The Ambitious Plan Behind Facebook’s Cryptocurrency, Libra

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Near the end of 2017, on a Dominican Republic beach with his family, Facebook executive David Marcus wrestled with a question he’d been pondering since his previous job as president of PayPal. How would you build the internet of money? A friction-free global digital currency would be a boon for the many people with mobile phones but no access to banking. And who better to develop something like this, he wondered, than Facebook, with its global reach and massive user base? Marcus, then head of Facebook Messenger, thought he had an answer. He texted his boss and told him it was time to talk about Facebook creating a cryptocurrency, saying that he had a clear view of how to do it, in a way that would earn trust even from those skeptical of Facebook. Marcus spent the next few days writing a memo that laid out his ideas.

Facebook CEO Mark Zuckerberg quickly endorsed the plan, saying the approach synced with his ideas. Zuckerberg had long sought an in-house currency for Facebook-remember Facebook Credits?-and the lofty aspiration to empower consumers in the developing world reprised a familiar theme of serving the next 2 billion. (Think internet.org with digital money instead of broadband.) Besides, competitors like Apple, WeChat, and Google were making inroads into global finance.

So just like that, Facebook began marshaling resources for what Marcus describes as the most ambitious cryptocurrency plan since Bitcoin. Within several months, Marcus was out of Messenger and recruiting a team of the company’s top engineers to work in a secure location on the edge of the Facebook campus, with access limited to those with special badges. He also hired a selection of top economists and policymakers. More than 100 people were gearing up for a dual challenge: building a global currency on top of blockchain technology, especially for those underserved by banks, and convincing people to adopt it despite the fact that Facebook built it.

The result is Libra, a new crypto coin and payment infrastructure. Its aspirations are set out in a white paper released Tuesday. Mission: “a simple global currency and infrastructure that empowers billions of people.” It begins with a new cryptocurrency designed for payments ranging from micropayments to remittances without fees (“as easy to send money as an email”) as well as enabling more exotic “smart money” use cases like dynamic contracts, which could enable blockchain-based loans or insurance. The value of the coin will be pegged to a market-value basket of several trusted currencies, with individual Libras worth about a buck. It’s money, not an investment vehicle. Libras will be fully reserved; basically, every time a user trades traditional currency for Libra, that money will go into the reserve, and stay there until the customer withdraws money from the system.

And here’s Marcus’ big idea: To deflect the well-justified wariness of Facebook’s every move, Facebook has open-sourced the technology, and will cede control of the blockchain to a neutral Libra Association -kind of a Switzerland of digital coinage-that will of course be based in Switzerland. The Libra Association will consist at first of up to 100 founding members including Facebook, each of which will invest at least $10 million to fund the association’s operations, and receive interest earned off the reserve. (Libra’s NGO members are exempted from the investment requirement.) Each member will be empowered to operate a node on the blockchain, and have a voice in determining changes to its code and managing the reserve. (This limited access is called a “permissioned” blockchain.) “Facebook will have one seat on the council that oversees the foundation but will have no more rights, no more governance, that isn’t the exact same as what everybody else has,” says Kevin Weil, a top engineer who left his role as Instagram’s product chief to work on the project.

“Some of the articles out there have described this as Zuck-bucks and Face-coin. If it’s that, it’s dead in the water.”

David Marcus, Facebook

The intended parallel is to the first breakout cryptocurrency, where the creator has no control of the system. “Think of Facebook as Satoshi [Nakamoto, the creator of Bitcoin] and Libra coin like Bitcoin,” says Fred Wilson, head of Union Square Ventures, a venture capital firm that has signed up as a partner.

Of course, Facebook has plenty to gain if this works out. Ceding control of its invention makes Libra worth more to Facebook than keeping it close: The currency may be more widely circulated and more trusted. The notion of a borderless payment system fits perfectly with Zuckerberg’s focus on messaging; even before the Libra rulebook is fixed, Facebook developed a digital wallet that will integrate with Messenger and WhatsApp. Facebook also will be offloading a lot of the regulatory and security concerns to a new bureaucratic organization. Nonetheless, it’s Facebook’s vision, and Libra’s greatest hurdle may well be overcoming the tarnished reputation of its creator. Marcus knows this, and thinks that the key is making sure that Libra is not synonymous with Facebook.

“Some of the articles out there have described this as Zuck-bucks and Face-coin,” says Marcus. “If it’s that, it’s dead in the water.”

