Wharton prof explains Facebook’s new currency

Wharton Professor Kevin Werbach explains Libra: whether it’s actually a cryptocurrency, Facebook’s interest in it, and looming regulatory challenges.

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In June, Facebook formally announced the cryptocurrency Libra, a decentralized digital currency founded with investments from Facebook and partner companies like Visa, Uber, MasterCard, and PayPal. The company’s plan calls for it to be operated using digital wallets—third-party or through Facebook-owned WhatsApp and Messenger—and, ostensibly, aims to expand worldwide access to those who have a smartphone but not access to a bank account.

Here, the Wharton School’s Professor of Legal Studies and Business Ethics Kevin Werbach unpacks the company’s white paper and explains how the currency works, how Facebook benefits from it, and why the social media giant may be well-positioned to boost its privacy reputation through this unusual venture. 


This is being billed as Facebook’s cryptocurrency. Is this a cryptocurrency, and what does it mean for Facebook to claim ownership over this?

I would consider Libra a cryptocurrency. There’s been a great deal of debate about how it should properly be classified, but it’s designed as a form of digital currency that will actually function as a medium of exchange like traditional fiat currencies. It’s based on distributed ledger technology, like Bitcoin and other cryptocurrencies. It’s not a purely decentralized permissionless system like Bitcoin; it’s based on a network of identified validators. But I still think it’s appropriate to call it a cryptocurrency. One of the challenges in the whole blockchain and cryptocurrency space is definitions are somewhat unclear and there are religious wars about what actually counts. Libra is distinct from the fully decentralized permissionless systems, such as Bitcoin, but it’s also very different than either traditional state-issued currencies, or private e-money products like loyalty point systems and so forth.

When you say fiat, you mean what a country issues?

Like the dollar. That’s the name for a currency backed by a state.

And why is this described as Facebook’s cryptocurrency?

Libra is designed as a platform. Facebook has created the technology, but the proposal is to set up a Libra Association. They have recruited 27 partner companies, and the way the system is described in the white paper, Facebook would only be one validator on that network and wouldn’t control the operation of the network. Facebook also has a subsidiary called Calibra that will develop software to use on the Libra network, such as wallets to hold currency. But other companies will, at least in theory, have equal access to develop software for the network. There’s appropriately a great deal of skepticism about whether this will truly be outside the control of Facebook, but the design of the system is for it to be something Facebook establishes but then gives up control over.

And Facebook collects interest on this?

Libra is what is called a stablecoin. The coin is backed by a basket of currencies, including but not limited to dollars. Companies that pledge money to back the cryptocurrency put the money into what is called a reserve, and they earn interest on the money in the reserve. So, the proposal is not that Facebook would get all that money; it’s the companies that contribute the funds to the reserve. It’s complicated. There are two tokens: the Libra token itself, which is the coin people will use to spend as the medium of exchange; and something called Libra investment tokens, which only the partners in the network who pledge funds would get, and that would entitle them to interest.

Libra is, to my understanding, supposed to be more like the dollar in how you acquire it?

It’s a medium of exchange. The classic economic definition is money is a medium of exchange, a store of value, and a unit of account. And the cryptocurrencies such as Bitcoin, so far, have not been particularly effective in being useful as a medium of exchange. People will buy cryptocurrencies to speculate in the value of them going up, but that’s seeing them as a speculative asset and not a form of money. People will buy them as a hedge, that they will store value, for example, independent of inflation from the local currency, but there’s still a very small level of real transactional activity where people are using Bitcoin or another cryptocurrency to purchase actual things in the world. And one of the big reasons for that is these currencies have typically been so volatile. If the price of your bitcoin could go up or down by 50 percent in a short period of time, then you, as an individual, may not want to give up your Bitcoin to buy a product and the merchant is not going to want to take Bitcoin in return for something. Libra is designed to be stable, not precisely pegged to a dollar but pegged to a basket, so that it would not change in price very rapidly.

Who is Libra targeted toward? They say it’s partly for people who can’t access banks easily, but that seems like a stretch.

This is a big question. Facebook has put out a white paper and made an announcement and recruited this initial group of partners that includes major companies like Visa and so forth, and they’ve said they anticipate having 100 partners by the time they launch the network. All those partners have different interests and reasons for wanting to be part of this. One of the key value propositions of a cryptocurrency is it’s a global currency that doesn’t need to go through the existing banking and payment networks. For cross-border transactions, there are typically significant fees and delays in sending money across borders for things like remittances. 

This is something that’s been identified for a long time as a potential application of cryptocurrencies, but Facebook has identified it as a particular opportunity for Libra. There are a couple billion people in the world who don’t have access to the banking system. For some time, people have pointed to cryptocurrencies as a potential way to address that gap, because they’re independent of the existing financial infrastructure. And because Facebook has several billion people using its existing messaging services, one can see how it might address a part of the market not being addressed by the current banking system. That’s one explicit target for Libra. There may be others, but at this point we just have an announcement.

Is there a regulatory concern with Visa and MasterCard partnering with this?

There are a massive number of regulatory concerns about Libra. This is creating money at a very large scale globally. 

There are very serious concerns about money laundering and criminal activity. There are concerns about whether potentially this is creating a bank, and therefore it needs to have the kinds of regulatory controls banks have. And there are concerns this is creating a new form of money which conceivably could displace existing central bank management of the monetary system. Those are just a few of the regulatory questions. There are regulated entities participating in Libra, but independent of that, there are a whole series of questions that regulators in jurisdictions around the world have to work through. Several members of the House Financial Services Committee in the U.S. Congress sent a letter to Facebook to put a moratorium on further developing Libra until they can address these issues. They’re going to have a hearing with Facebook executives and others to ask these kinds of questions. There certainly are a large number of regulatory issues to be addressed.

Facebook has a terrible privacy reputation. Won’t that also be an issue?

Well, the way Facebook has outlined Libra, it is completely separate from Facebook’s services. Calibra is a subsidiary of Facebook, which is providing its own wallet software, but Calibra is a service provider interfacing with the network. It’s not operating the actual validation of the transactions. Facebook has stated this is designed so that Facebook, or anyone else, won’t have access to private transactional information by virtue of operation of the network. 

Given Facebook’s track record, there’s a great deal of skepticism about the privacy concerns. No doubt regulators are going to press Facebook on how it can create confidence that privacy will be preserved here. The point I made in a piece I did in the New York Times is that’s exactly why Facebook is pursuing this avenue. The virtue of blockchain and distributed ledger technology is that they can provide technical guarantees of privacy that are necessarily independent of any central trustworthy actor. So, given how much skepticism there is of Facebook’s commitments, this is probably the only way they might be able to convincingly show they are building a platform in which privacy is protected. I’m not certain they’ve done that, but that’s what they’re proposing to do.

If you had to bet, is this likely to succeed?

You know, betting against Facebook has not been a very profitable thing, despite all their problems. I think if it gets off the ground—which is far from certain given all the regulatory concern—Libra has a very good chance of at least getting significant adoption. They do have a tremendous amount of heft behind it with Facebook, and the partners, and they’ve thought through the design of the system very carefully. There are a number of distinguished academic economists as well as internal people at Facebook who have worked on developing this. How successful it is and how much it will displace the existing monetary system is an open question, but given the existing infrastructure Facebook has to leverage, if they are able to overcome this initial regulatory hurdle, I think it has a very good shot at success.