4 months, 2 weeks ago libraryKeymaster
This is a preliminary & expressly tentative analysis of Libra’s likely scaling/legal strategy and challenges. It also includes analysis of potential Open Libra linkages with Libra.
The analysis has four parts: (1) Libra’s geopolitical posture & challenges; (2) Libra’s legal challenges; (3) what Libra’s really up to & its potential; (4) what crypto must do to defeat Libra.
First, a note on terminology, because it’s already confusing, perhaps by design. There’s Libra-the-blockchain, Libra-the-project, there’s Calibra, there’s Libra-the-currency, etc. To keep things clear, this memo uses the following notations:
- L = Libra-the-currency
- Libra = Libra-the-project (inclusive of Calibra, Libra Association, etc.)
- Cartel = Libra Association (including current members, and future members)
- Libraneers (Libders) = Libra engineers (Libra builders)
- Lusers = Libra users (sorry, not sorry; the acronym writes itself; explanation follows)
- OL = Open Libra
- OLT = OL-the-token
2. Libra’s Stated Goals
Libra’s stated goal is to create a cryptocurrency ecosystem. The idea is to gather multiple BigTech and other partners into a Cartel that will operate a money/payments/finance infrastructure that gives 2B+ people alternative ways to do transactions versus the mostly fiat-denominated status quo.
Here is how Columbia law professor Katharina Pistor describes Libra in her Congressional testimony a few months ago (bullets are direct quotations, with emphasis added):
- Facebook’s Libra is designed to become a “new global currency” that will complement existing fiat currencies. It is designed as a for-profit “currency of currencies.”
- The Libra White Paper promises to create a seamless, global, safe, and inclusive payment system based on modern digital technologies. Libra is labeled a “stablecoin” and as such aims at delivering low volatility and high liquidity to its customers, the holders of Libra coins, who shall be able to exchange their Libras against (local) fiat currency on demand without suffering major haircuts.
- To this end, Libra is backed by a reserve composed of “safe” assets. The safe assets of choice are bank deposits and the liquid debt of reputable sovereigns. These assets owe their safety to public backstopping mechanisms in the form of deposit insurance and the “full faith and credit” of the issuing sovereign. In effect, the sponsors of Libra and its profit-earning beneficiaries will be free riding on a public safety net for which they are not paying.
Calibra is a FB subsidiary building the wallet & associated APIs on which L-related products and services will be built. Calibra’s stated goal regarding customer data is:
“[to] use customer data to conduct research projects related to financial inclusion and economic opportunity.”
Ha ha ha.
3. For-Profit ‘Currency of Currencies’
Irrespective of how narrowly it frames its goals today, everyone knows the Cartel’s actual goal for Libra is to create a much more profitable global economy for Cartel members. Everything else is secondary.
Yes, Calibra is an attempt to build a WeChat for “the West” (The Economist, AP, etc.), but that is just the means to the end.
The end goal is a world built on Facebook’s image of itself, governed by Facebook’s own rules, unaccountable to anyone, except perhaps shareholders. If Libra succeeds in building a global for-profit ‘currency of currencies,’ as Pistor describes, the Cartel will become one of the most powerful political/economic blocs in world history.
This may sound exaggerated, but it’s not. Here’s another take by other analysts:
Libra as defined may be the single largest scale ‘trojan horse’ in human history; the conquerors bearing gifts as an opening move in a grab for economic and political control.
The analysis here reflects the legal and political mood of the day, including calls to #BreakUpBigTech by prominent US lawmakers and presidential candidates (eg, former Harvard law professor & now- Senator Warren who architected the CFPB).
Strong US and European political rhetoric against Facebook stems, in part, from mounting evidence that FB & peers engage in anti-competitive behavior like: (1) abuse of dominant market position; (2) conspiracy in restraint of trade (eg, the Cartel). But antitrust law is just one attack vector, of many.
Given the volatile political climate around FB (& BigTech more generally), we have to be conscious about the complex interplay between many other attack vectors against FB/Libra by multiple actors, and FB’s own increasingly bellicose posture.
- For example, “in an audio leaked by The Verge on October 1, 2019, Zuckerberg revealed that the company would probably sue the government if Warren were to win the presidency and try to break up Facebook. He termed Warren as an ‘existential’ threat.”
- On October 3, 2019, US Attorney General William Barr renewed demands that FB provide backdoor access to US law enforcement (expanded potentially to include UK, Australia), notwithstanding FB’s recent commitment to strong encryption practices.
