Christian Catalini, co-creator of Libra and chief economist at Calibra, explains why Facebook made the design choices it made for Libra, reveals whether the team was prepared for the regulatory blowback it received after publishing the white paper, and talks about what it means for Libra now that nearly all the initial payment company members have left the Association. He describes how Facebook defined stability for Libra, whether the Chinese renminbi could ever be added to the reserve the way it is part of the IMF special drawing rights basket, and if so, what the Libra or Calibra would do if the Chinese government tried to censor individuals or transactions in the system. We also cover the tension between the desire to have strong know-your-customer and anti-money laundering processes on the platform but then also to bank the unbanked, who often don’t have strong government identification. We also discuss how Facebook will make money from Calibra, what it would take for Facebook to let the Libra Association go forward without it, and why Facebook, which not too long ago was trying to woo China to enter the Chinese market, now says it is the best counterweight to a Chinese digital yuan. Plus, he answers how Facebook and Calibra will handle privacy.
Thank you to our sponsors!Crypto.com: https://crypto.
Christian Catalini: https://twitter.com/
Letters to payment companies from Congress: https://www.schatz.
Mark Zuckerberg’s testimony in front of Congress: https://www.c-span.
Reported breakdown of the Libra reserve: https://www.reuters.
Calibra — can send money at low to no cost: https://newsroom.fb.com/news/
Asian central banks not too open to Libra: https://www.bloomberg.
Unconfirmed interview about UN work with blockchain-based vouchers: https://
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My guest today is Christian Catalini, Co-Creator of Libra and Head Economist at Calibra. Welcome, Christian.
It’s a pleasure to be here, Laura.
Libra has been one of the biggest crypto stories of the year, though we will talk about whether or not this is being usurped from that status, but first, let’s dive into your background. What were you doing before you got involved with Libra, and how did you become its co-creator?
So I started getting interested in cryptocurrencies and blockchain around 2013 when we co-designed the research society around the MIT bitcoin experiment, and after that, a lot of my research really developed closer and closer to different applications of blockchain, its potential for, you know, democratizing access to financial services, and to really trigger a new wave of innovation across a variety of different industry verticals.
From there, at some point, I was in touch with Morgan Beller, who, at the time, was exploring, you know, a number of different ideas around how Facebook could be active in the blockchain space, and we were discussing, actually, a research project. You know, how can we use cryptocurrency or a blockchain application to really build on financial inclusion, potentially, as a small-scale experiment in a region?
You know, from there, conversation became much more series, and at some point, I visited Menlo Park, and David there, who was still at Messenger, was starting to think about building a team around this effort, and that’s when it really became clear that, you know, if I wanted to kind of help shape this, I would have to go and leave and take this on as a full-time effort. Now, the idea being that we had a blank slate.
We had, you know, a fairly aligned mission on really building blockchain a cryptocurrency to deliver financial inclusion, and from there, there were just a very long series of hard technical problems on the economic side, on the engineering, computer science side that we would have to solve over the next months to come up with an initial prototype and design for what this new type of metric could look like.
And just for reference going forward, when you said David, you were talking about David Marcus, who is the former president of PayPal. Used to be a board member at Coinbase, and is now head of Calibra. I’m sure his name will come up again. So, during this time before you guys went public with your plans with Libra, when you were brainstorming and designing the system, what did that process look like? Like, how did you define the problem, and then how did you come up with Libra as the solution, and what were the different design choices you considered and decided against, or why did you decide on the design choices you made?
Yes, you know, what was interesting is that…and this was something where the initial team was really aligned on, was we wanted to start from the problem we were trying to solve. Having been following, you know, the cryptocurrency space for multiple years, I was kind of frustrated by the fact that I saw so much potential in the technology, but on the other hand, when you look at its potential to actually deliver on that potential, there were big gaps in many different aspects.
So if you think about last mile issues in delivering a service around remittances, there are all sort of use cases that I thought were really exciting and had the potential to help a large segment of the population that is excluded or underserved by the current system. That’s where, you know, we started from. We started from this idea that it was clear to us that the technology was ideal for expanding access, for providing new types of services at a lower cost and on a global scale.
