Calibra — Ask Not What, But Why?
Facebook’s Blockchain Plans in Context
You’ve probably been inundated by all of the coverage on Facebook’s latest venture, a new subsidiary called Calibra, which will be launching a digital currency network called Libra, which will have a digital currency called GlobalCoin. Confusing, we know…
For us, despite the hype being made of it, this is a moment to ask not ‘what, but why?’ And ‘Why now?’
I’d like to share a few key insights on why we think Facebook is going down this route, and to outline what it might mean for the cryptocurrency industry.
We have also included ample industry analysis on the mechanics of this new currency and payment network, but in our view, the particulars are far less important to grasp than the bigger picture.
If you prefer a short take, I was on CNBC to chat about this topic.
Why Now? A Company in Crisis and Changing Privacy Laws
Despite the 18 months that have passed since the Cambridge Analytica scandal, Facebook is very much still a company in crisis. Its executives have been called in front of regulators to testify on a number of issues. Several high profile departures across its Instagram and WhatsApp platforms have called into question the ability of the tech giant to maintain its status as place where top talent wants to work. Lastly, Facebook co-founder Chris Hughes wrote a scathing editorial in the New York Times arguing that Facebook should be broken up, given its unprecedented power.
Libra is part of a broader strategy to change the Facebook narrative.
This strategy began when Mark Zuckerberg wrote a piece on Facebook’s new pivot towards privacy, and will continue with a series of announcements focused on countering negative attention.
…And it’s already working — following Facebook’s announcements concerning Libra, many sell side firms have reacted positively to the news.
The world around Facebook is also changing rapidly. We cannot forget the macro climate plays a massive role in shaping the strategy and long term outlook for multi-nationals like Facebook.
- In Europe, GDPR has gone into effect, but fines have only recently begun. There is an increasing urgency to address the privacy of internet users, and Facebook is a natural starting point — alongside Apple and Google.
- In the US, policymakers are working on new privacy regulation, which is slated to go into effect before the end of the year. If not, California’s privacy laws may go into effect at the federal level. Furthermore, the 2020 election season is picking up steam, and Facebook — along with big tech- is a political punching bag on both sides of the aisle.
- In Asia, platforms like WeChat in China and Kakao and Line in Korea continue to proliferate and build value added services within their platforms. Facebook’s largest user segment is in India, where the market opportunity is very large given the lack of clear competitors.
In 2018, over 50% of Facebook’s advertising revenue came from the US & Canada, as demonstrated by the below chart provided by the company in its quarterly earnings report.
However, if we look at where users are, the majority of Facebook’s daily active users are in fact outside of the US. Currently, a small portion of Facebook’s audience is driving the majority of its revenue.
Clearly, in order to continue to grow the business, Facebook needs to find ways to expand high value services into jurisdictions where users already have local alternatives for messaging, payments, and mobile financial services. Facebook has an estimated 2.7 billion users across its 3 main platforms — Facebook, WhatsApp, and Instagram. However, Facebook currently can’t reconcile users across these platforms or provide more granular metrics on the lifetime value of its users.
In order to more effectively monetize its user base, Facebook needs a way to convert its free user base into a revenue generating user base. In effect, by launching a digital currency network, Facebook will be able to monetize its user base more effectively. In our view, the bigger narrative here is that Facebook will be able to implement a global identity scheme.
For users who want to utilize the Libra network and utilize GlobalCoin for payments, they will likely be required to submit personal data and financial data for compliance purposes (after all, know your customer and anti-money laundering rules don’t go away just because you’re in a digital medium) and Facebook, for the first time, will be able to map all of its users to their real world identities. This excerpt from the “white paper” is particularly telling:
“When you authorize a payment, we share data with third parties necessary to process that transaction. We also share Calibra customer data with managed vendors and service providers — including Facebook, Inc. — that support our business (e.g., to provide technical infrastructure or direct payment processing). In both cases, we share only the Calibra customer data that is necessary for completing the defined activity or service.”