Searching for Partners

Considering that its effort had been over a year in the works, Facebook has been scrambling to fill the 100 planned nodes on the Libra blockchain. So far there are 28 partners, including payment networks like Visa and Mastercard; fintech firms like PayPal, Coinbase and Stripe; VCs like Thrive and Andreessen Horowitz; NGOs like Kiva and Women’s World Banking; telecoms like Vodafone; and software services like eBay, Lyft, Uber and Spotify. Their ambitions are varied: the software companies foresee cheaper global payments (especially micropayments) and the NGOs a new way to offer financial services to the unbanked (who could later become customers of other partners); the blockchain companies envision Libra as an onramp to other cryptocurrencies. The first came onboard in April; others joined only in the past few weeks. Tellingly, there are no banks included; Facebook says it will welcome banks, if they do want to join.

Actually, all of those are provisional partners. At this point, their participation in the association doesn’t mean they’ve committed to paying $10 million to become a Libra node. The partners seem motivated by curiosity, FOMO, and a shared dream with Facebook that the effort could be both a boon to their ambitions in underserved economies and a milestone in the evolution of digital currency. But they have varying degrees of enthusiasm.

As Joshua Gans of the University of Toronto’s Creative Destruction Lab, one of the launch partners, puts it, the members have thus far been invited to a kind of constitutional convention. “It’s entirely possible not everyone stays part of the union after that,” he says.

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Not surprising is the absence of any of Facebook’s giant tech peers, all of which are making their own, competing forays into digital payments. Google, Apple, and Amazon aren’t in line to be Libra partners, though Facebook says that they would be welcome, in what seems like the unlikely event they join. (None of those companies cared to comment, but Google released a blog post last week saying better relationships with banks are key to extending digital payments to the underserved billions.) Twitter and Square CEO Jack Dorsey, whose payment system would seem a natural partner, has recently gone all-in on Bitcoin, devoting talent and resources at Square to make it a more usable platform for payments. Last week, Dorsey praised the virtues of Bitcoin to Quartz, noting that, although he doesn’t know the details of Facebook’s effort, “I would hope that all private companies can see the value of having a stateless currency that all people can access, and is not bounded or constrained by any one corporate entity.”

Facebook would say, That’s Libra, Jack! We’re just one node! “I don’t think we or others would tolerate Facebook having undue influence,” says Katie Haun, a general partner at Andreessen Horowitz.

Still, the association was Facebook’s vision. Facebook engineers are doing the technical development, and will continue to do so. Facebook has created a dedicated programming language, called MOVE, for developers to write Libra applications. And even though the Libra Association has yet to choose a board, hire a managing director, fill almost three-fourths of its partnerships, or even meet for the first time, it has already released a White Paper and a stack of supporting documents. Who wrote all that stuff? Facebook, with the consultation of the current partners who reviewed, edited, and signed off on the materials. In theory, all of that could be tossed out the window once the full association-where nominally Facebook has just one vote-meets. In practice, though, Facebook has chosen partners who are inclined to share the values and ambitions that helped shape Libra thus far. So while the charter is yet to be finalized, it seems inevitable it will not vary drastically from the current draft.

More Venmo Than Bitcoin

Meanwhile, Facebook has already developed its own product, a wallet application called Calibra. Obviously, since the company developed the Libra technology, it had a head start on its partners. (Other companies are speculating about potential products, and fintech firms like Coinbase and PayPal could potentially include Libra in their wallets, but no other company has announced a product so far.) Calibra will run inside WhatsApp and Messenger, allowing seamless access to more than a billion people, and will be available as a separate app as well. It will launch once the Libra protocols are finalized sometime in 2020.

Despite Facebook’s emphasis on the “decentralized” aspects of Libra blockchain, the Calibra experience will be more Venmo than Bitcoin. Calibra will store your Libra coins and hold the cryptographic keys required to access them-a user-friendly move, in the sense that you can lose your password or phone and know your money will remain accessible. That also allows Calibra to easily intervene in cases of fraud or other disputes. But Calibra’s custody of the keys and coins means the company can move money between its wallet’s users without relying on the blockchain itself; the only time the blockchain gets involved is when a customer wants to send money outside of Facebook to a wallet or service developed by another company.