At the same time, there were, you know, massive challenges in terms of scaling, in terms of different tradeoffs that you have to make when you’re trying to take that idea and that vision into something that can actually be built, and so the initial months were, you know, intensive R&D months.
I think when I look back at those months, what was most exciting was really that we had talent from different domains of expertise, people who had deep experience in building large-scale products, people with deep expertise in scaling engineering systems and data centers, people with a background in cryptography, and also people with a lot of admiration for what was happening in the cryptocurrency space. So we looked at very much every possible permutation of either technological solution, building on existing new rails.
And it become very clear that, for what we were trying to do, we would have to take a slightly different approach, and I’m sure that, you know, if you look at the choices we’ve made, different people will have different opinions if those are good choices or not, but they all really boiled down to this idea of, like, how do we create an extremely efficient, cheap, fast medium of exchange that can help all sort of cross-border activity, starting, of course, with remittances, which we saw as a major use case where people were charged exorbitant fees?
You know, if you look at the World Bank data, I think the average is about 7%, but that really hides a wide dispersion around that 7%. So, in some regions, you know, intraregional exchanges in Africa can charge you as much as 20, 30%, and that’s simply, you know, unacceptable. So, starting from those challenges, it became clear that, for example, we needed to prioritize the asset, the coin having intrinsic value.
And of course, that comes with some drawbacks from an architectural standpoint because now you have a reserve, which you really want to make sure is not kind of a central point of failure, but it was really important to us to have an asset that wouldn’t be speculative and that wouldn’t provide wide swings in volatility, because we realized if that were the case and you had a large number of people accessing this network, it could also be extremely harmful. So that’s where we started around this first concept of stability and bringing in kind of intrinsic value behind the coin.
The other next, you know, design decision that was…of course, the beta in every possible direction was like the permission setup. So the idea that we had to start with a set of permission nodes, and that really boils down from two things. The first one is that, you know, when you look at a lot of the really talented engineering and R&D outputting in the cryptocurrency space, there’s no solution at scale, at the moment at least, that, either through proof of work or proof of stake, can support a network at the scale that we hope Libra can reach.
So, working backwards, we realized we needed to kind of bootstrap the entire system from trust that’s already established offline, and that’s where the trusted brands and initial institutions come into play. They’re kind of seeding this new network, securing it, defending it, and trying to scale it together. Now, of course, you know, as an economist, when I look at the permission setup, the first thing that comes to mind is a taxi medallion system.
And so you get an immediate aversion to that, and that’s why the Libra setup, although permissioned, has some important tweaks that often are not talked about, but I think are really important from an economics perspective. So, you know, you start with a set of 100 founding members and nodes, but really, what you introduce over time is competition. So when I look at permissionless, I think permissionless is one of those words that really embeds many different things to many different people.
As an economist, what matters to me the most about permissionless is the idea that anybody can compete, anybody can build on top of the system, anybody can have the same degree of access. So, if I’m a startup, I should be able to be fully interoperable and you know, play on the same level of playing field, either with a large financial incumbent or a tech incumbent. If we can use the same rail, if we have the same degree of access to the network, that dimension of permissionless to me is really important. Now, that applies both to the network level, right?
If you have a number of nodes operating the network, you want competition for being a node so that, over time, the best node operator is the people that know how to secure and scale the network…are the ones in charge of the infrastructure, but you also want…and this is actually more subtle, and you know, we have a paper on market design with some researchers at Harvard where we’re looking at market equilibrium level implications of different consensus models, something that was really important to at least the economic steam in the early days.
Again, I want to preface that a lot of what I’m discussing were the ideas as original incubator within Facebook, but as you know now, a lot of this is transitioning over to the association. So, going forward, this won’t be just Facebook effort in terms of refining the design, but going back to kind of the aspects of permissionless that really matter to us was, like, if we want this network to be through shared infrastructure that everybody can build and compete on, then we also need to make sure that there’s not new vectors of concentration.
So if you take something like proof of work, which, I think it’s extremely effective to solve certain types of problems, it also leads to extreme concentration on other dimensions. Think about, you know, for example, mining. Mining fairly concentrated, not just from one operational perspective, but also from a hardware and infrastructure perspective, right?