- Given this Administration’s use of quid pro quo negotiation tactics, it is reasonable to imagine a potential quid pro quo in the form of a backdoor-for-market deal (FB grants USG access to data; USG grants FB broad license to launch Libra). See also § 8.
By themselves, these political considerations strongly militate against projects like OL, which was announced at Devcon5. Other factors also underscore the need for extreme caution around Libra.
5. Libra’s Geopolitical Posture Initially
Libra comes pre-loaded with a lot of ideological and political baggage. In his Senate testimony on July 16, 2019 (available here), David Marcus made it expressly clear that Libra is a global power play.
Despite ongoing fallout from the Cambridge Analytica & related scandals, FB’s position to American regulators is that it’s better to ally with a known domestic scoundrel, than to wage war against an ostensibly-foreign scoundrel “whose values are dramatically different.”
In the past, this alignment tactic worked extremely well for BigTech (BigTech + BigBrother = BigTechBrother). This begs the question: what went wrong this time?
6. Libra’s Geopolitical Posture Now
Some analysts attribute Libra’s rocky reception to shaken faith and lack of public trust in the wake of FB’s massive privacy violations.
But the real reason may be that FB grossly underestimated the extent of Wall Street’s interest in protecting and expanding the global currency of currencies it already controls: the USD. Concretely, FB’s plan to build a global blockchain-based financial base layer is an existential threat to Goldman Sachs, JPMorgan Chase, and peers. Every global player wants to control a for-profit global ‘currency of currencies.’
Faced with unexpected domestic resistance, Marcus has tried to appease regulators and thought leaders (& also Wall Street) by doubling down on the narrative of “Libra as a counterbalance to China.”
- FT Headline (September 19, 2019): “Libra is an ‘instrument of development’ that will (somewhat paradoxically) allow Western nations to preserve their influence.”
- Excerpts from above FT report, providing translation of David Marcus’ interview (in French) with Swiss public radio station Radio Télévision Suisse:
“China is marching towards a digital renminbi. And what is not really understood is that people think this is really just a domestic project for China. In reality it’s a far more ambitious project — a project that really wants to replace certain financial networks in the Belt and Road countries. It’s a real risk.”
“What we see today on the internet is a fractioning into two internets. We have the internet of what I call the Free World, and another internet, which is an internet of surveillance, etc. And if we have the same thing happen with financial networks, where fundamentally, the US and others don’t have the ability to impose sanctions that are respected by financial systems, that creates geopolitical problems with huge consequences for the world.”
There are lots of problems with this narrative, including:
- the “two Internets” narrative hides FB’s own complicity in expanding and profiting from state surveillance capabilities;
- the narrative recycles colonialist/imperialist tropes in ways that show complete lack of regard to the needs of historically and currently oppressed populations, especially in the Global South (L as hegemony & business-as-usual);
- L as #FreeWorldCoin is, in effect, L = #USGCoin. See eg Claire Jones & Izabella Kaminska, Libra is Imperialism by Stealth (subtitle: “stablecoins [like L] are dollarisation by proxy”) Financial Times (September 13, 2019) (part of the Breaking Zuck Bucks Series).
7. Legal/Political Opposition to Libra From Privacy/Consumer Groups
Given FB’s disappointing track record of lying about data privacy it is reasonable to expect more opposition to Libra on privacy grounds. This will be increasingly framed in legal terms.
As Privacy International notes,
“[Libra means] even more intimate profiling of individuals allowing organisations to offer products and services with discriminatory pricing based on a large dossier of data”.
In the US, it is reasonable to expect waves of class action lawsuits against FB and Cartel members in the time period 2020–2023. This forecast stands notwithstanding settled US Supreme Court precedent — like ATT v. Concepcion [& progeny cases] — that enforce contractual class action waivers & binding arbitration provisions.
These class action lawsuits will come because there is no shortage of plaintiffs and large plaintiff-side class action law firms that will want to exploit this politically fraught climate for FB to extract some opportunistic (& admittedly likely justified) remedies.
We’re likely to see a similar trend globally in private litigation and various administrative actions. In the bigger war, these can be thought of as border skirmishes. Cartel members would be able to fight these skirmishes with relative ease via settlements. However, it is not clear what sort of legal defense capacity OL & other small Libra ecosystem players would have, especially at first.
8. Legal/Political Opposition to Libra in US
In the US, the President, Treasury Secretary Steven Mnuchin, and Congressional leaders have made sweeping statements regarding their intent to regulate both existing and forthcoming cryptocurrency schemes like Libra.