Most importantly, in many ways, Facebook looks to be poised to become a tool in the toolbox of American foreign & international monetary policy. If 2 billion (or more) people outside the US begin to rely on a US company (run via a Swiss foundation) and a consortium of US firms who maintain a payments network, Facebook will have tremendous power and oversight into the way economies operate.
What Does this Have to Do With Crypto?
In my view, it’s far too early to make definitive statements about the implications of a digital currency issued by the world’s largest advertising and social media platform.
Here are a few things I feel we can say with certainty:
- Facebook pursuing a “blockchain” strategy to issue and manage this new digital currency validates the belief that blockchain technology will disrupt financial services as we know them. Facebook is by no means the first to do so, but arguably has the largest user base and the largest impact. Here are a few other companies who have publicly stated their intention to implement a blockchain with a native token into their business:
- The lines between tech companies and financial services companies has been getting blurrier. This cuts both way — as evidenced by Goldman Sachs launching its online consumer bank, Marcus, and with firms like Lending Club and Common Bond changing the lending landscape and expending access beyond the control of PE firms and institutions. Not to mention Apple launching ApplePay and following with a credit card offering. The playbook Facebook is employing is not new — WeChat and its parent company TenCent have successfully embedded financial services and asset management into its platform — but Facebook’s play will likely inspire dozens of other technology companies and the blurring will continue. Every tech company is a finance company, and every finance company is a tech company (stay tuned for Amazon, et al to enter the race).
- This is still an idea at this stage, and we’ve already seen Facebook face political, regulatory, and corporate opposition as it embarks on launching this network. As with all blockchain related PR — the network is not slated to launch until 2020, and we expect many twists and turns as the idea matures and moves from the lab into the real world. Note that this is something we understand exceptionally well after five years of investing in digital currencies (and new computational networks) in the “white paper” or pre-product stage.
- I believe this new cryptocurrency does not compete with Bitcoin, but rather competes with central banks and all digital currencies focused on payments, including the new crop of ‘stablecoins’ issued by crypto firms and legacy financial firms alike. This new digital currency has no investment upside, and therefore is minimally interesting to investors — excluding the opportunity to gain exposure to the consortium via an investment token. In our view, this is a positive development for bitcoin and the larger industry as a whole.
- Lastly, depending on what infrastructure is used to onboard users to this new “network”, Facebook’s efforts could be the Trojan horse that onboards billions of users to crypto by teaching people how to use public / private key cryptography and providing them with digital currency wallets (the best I’ve seen it stated: what MySpace did for websites / html; and Napster, et al did for Spotify / Apple Music; Facebook may be about to do for crypto). While Facebook has initially stated they will manage users’ private keys, as the network evolves and the crypto industry matures, this may change.
Hopefully this overview is helpful in providing relevant context around Facebook’s ambitious plans to “blockchain” their business. It strikes me as a sharp contrast to the approach taken by Square and Microsoft, who are both building on public, permissionless blockchain networks, particularly Bitcoin and in the case of Microsoft, Ethereum. Time will tell whether the walled garden of Facebook or the open fields of Square and Microsoft prove most fruitful. Either way, we are looking forward to the journey!
Helpful Perspectives for Further Reading
- David Marcus, the former Facebook Messenger lead who helped create Libra — via (ironically) Twitter
- CoinDesk has a great summary of how Libra will borrow from existing cryptocurrency projects here
- Nick Grossman, a venture investor with Union Square Ventures, wrote a piece on why the VC firm has joined the Libra consortium
- Jameson Lopp, a well-known bitcoin security engineer and CTO at Casa, via Medium
- Bloomberg reports on France’s immediate political opposition to what it calls “a shadow bank” here
- Messari, a well-known data and research platform in the industry, has a board dedicated to all of the various “hot takes” from various industry pundits
*Note that Meltem Demirors is personally invested in Casa and Messari, two companies that are referenced in this list
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