Ceding control of the Libra Association thus sets up a potential win-win for Facebook. With Calibra, the company gets its mostly walled garden: a way to internally handle things like cross-border payments between friends and family, micropayments within Facebook applications, and transactions on Facebook’s marketplace and with small-businesses-and potentially other financial services as Libra’s technology matures. With the Libra Association, it gets the benefits of an open-source ecosystem, along with an external group to manage the complex financial aspects of the coin and messy global regulations. Subsequent non-Facebook tools and applications built for the Libra blockchain, as well as the wide network of customers and merchants brought in by partners, stand to increase the utility of Libra for Facebook’s users.

Facebook knows that critics and regulators might freak out that it’s adding a wallet that will give it bundles of new personal data. So it’s taken pains to assure people that this information won’t be blended with other stuff it knows about you, or that your Libra purchases will be used to target ads. Calibra will be a separate subsidiary of Facebook, and keep the information separate. Unless… you give permission to allow data like your Facebook friends to be blended into Calibra, for convenience and added features. If you use the version of Calibra integrated within WhatsApp or Messenger, Facebook will be able to see which people or businesses you’ve transacted with (though it says other details won’t be visible). Also, the draft terms of service give Facebook the right to use aggregated Calibra data “to facilitate and improve the Calibra product experience [and] market Calibra products and services.”

“The response in the crypto space has been that this is a dystopian nightmare.”

Angela Walch, St. Mary’s School of Law .

The Libra blockchain brings its own privacy complications. Facebook has designed Libra so that transactions are public and permanently logged in the blockchain, but pseudonymous. Note: that’s not the same as anonymous. When problems arise, Facebook expects the authorities to use tracking services similar to those that have been developed for Bitcoin and Ethereum. For that reason, Facebook says Libra won’t be of much use to money launderers or drug dealers. And, as with bitcoin, law-abiding folk may be wary of a system where details of every transaction are archived forever.

Even if people accept Facebook’s claims that it will hold no favored position, some experts criticize the plan to give power to the limited number of node-holders. “It’s sad to see a crypto effort so overtly target incumbents with deep pockets,” says Emin Gün Sirer, a Cornell computer scientist specializing in cryptocurrency. Facebook’s economist Christian Catalini, on leave from MIT, admits that only a “permission-less” blockchain, similar to Bitcoin’s design, would allow access to all players and be a truly egalitarian global payment system. (He compares the nodes to taxi medallions, which grant paid access to a market that excludes competitors.) Facebook says that the initially permissioned approach is a necessary compromise to scale the network to the needs of millions of potential users, given the current limitations of blockchain technology, which is notoriously slow and expensive to run. Constraining the membership to only trusted partners does away with the need for security protocols such as “proof-of-work,” the computationally expensive (and environmentally unsound) process that keeps Bitcoin secure. At launch, the goal is to handle 1,000 transactions per second, with a 10-second wait for each transaction to complete. (By comparison, Bitcoin handles seven per second and Ethereum does 15. Visa can handle tens of thousands on its network.)

Crypto purists argue that defeats the purpose of blockchains, which rely on that expensive computation so the system doesn’t need a tribunal of trusted gatekeepers. With the core blockchain innovation stripped away, the system looks a lot more like a conventional database, with 100 administrators instead of one. “The response in the crypto space has been that this is a dystopian nightmare,” says Angela Walch, a professor at St. Mary’s School of Law who specializes in blockchain. “I’m not really sure what these other companies add other than it makes Facebook look like we’re not the only ones doing it.”

The White Paper vows that the Libra Association will move to a permissionless system, but the commitment is weak-just an intent to begin the transition within five years. Catalini notes that for now, no one knows how to build such a thing at a global scale.

Money, Justice, Freedom

Facebook named Libra for three reasons: its use as an ancient Roman unit of measure, the astrological symbol depicting the scales of justice, and its phonetic resemblance to the French “libre,” meaning free. “A combination of money, justice and freedom,” explains Facebook. For the initiative to live up to those lofty values, it will have to draw not only powerful partners but be open to the grassroots developers in every place that receives an internet signal. Serious rivals to Facebook’s own Calibra wallet (in theory all Libra wallets will be interoperable) must emerge. The promises of privacy and security must be fulfilled. And the association must prove it can act independently of its corporate creator. Otherwise, the entire effort will come to be viewed as another self-interested move by Mark Zuckerberg-even if billions of people wind up spending Libras in Facebook applications.

As tough as it is to develop a groundbreaking global cryptosystem, Marcus says convincing people of Facebook’s intentions makes the job much harder. “This is by far the most difficult, intellectually stimulating and challenging thing I have ever done in my life,” he says.

Those challenges are only beginning. You can bet your last Libra on it.

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