According to US Federal Reserve Chairman Jerome Powell, “Libra should not be allowed to move forward” unless and until the company addresses anti-money laundering (“AML”) and know-your-customer (“KYC”) concerns, among other issues. This trend shows no sign of reversal. [Please note, if USG policy does suddenly shift in favor of Libra (or towards ambivalent tolerance of Libra), that may be indirect evidence of a Libra/USG quid pro quo (L ≈ USGCoin). See § 4.]
The lobbying pressure against Libra in the US seems to be coming primarily from Wall Street, which clearly views Libra as a threat. It’s the ultimate East Coast v. West Coast battle, which right now is literally being played on the East Coast — mainly, though not exclusively, in DC. Other BigTech players may also be covertly lobbying against Libra. But Wall Street is on home turf here.
If Libra succeeds, the Cartel will become one of the most powerful political/economic blocs in world history.
The main tool that Wall Street has against Libra is the ability to change the rules of the game, at any point in the game. See eg Keep Big Tech Out Of Finance Act (draft bill to do exactly what the name suggests, destroy Libra). For more context, pls see Crypto in Congress.
The Keep Big Tech Out Of Finance Act seems like a shot across Libra’s bow, intended to (1) signal who’s boss; (2) bring FB back to the negotiation table; (3) serve as a warning to other BigTech players to not even think about surprise go-to-market public announcements along the lines of what FB orchestrated.
Apropos surprise announcements, there may be a lesson here for OL as well.
8.1 Securities Law
US securities law represents another potential regulatory/legal lever of influence against Libra/OL. The most powerful version of this lever is the indeterminacy of existing securities laws, regulations, and precedents — as applied to a broad range of crypto instruments.
The indeterminacy of the current regime is best captured in this recent statement by current SEC Commissioner Hester Peirce:
“we should eliminate immaterial but market-fragmenting differences in our rules[… while encouraging different approaches to get at identical objectives].”
That’s intentionally cryptic; it’s Legalese at its best and worst.
The key point here is that SEC is arguing for harmonization through managed pluralism, on SEC terms. As with the draft Keep Big Tech Out Of Finance Act, the SEC lever against Libra/OL is not so much an existing rule, regulatory guidance, or bundle of enforcement precedent, but the SEC’s inherent power to change the rules mid-game to effectuate its statutory mandate. See eg, draft Token Taxonomy Act.
As applied to crypto, the SEC has claimed vast regulatory reach. It is reasonable to expect the SEC extend this reach to L, Libra, and Libra-related firms/instruments. Libra lawyers are doubtless doing multiple rounds of analysis here — especially with a view towards expanding existing token classification/taxonomy schemes — and that’s a good thing.
Because any potential peg between OLT (OL-the-token) & L must be implemented through some sort of bridge token, there is a non-trivial chance that OLT might be classified as a security, not only by the SEC in a top-down enforcement action, but also by any number of potential private claimants who may want to pursue ‘horizontal’ actions against OL and/or OL-related entities/persons.
8.2 Antitrust Law (#BreakUpBigTech)
The biggest lever that opponents wield against the Cartel is antitrust law, not just in the US, but globally.
If the Cartel attracts other BigTech players, Wall Street may exert its considerable lobbying leverage to nudge the start of formal public antitrust investigations into Facebook (vertical antitrust enforcement), as well as potential private antitrust actions (horizontal antitrust enforcement).
We may see the start of formal antitrust investigations into FB (and possibly several other core cartel members) immediately preceding Libra’s full launch in early 2020, or shortly thereafter. Wall Street has lots to gain and little to lose from a DOJ investigation into FB/Libra. In the near term, an investigation would likely slow and potentially stop other BigTech players (eg, IBM) from joining the Cartel.
Please note that even though OL contemplates a merely technical and not necessarily legal linkage(s) between OL & the Cartel, this distinction will not deter lawyers who will attempt to portray Libra (+ potentially OL) as part of a constellation or cluster of agreements that, in totem, operate as a restraint on trade or constitute an abuse of dominant market position.
Factually and legally, the arguments against OL may be extremely tenuous and unsubstantiated, but if these arguments can be made in good faith, OL should expect these arguments to be made against it.
9. Legal/Political Opposition to Libra in Europe/Globally
Among EU government leaders, the sentiment is that Libra is DOA, with leading journalistic outlets running headlines like: “France and Germany have agreed to block Facebook’s Libra cryptocurrency.” The basic view shared by many European leaders is:
“No private entity can claim monetary power, which is inherent to the sovereignty of nations”.