So anyone that can get a big leap in R&D on mining can control, indirectly, a big part of the ecosystem. Similarly, I think we’ve seen also in proof of work chains, concentration in custody, and so once you start thinking about all those problems, it really doesn’t become clear what the best models should be for a network that can start potentially with a set of founding members, but really expand and become more open and competitive.
So that’s where…you know, we started tweaking a number of different dimensions and again, the design is far from complete, and that’s why when we announced, the idea was to gather a lot of feedback and ideas and really crowdsource part of the iterations, both around the open source code base, but also around some of the economic principle of Libra.
Wow. So we’re going to unpack so much of what you described there. Thank you so much for your really full and considered answer. I actually wanted to ask a little bit more about this period when you guys were planning. So, as you have probably seen, after you released the white paper, there was a pretty strong reaction from regulators, but I do know that before you guys did publish the white paper, that you also actually did spend some time talking with regulators.
So were you aware that they would have such serious concerns and that there would be kind of such big blowback around your history with things like the Cambridge Analytica data breach or how Russia used Facebook to try to influence the 2016 election? Like, was that part of your strategy, as well, before you released the white paper? Like, did you have an awareness that would happen?
So, first of all, again, we realized that this is a regulated space and that we would need to engage with regulators even before announcement, and so that’s what we did. We had extensive meetings both in the US and abroad. Of course, you know, there’s a broader constituency that is interested in this, and so, after announcement, I think things held up substantially.
You know, on your point about Facebook kind of being the initial messenger of this, I think it’s also important to remind ourselves that we were able to make a number of choices that are pretty innovative and new in this space, at least for tech. It’s very rare for a tech company to make some of the choices that we were able to make on the protocol, exactly because I think there was an understanding within Facebook that a new model for trust in digital platforms, a new model for exploring different business models was really important to be developed.
So when you look at the design of Libra, it’s not meant to be kind of a wallet garden or kind of a siloed solution. I think there’s been very successful payment solutions that are fairly centralized and have digitized cash in other regions of the globe. This is not what Libra is really about. It’s kind of the opposite, and so although it was incubated at Facebook, now passing over governance and control, Facebook is now only 1 of 21 members as October 24 of 2019 at the association.
With this new distributed governance structure, I think there’s a real commitment to interoperability to ensuring that this is a network where you can have low switching cost and where, ultimately, you know, consumers across the globe and merchants and other service providers will have more choice. That was really the core of the original economic principles around the network, and again, I think we were aware that we would face a high degree of scrutiny.
When you try to innovate in any regulated industry, by design, I think what you’re designing, what you’re pushing out will not fit exactly into the existing regulatory frameworks because it’s new, and you know, it would’ve been hard for regulators writing laws 30, 40, 50 years ago to predict that technology like blockchain could come around and you could build marketplaces in this new way, and so this is the phase we’re in.
I think there’s a number of very constructive feedback coming from many of the regulators and the technical staff, from central banks to institutions like the SEC and others, and it’s been extremely helpful. In a sense, you know, we want to be aware of what the challenges are, of what the questions are, and we want to make sure that the network really can fulfill its promise and its mission. So if we launched something that didn’t fit into the regulatory framework or didn’t address some of the concerns of central banks or other stakeholders, we would have failed anyways.
And so this phase, although it’s difficult, of course, because, you know, you see a lot of pressure in many different directions, is one of very intense design and fine-tuning of that initial concept, and what’s exciting to me is that now it’s not just us incubating internally within the Calibra team, but it’s the other 20 founding members, many of which have deep expertise in other verticals. You know, there’s NGOs and nonprofits, for example, that really understand what it means to operate in regions of the globe where people don’t have any access to financial services and where even issues like KYC and identity are extremely problematic.
You have universities that can bring a lot of expertise in some of these topics, and then you have players that I think really believe that a network of this type could streamline their operations, and so there’s, you know, a fairly selfish business objective there of reducing costs and reducing frictions within their own operations, and those are the kind of players that I think are needed in this space because, as you know, lot of pressure, lot of regulatory pulls and pushes in different directions, but if you can get the design right, I think it’ll be a very constructive phase.
