, it is seeking medical retirement…

the lure of Facebook’s nearly 2.4 billion monthly active users was too strong for many companies to pass up. Card companies have long fretted that a technology giant could muscle into their business, creating a payment option that cuts out card networks. Participating in Libra allows them to closely monitor Facebook’s payment ambitions while sharing in the upside should the project gain traction with consumers.

Corporate PR-speak for “let’s get them to waste a lot of time, resources and money in the vague hope this might amount to something and, if it does threaten to become a contender, we’ll make it wear some concrete boots and push it into the Hudson. Or off the Golden Gate Bridge, depending on where they headquartered it.

Back to the current post. In fact, from the very beginning, Libra has has all the hallmarks of a CEO project launched after he came back from a conference where he got his head filled by consultants selling The Next Hot Thing or fellow CEOs trying to talk sagely about their new forward-thinking initiatives. Smart managers who work in close proximity to the C-suite make a point of being out of town shortly after those sort of confabs, lest they be tasked to, or worse, asked to lead, one of these Hall of Hollow Mandates initiatives.

The fact that Libra asked for nothing from their “Association members” save the use of their name demonstrates how Libra was vaporware. Oh, except the Journal reveals they didn’t even agree to that:

Some companies thought Facebook overstated their involvement when it announced the project in June and resented being described as “founding members.”

As Clive correctly guessed, all the members did was sign a non-binding agreement that they’d commit $10 million each if the project actually started to get anywhere. $10 million is couch lint for these companies. In fact, the ones that signed on because they were worried they might somehow miss out on something big no doubt recognized that if they were asked to ante up that $10 million, it was way lower ticket than a lot of corporate vanity projects they’d had to bury quietly.

The current Wall Street Journal account confirms speculation I’ve heard, that Zuckerberg has surrounded himself with yes men, so no one had the nerve to tell him his Libra idea was silly. But why didn’t Sheryl Sandberg speak up? She’d worked at Treasury and ought to have known the idea was going to land like a lead balloon.

Initially, one might have thought Zuck didn’t care, as long as the stock got a pop for a while as he created the impression that a big new revenue stream was around the corner as Facebook was getting roughed up around the world for its bad practices plus was short on growth opportunities. But Facebook does appear to be trying to soldier on despite the early defection of essential players, plus plenty of wrath from central bankers and US Congresscritters.

The juicy details from the Journal, which oddly puts “Libra” in lower case. Is this a new Facebook affectation that the Journal is taking up, that Libra as a currency wanna-be, should be lower-case like “yen” and “pounds”?:

….the libra project is on life support…

Libra’s bumpy rollout is a big setback to Facebook’s efforts to reduce its near-total reliance on targeted advertising. It is also a warning to technology giants that are expanding into financial services. Apple Inc., Amazon.com Inc. and Google are each working on payments projects of their own, which could give them access to sensitive personal financial data at a time when public trust in Silicon Valley is eroding….

Facebook shows no signs of abandoning libra…

Goodie, we’ll have more opportunity to ridicule Facebook.

Even with ex-PayPal CEO David Marcus heading the project and Zuckerberg approving it, there has been visible internal skepticism:

Others had a less optimistic view. Finance chief David Wehner asked Mr. Marcus how libra would recoup its costs and make money. Staff at WhatsApp, a messaging service owned by Facebook, viewed integrating libra into the app as a low priority….

Tensions have grown within Facebook. Senior executives have asked Mr. Marcus why a new cryptocurrency—with all the baggage that comes along with one—is necessary to advance Facebook’s finance ambitions. Couldn’t the company work with dollars or bitcoin, they asked?

This part is priceless:

Around that time, representatives from several companies in the Libra Association hopped on a conference call to coordinate their responses to the growing backlash. A cacophony of voices drowned out potential solutions: A glitch in the call-organization software turned on many people’s microphones at once.

Efforts to find new jackals, um, friends, are not going well either:

Mr. Marcus, undeterred, has been reaching out to major U.S. banks about joining libra, according to people familiar with the matter, which could allow consumers to load money into their libra wallets from their checking accounts.

JPMorgan Chase & Co. and Goldman Sachs Group Inc., however, had rejected Facebook’s invitation back before the June announcement. Both declined in part because they worried a cryptocurrency could be used for criminal activities that would violate strict money-laundering and sanctions rules.

And Clive describes another big fly in the Libra ointment, in response to a barmy Business Insider article touting Libra as a potential US champion to contest China as a payments player for emerging economies:

The only reason China is even vaguely getting into a digital currency is as an extension to their Social Credit initiative. The last thing the Chinese government will want is an option to bypass a key information source in their surveillance (i.e. by using cash transactions) so it might make sense for them to foster a non-cash payment system which is also under domestic control.

But none of that augurs well for Libra. If China wants to enable a digital currency it will demand rigid ownership, policy and data access oversight. Unless Facebook is willing to cede that to the Chinese government, Libra will not be allowed to establish any domestic foothold in China.

The Journal story depicts Marcus as having developed the vision and key design elements of Libra. That calls his competence into serious question (was he lucky? did he fail upward? was he very good at finding and managing good subordinates and never really mastered detail?). Or is Facebook’s new PR strategy to pin Libra squarely on Marcus, so that if (meaning when) it goes splat, Zuckerberg has already been distanced from it?

That is not to say that Facebook won’t be able to launch a digital currency. But the main uses are overwhelming speculative trading and illicit transactions. The idea that Facebook can create a low-cost transfer system in an alien currency seems dodgy. Its direct competitors are with Western Union and international bank wire transfers. Western Union charges 2% and banks in the US levy fixed fees and have paperwork which make bank wires very costly and inconvenient. However, neither forces users to trade through an intermediate currency, which creates FX risk that could often exceed the Western Union charges.

In other words, if Facebook keeps throwing its resources at Libra, it can probably get something done. But don’t expect it to amount to much, particularly in terms of profit.

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