Some levers that EU-based actors could use against Libra/OL include: patent law, data storage/privacy law (GDPR), and antitrust, among others.
Like in the US, antitrust represents the strongest regulatory lever that EU leaders will likely use against the Cartel/FB, building on precedents like: (1) the decade-long prosecution of Microsoft; (2) recent prosecutions of Google; etc.
9.1 Will the EU Really Block Libra?
Just as in the US, European regulators may not necessarily want to ‘outlaw’ or ‘block’ Libra. Rather, they may want to use the prosecution as a way of exacting political concessions and constructing a new accommodation and modus vivendi between EU power blocs and other global power blocs, including the Cartel.
As we enter this new phase of crypto regulation (not only w/r to Libra), it’s useful to think of these regulatory actions as forms of global negotiated rulemaking (aka #NegReg: when industry and regulators work together to craft the regulations that will govern the industry), except through a more adversarial outward-facing optical frame.
9.2 Libra as Catalyst/Cover for Broader Strategic Realignments
Crucially, if we look closer at the complex interplay between ‘domestic’ and ‘foreign’ antitrust prosecutions, we realize each of the previous European Commission antitrust cases against BigTech is also about re-adjusting the semi-permeable line between domestic and international law (please note: re-adjusting, not necessarily clarifying [if the lines are clear, there is less need for arbiters, eg, the folks who draw the lines]).
It is important to emphasize why regulators/governors create these types of dynamic regulatory regimes. Creating the conditions of ‘perpetual transition’ (and sometimes even actively manufacturing consent and external threats) underscores the indispensability of the expert ruler, according to … the ruler.
9.3 Narrative Forecast: Crypto/OL as Scapegoat
Over the coming years, it is reasonable to expect the emergence of new narratives that will try to connect particular Libra/crypto tropes to ongoing shifts in European politics (eg, problematizing the negative economic fallout from Brexit & similar failures as increasingly attributable to crypto).
Over time, this may include tropes that directly blame crypto & BigTech cartels for what may be largely endogenous economic failures (eg, potential wholesale collapse of the Euro). Similarly, Libra may also use OL as a scapegoat, especially in circumstances like criminal exploits, etc., where funding/data flows may have occurred by third parties on OL/L networks.
It is important to consider these worst-case outcomes now because they highlight the need for narrative and normative clarity and primacy in those moments of crisis. Because while every crisis is factually unique, many crises share certain characteristics like rapid apparent onset, and rapidly-ensuing structural adjustments.
Given that crises build up long before the ‘actual’ moment of crisis, we must model crisis governance strategies as early as possible. Even though Libra is opposed to core crypto values like transparency and equality of opportunity, we need more analysis of Libra’s potential and its shortcomings, not less.
This is especially true in light of FB’s vast narrative control capabilities.
10. Libra + OL Under FATF/Int’l Law
As part of the June 2019 G20 summit in Fukuoka, the Financial Action Task Force (FATF) adopted a Guidance on the application of its “risk-based analysis” (RBA) to “virtual assets” (VAs) and “virtual asset service providers” (VASPs).
The Guidance is intended to help both national authorities in understanding and developing regulatory and supervisory responses to VA activities and VASPs, and to help private sector entities seeking to engage in VA activities, in understanding their AML/CFT obligations and how they can effectively comply with these requirements.
These new compliance regimes are mandatory; and self-regulation is effectively off the table (Guidance, p. 5). But compliance with what? Where? How?
Some crypto teams (eg ZCash) are taking a posture of affirmative compliance, publishing analysis intended to literally show “How ZCash is Compliant with the FATF Recommendations.”
But by the nature and structure of the FATF Guidance, affirmative statements of full compliance (like the ZCash statement above) are a priori tentative and not-legally valid. By design, the new FATF Guidance is a dynamic global coordination regime, with primary responsibility for enforcement falling on domestic jurisdictions.
Thus, to assure compliance with emerging FATF AML/KYC/etc. obligations, OL and like entities would be well advised to retain counsel with expertise in foreign asset controls and global financial regulation prior to announcing any affirmative intent to establish a working relationship with the Cartel (no matter how informal), especially in light of the current political situation.
Above, we sketched (1) Libra’s geopolitical posture & challenges; (2) Libra’s legal challenges. In the next section, we’ll turn to: (3) what Libra’s really up to & its potential; (4) what crypto must do to defeat Libra.
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