Yeah, and to dive into that a little bit more, I noticed that your criteria for Libra Association members are that they should have a market value of more than a billion dollars or more than 500 million dollars in customer balances and must reach more than 20 million people a year multi-annually, and you have a slightly different standard for, like, crypto investing companies or blockchain infrastructure companies.
But I was curious because it seems like you guys were being so strategic in the ways you thought about who you brought on, and obviously, you initially announced, you had a number of payments companies, but now VISA, MasterCard, PayPal, booking companies, and all those had to leave, or they decided to leave, Stripe, others. So what goals were you trying to accomplish by having so many payment companies as members, and what does that mean now for the project that almost all the payment companies have left?
Yeah, so, and this is part of, really, that idea of an open technology standard. So bootstrapping a platform that can have real utility from the early days. You know, any network like Libra has a massive, two-sided network effects problem. You need users, and you need applications, right? So, for the coin to be useful and for the coin to be a good vehicle for something like a remittance or a cross-border payment, well, there need to be on- and off-ramps, and people need to be able to come in and out very effectively, especially at the beginning, right? What you can expect is…
Oh, like for conversion?
Yeah, for conversion. So the idea of bringing around founding members was two-fold. So, first of all, these are institutions that have a brand. They have a reputation at stake, and so when you think about, for example, many of the permutations that we’re seeing in the space around proof of stake models, part of the challenge is, as you all know, the nothing at stake issue.
And so you can think of the seeding group as a way to work around the nothing at stake problem of a proof of stake model. By bringing in these trusted brands, we were trying to bootstrap the network and ensure that, essentially, you know, if you’re running a node, you have a lot more to lose by not operating it correctly because your brand is on the line.
You know, to your more specific question about changes in the composition, this is a difficult journey, and as you know, there’s been all sort of different pressure, much of which was public, and so many of these payment companies, of course, are regulated institutions, and they were under additional pressure, especially in this phase of uncertainty, but it’s really important to remember that the platform is open. So you don’t need to be a founding member to build a product on this platform.
So I think there’s also reasons for many of these players and other players to kind of wait and see, get the founding member to kind of shepherd this through this difficult phase where there’s additional pressure, and then come and build once that is resolved. So, again, of course it’s a setback, because when you think about on- and off-ramps, payment companies play a major roll. PayU is still a member of the association, and they’re very active in many of the important markets, especially from a financial inclusion perspective.
But more broadly, I think my sense is that, you know, over time, the association will be able to expand its founding member set, and so the goal is still to launch, but maybe is it 60? Is it 100 founding members at launch, and that set will actually be much more global in nature, will represent many different verticals. The idea is really to seed the network with the best possible players to ensure that this thing is useful and solves people’s problems.
It was reported that Libra will be made up of 50% US dollars and US bonds, 18% euro assets, 14% Japanese yen, 11% British pounds, 7% Singaporean dollars, and I know, of course, you have this goal to create the most stable currency, but so, you know, I’m not a forex person. I was trying to do some research on this. As far as I can understand currencies basically just have value in relation to each other.
And when I was literally Googling things like what is the most stable currency, like, none of the sites were giving the same answer. So then I started to wonder whether there was any kind of objective measurement of this, and so, basically, I was just wondering, how did you define stability for the globe? Because I think that will basically impact different populations differently, and so, from there, how did you end up deciding on these assets and this mix?
Yeah, so there’s a lot to unpack there. First of all, again, the percentages are just a proposal, and right now, you know, there would be a work stream at the association, and so all the founding members will work together on that final composition and in evolving the concept of the basket. From our perspective, the objective has always been thinking about value preservation, right? So if you’re using the network, if you’re trusting this network with some of your savings that maybe you’re trying to send abroad as a remittance, how can we ensure that that promise is kept?
So, you know, we wanted the network to be global in nature. Otherwise, you could’ve imagined pegging it just to the US dollar. Now, the advantages of the basket…and again, there’s a history here that traces back to some of the concept that the IMF, for example, has been working on with the SCR, is that when you think about the perspective of many different foreign countries, if you’re pegged to only one asset, now you’re really susceptible to the volatility and variation that’s coming from that one single one.
