What’s up with Facebook’s Libra project?

This week brought news that PayPal has withdrawn from Facebook’s Libra project, following significant regulatory scrutiny. And a leaked transcript of a recent company “all-hands” suggests the strain of taking on the combined might of the world’s financial system is beginning to take its toll on senior management.

But the regulatory hurdle is, in fact, just one of several obstacles that could inhibit Libra’s Facebook’s grand pivot from social networking to financial services. Let’s unpack them.

A vehicle for criminality

Those of us working in financial services are used to hearing about “money-laundering,” as we’ve all sat through endless boring compliance training sessions. But it’s a much bigger problem in the “real world”.

Money laundering is a formidable challenge for Facebook. Crypto has already proved fertile ground for bad actors, and Libra, sitting on Facebook’s 2.4 billion monthly active users will expand the scope for wrongdoing on a vast scale. Forget headline-grabbing stories of institutional-scale fraud. Libra could enable small-scale forms of money laundering and criminal financial activity across a long tail of individuals and businesses.

Libra probably won’t be used by high-end criminals, who set up Cayman domiciled companies to buy London property and stuff it with luxury art. But Facebook’s cryptocurrency is definitely at risk of being abused at the low end to enable human trafficking, modern slavery, drugs terrorism.

Let’s be frank – Facebook is already used by some to spread misinformation and hatred around the world. The thought of it sending money across borders is worrying. “Off-ramps” (where people convert Libra to USD) will have to be regulated. But if increased adoption means that vendors start accepting Libra, there’s less of a need for an “off-ramp”. Terrorist networks can be globally distributed, cells and individuals can be paid instantaneously. That’s scary.

Central banks push back

Central banks are (legitimately) worried about losing control of their monetary policy, especially given the depressed state of nominal interest rates and the fact that the global economy is potentially tipping into another recession.

This is particularly true for central banks in smaller, more vulnerable countries. If significant numbers of their citizens adopted Libra, it would be akin to them forcing a currency peg on the country. Of course, some countries choose to peg their currency if they are dependent on a larger neighbour, but others break currency pegs in order to regain control over local interest rates.

Question marks around adoption

The benefits of Libra aren’t super clear for people in developed economies. In the UK, all I need is an account number and sort code to pay anyone and funds move (almost) instantly. In the US, things are a bit more antiquated, but Paypal and Venmo have plugged the gap to a large extent. In China, Alipay is dominant. In India, cryptocurrencies are effectively banned.

That precludes much of the global user base from using Libra. Remittances is one angle where it may find adoption. For example, a Kenyan immigrant in the UK might send Libra back to family in Kenya, but the family would likely want to convert the Libra back to Kenyan Shilling. Instead of going via Facebook, they could simply do this via Transferwise.

Of course, Transferwise isn’t everywhere. However, in order to stay compliant, Libra likely wouldn’t be able to operate in any country on the US or EU sanctions list, which includes places like Venezuela, which is often used as an example of a country that might be ripe for a stable currency like Libra. Just look at what’s happened recently to Adobe’s business in Venezuela. Facebook may find itself in a situation where those who “need” Libra most cannot use it.

A flawed understanding

One of my biggest concerns about Facebook is its belief that big change requires big resources and a “big bang.”

Changing the structure of payments is a big challenge, but one of the biggest failures of the late stage of this cycle is the collective delusion that ambitious changes require huge entities with endless financial capital. What tends to happen in actuality is that capital and resources are misallocated due to ego, inertia, and also the inescapable fact that V1 of anything is going to be sub-optimal.

Consider the most disruptive technologies and platforms of our day – Facebook’s core social networking product being one of them. Rather than raising loads of money and getting a bunch of corporate sponsors, it achieved huge success by starting out small, growing organically (and virally), and iterating rapidly to provide a service that has fundamentally transformed the way we interact.

Incremental change is the key to transformation. If Zuckerberg raised a few billion dollars and recruited the heads of major entertainment studios and news organisations to join as corporate sponsors of a new social network, there’s no way Facebook would have taken off. Rather, it has thrived because it got its start in a college dorm room solving a problem for students. The best ideas begin life in small laboratories that they soon outgrow.

In the era of Softbank, mega-funds, and cheap capital, it’s worth remembering the folly of “big-bang” approach. Big things start small. They take time. And they grow from the ground up. Zuckerberg & Co’s latest master plan feels like a top down pivot for a business that’s struggling to remain relevant in a rapidly evolving political and regulatory environment.

I might just share that on Facebook.