Now, for some regions of the globe, it may not matter because they’re already fairly dollarized, but from a more global angle and a more global perspective, one of the key advantages of the basket is that, first, you have a diversified set of assets, but also that it’s kind of a more global representation of a set of central banks that have a history of stability, low inflation, and really strong independence, and so that was the inspiration around the basket. Something that I want to demystify is, you know, often, this is considered as a basket stablecoin.
You can’t really build a global stablecoin, right? It’s an oxymoron. Prices and basket of goods and services that people consume in different regions of the globe, even within the same country, if you think about, you know, rural versus urban parts of different countries, are fundamentally different, and so that’s also behind the idea that Libra should not have any role in monetary policy, simply because, you know, it’s not the role of an association of this type to help people smooth consumption around that basket.
What something like the reserve can do, though, is ensure that, in aggregate, you’re kind of backing the coin with assets that provide stability, low inflation, and guarantee, you know, a lower spread relative to your local currency. Now, of course, if you live in a country that’s going through hyperinflation or that has wide swings in volatility in their own region, Libra will be volatile against that.
There’s no way to buffer that, and this is where, you know, I think when you think about what Libra is useful for, it’s really useful for cross-border payments, remittances, things where people are already incurring a lot of effects fees and conversion fees, a lot of additional fees added through the value chain, and if you do have this global medium of exchange, you can not only cut a bunch of middlemen out of the picture, but you can also streamline that operation and offer something that we believe would be a valuable additional toolkit in somebody’s digital wallet.
So I’m glad that you brought up the IMF special drawing rights basket because, as you probably know, in 2016, they did add the Chinese renminbi to that, and so I wondered if you ever thought it would make sense for the Libra Association to use Chinese currency to back Libra?
So, again, this is a decision that the association would have to make in the future. We’ve started mostly from, you know, historical conditions of stability, local stability, and low inflation, and so the five sets that are in the proposed basket were selected that way. So that’s how the basket was defined.
And so, basically, you’re saying it’s out of my hands, but do you think it could ever make sense?
Again, that’s a decision for the Libra Association to make in the future.
And so let’s say that, at some point, they decided that the renminbi would be part of Libra. If, after that, the Chinese government came to the Libra Association or even to Calibra and said, hey, we want you to block access to Libra tokens for these specific Hong Kongers or for these specific Chinese dissidents. Would that fact that Libra holds renminbi in the reserve give any weight to their request, or would they be able to harm the Libra in any way if they didn’t comply, or how do you think the Libra Association would respond to that?
Yeah, I think, you know, taking a step back first, I think if the association were to, in the future, expand the basket, they would have to consider all the possible ramifications of that decision anyways. It’s important to remind that the basket is not meant to be actively managed. So the idea is to set it and keep it stable that way that for a long period of time.
To your more specific question about conditions and censorship within a certain country or a certain region, something that’s important to realize is that all the wallets and custodians operating in a region will have to comply being kind of financially regulated entities with the rules and regulations of that country. So if a wallet is operating in China or any other region, they would have to follow, you know, whatever the restrictions are of that specific region. So this is already true in the network as it’s currently designed. So I don’t think it would be any different in the scenario you described.
Oh, okay. Actually, from Mark Zuckerberg’s testimony, it wasn’t totally clear to me if it was possible…just from the way he answered his questions, it seemed like it might be possible to create anonymous wallets, but you’re saying that every single wallet will be KYC’d?
So there will be non-custodial wallets on the public chain, and what’s important to consider, though, is that many of the…essentially, all of the on- and off-ramps, the authorized resellers and exchanges that are authorized, will essentially apply KYC/AML, and there’s a new framework that the association is working on to really kind of describe all of this different aspects.
Oh, okay. So then I’m sure you’ve heard this question before, but so, if that’s the case, then how will that affect your goal of banking the unbanked who maybe, in many cases, don’t have really strong identity verification?
Yeah, and you know, this is where it’s really great that there are founding members that are really active from an NGO perspective in regions where that’s exactly the problem you describe. I think, over time, the hope is really to lift up KYC and identity standards, maybe even in collaboration with international organizations that can help you.
Let’s say you’re working in a refugee camp or in a condition where you do need a trusted intermediary that could be a global NGO to certify that this person actually should be allowed on the network. You know, going back to he broader problem of last mile issues, this is not something that we can solve in one single swoop. It will take time, and especially on the unbanked, I think the promise is in regions where you already have wide smartphone penetration.
And people may be using the classic 30-dollar Android device, and they have access to data. That’s where you can start. You do need often that in combination with strong identity. You know, some regions have made good progress on this, if you think about India. Others are lagging behind, but it will be a long-term effort, and I think among the founding members, many of them feel this problem of identity because they’re operating in many different countries.
Often, they have to deal with cash, and so I think you will see the financial inclusion piece advance, especially together with broader infrastructure around identity and KYC. Again, it won’t happen overnight, but I think the NGOs can play a major role in really identifying solutions that fill both the void from people that come without strong identification, but also without excluding them completely from the network, and this is where, you know, the public chain allowing for small cash-like transactions could be quite meaningful.
We’re going to discuss more about how Libra can help bank the unbanked, but first, a quick word from the sponsors who make this show possible.Cipher Trace
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Back to my conversation with Christian Catalini. So, actually, before we talk a little bit more about this unbanked issue, I was curious to hear how Calibra and Facebook will make money from your efforts here.
Yeah, so there’s a number of dimensions where something like Calibra is a complement to Facebook’s existing business model. So what’s interesting is that when you think about, you know, how remittances are happening today, people may be going to a kiosk or a store and essentially pay for a remittance, take a picture of the receipt, and send it over a messaging app somewhere across the globe.
So, ironically, those transactions are kind of already happening, facilitated through the platform. The additional challenge being that people pay very heavy fees on that leg, on that little trip of data across the globe, and so, you know, you can see facilitating that as being one more way that users can be engaged on the platform and can be actively using the platform for their different needs.
There’s a large number of small businesses, I believe it’s about 90 million at least, that are active on Facebook’s different properties, and you know, for them, payments and the ability to really move value could be quite important, especially because many of these, even if they’re trying to pay for ads or if they’re trying to sell some goods, payments are a friction, and payments may be costly in their current framework.
So, again, that’s another important dimension, and more broadly, I think this relates also to I think some of he pushback on privacy. With Calibra, there’s really a strong effort in showing that the company can innovate around different types of business models and with a different type of long-term view about, you know, how the product could shape over time. One of the things that was near and dear to my heart when I was probing David in that initial meeting about, okay, if we want to design this right, for example, what about privacy?
And I think, from the very beginning, there was an understanding that people, at least in the US and many other western countries, do not want their social and financial data to be comingled. That’s something that many feel strongly about, and so if you look at some of the commitments that’ve been made for Calibra, the idea is really to explore new types of business models in the long run and new types of innovation and applications that do not involve that link, and so that was something that was really important to me and to many other people on the team.
So I think, you know, when you’re part of a platform and an ecosystem like Libra, first of all, you’re pushing the company to be on the frontier of a really important wave of innovation, but second, there’s strong complementarities with things that are already happening on the platform, and you know, going back to the cash example, there’s people in different regions…and this is a relatively smaller use case, but that are trying to buy ads and can’t because they don’t really have a payment solution. So there’s also very practical reasons for why this could be good for the ecosystem.
Okay, so it sounds like, from Facebook’s perspective, it’s a way to diversify revenue to bring in a stream that isn’t necessarily dependent on advertising or selling data, but that maybe then within the app itself, the way you guys are making money, is by charging fees? I wasn’t clear on that, actually, because I’ve seen…like, for example, in the white paper, it said low to no cost, and then I saw Kevin say in an article in the Verge that there might be a small fee just to cover fraud and chargebacks, but not a fee to use the payment itself. So can you just define…or maybe you haven’t figured it out yet. I don’t know. Do you know what the fee structure will look like to use Calibra?
Yeah, so, on Calibra, again, a lot of this is still a work in progress, but the goal is certainly to go as closely to zero as possible, right, because, again, going back to the 7% charge for remittances on average globally, the World Bank sustainable development goals has a goal of 3%, and so I think this is a metric that can push much lower than 3%, and you know, again, close to zero as possible. I think where fees may be more reasonable is actually on the merchant side.
And this reflects I think some of the current business models where consumers don’t pay for some of these fees, and then there are small fees for merchant services. Merchants need all the additional feature and functionality around chargebacks, fraud, and everything else, but again, this is an area that we will love to see and may also vary on region, depending on what the integrations look like. The objective is, you know, over the short term and medium term, to really bring this available at almost zero cost.
But then again, once you start thinking about AML/KYC, there are additional structural costs that, of course, you can’t subsidize for a long term, and so I think it’ll be important for a wallet like Calibra to understand what is the best way to cover those fees and ensure that the platform is both secure, but also responsive to the kind of functionality people have come to expect from a digital payment service? You know, if you’re locked out of your wallet or if your wallet gets taken over, those are all additional features that I think protect consumers, and so those are all features that Calibra will support, and of course, that will come at a cost.
Okay, and so, yeah, that was my other question about the chargebacks. So it’s not literally that you’re reversing the Libra transaction? It sounds like that’s not possible. You’re just charging the fee so, that way, you can make people whole if anything goes wrong? Is that correct?
Yes, and again, if a transaction is between a merchant that’s using Calibra or a user that’s using Calibra, in that case, it’s even simpler because it can be reconciled within the system. If it’s between two wallets that have a business relationship within each other because maybe they transact often with each other, there could also be an operational pat there. If it’s on the public chain, yes, you know, that couldn’t be reversed, but of course, the agreement with the end user would cover that.
Oh, oh, now I get it. Okay. Okay. So, basically, you’re sort of like a Coinbase where if the payment is happening all within the Calibra ecosystem, then you guys can just update your records, but if it’s, you know, between a Calibra user and somebody not in the Calibra system, but it’s still using the Libra currency, then that obviously probably can’t be reversed, but you can make them whole? Okay.
I think it would really depend on, you know, what triggered the reversal, but my sense is that it will reflect a lot of what people have come to expect from existing platforms. So it won’t be different in that.
Okay. So now let’s talk about the regulators again. I’m trying to figure out, you know, what signals are you looking for from US regulators to decide whether or not you should go forward or not go forward? Can you break it down maybe by the particular agencies? Like, do you need some sign from the SEC that this isn’t a security, or are you waiting for something from Congress? Obviously, then here we’ve got the G7 saying you guys should not go ahead until you’ve proven that it’s safe and secure. So just do you have kind of like a checklist of the things that you need before you can say we’re okay?
So, you know, I think a lot of these regulators have already given us some homework in terms of, like, what are the kind of questions that they want more detailed answers on, and so I would look for further announcement by the association in the coming months about many different dimensions that people care about. I already mentioned, for example, AML and KYC.
That’s a dimension that many regulators, for example, Treasury and others, are focused on, but again, I think, like we said before, we want to launch this once we have kind of a green light and we feel like all the stakeholders are happy with the design, and so in the US…of course in Switzerland, the relevant one is FINMA, and I think what’s been great about Switzerland as a home for this is that FINMA and the regulatory framework, as you know, in Switzerland, has been fairly advanced when it comes to cryptocurrencies, blockchain, stablecoins, and some of these issues.
So, you know, you may have seen the FINMA guidelines on payment networks. Those are things that we’re looking really closely at to really ensure that this network can not only integrate, but also operate across different regions, and that’s really the challenge here. There’s no global framework for anything like this, and so we’re kind of the first ones to explore that, and that requires additional work.
And obviously, I’m sure you’re aware that the scenario that potentially the Libra Association could go forward without Facebook has come up a few different times. What would need to happen for Facebook to say, okay, you know what? This is the way that this will go forward, is Facebook will leave and will no longer be a part of the Libra Association?
Again, I think, you know, we’ve seen Facebook’s commitment to this over a long period of time, all the same phase of very high pressure. It’s not a project that has gained Facebook I think any favors or friends, but you know, if you roll back to the mission, I think Facebook is in a good position to really delivering on that goal of financial inclusion, having platforms like WhatsApp and Messenger reach and connect people and allow them to move value. Again, I think you’ll see tremendous pressure on all of the members as we go through, and that’s really important for the project, too.
I think the ultimate test is that the association…and this goes back to the economic design and why blockchain is so important. The moment you have, like, one single entity that is a single point of failure for the association, then the project is not really designed right or hasn’t reached the stage where it’s designed right. So I think in the future, it shouldn’t matter whatever entity leaves or joins. That the project should be self-standing and be able to support itself and evolve. So you can think of that as an important test of the association itself.
And one thing I was curious about was that in one of the initial white papers, you stated that one of the goals of the association would be to minimize the association’s role as a manager of the Libra reserve and instead, fully automate reserve management. I didn’t know what fully automated means. Does that mean using some kind of algorithm to manage it or obviously, here in blockchain where we’ve got, you know, things like DAOs where people can vote with their tokens…so I didn’t know. What does that mean? Do you have a vision for that?
Yeah, and again, many of these are hypotheticals and are projecting us into the future, but you know, when we looked at all the designs…and there are many designs in the crypto space which I think are really clever, but you know, from an economics perspective, my main concern about many of them is that, at their core, they’re always based on expectations.
So if you look at some of the things that have been experimented with, if you have a change in expectations of any type, whether about the technology, the market, the regulatory uncertainty, all of those assets, or many of those assets, can really collapse to zero, and so here, we wanted something that didn’t have that property, and so taking a step back…and this is something that I think is misunderstood about Libra, but Libra is really designed to be a complement to good monetary policy, to good central banking, not a substitute, and so the future where the reserve could be automated or could even fade away is actually one where, you know, maybe central banks have worked hard to develop central bank digital currencies, and those can be just integrated. Maybe it’s in our cross-chain link between two different blockchains.
You don’t need to manage a reserve and do all this additional operations to digitize assets, because they’re already digital, and again, in that scenario, you can think of central banks, of course, keeping their domain over monetary policy, over building stable assets that people can trust and rely on, and the Libra network on top, enabling those sort of functionality across borders in terms of programmability through move and so on.
And so there’s really, like, this concept of a public-private partnership where the public sector, of course, is in charge of the public good, which is retaining the value of those assets and managing, issuing them, and doing everything else they do today, and you have layered on top, a very efficient payment network that can really activate all sort of new use cases that build on those assets.
And so, you know, the word automation, I think it’s kind of inappropriate in the sense that it would be like a scenario where the CBDCs are present and you can kind of integrate from the bottom up these assets on the network, and then the association doesn’t even need to manage a basket, doesn’t need to manage the assets, because the assets are just created and maintained by somebody else, and they’re linked on the Libra blockchain when they need to be used.
That’s fascinating. All right, so let’s talk about something else that has been a huge theme, especially this last week. So whoever controls the dominant global stablecoin, whatever it is, that they will be hugely powerful, and obviously, whichever existing currencies that that global stablecoin is tied to will also benefit, and that appeared to be the basis of Facebook’s argument during the recent Congressional hearing featuring Mark Zuckerberg.
So Libra’s ability to thwart the threat from China was, you know, I guess a big part of the thinking for why maybe the west at least should support Libra now, and I thought that kind of the argument from Facebook seemed like a pretty big contrast from a few years ago when Mark did the Smog Jog in Beijing and was learning Mandarin, all in his effort to have Facebook enter the Chinese market. So how did Facebook’s attempt to operate in China inform this current thinking that Libra is the best counterweight to China’s digital currency plans?
So, you know, a lot of those conversations and discussions are before me even joining the Facebook team. So I can’t really comment to that, but I can speak towards the broader I think context. So, when you think about it, right now…and this is not actually specific to blockchain if you look at some of the conversations around 5G, some of the conversations around quantum computing. There’s a number of different technological sectors where there’s different approaches to innovation, and financial services and digital money, of course, is one of them.
I think we have a current infrastructure and a current way, for example, where the US can enforce sanctions and other toolkits in the current system. I think what’s important to realize here, first of all, is that innovation will come in different flavors and forms, and as you well know, blockchain is just…and cryptocurrency in general, is just a tool, and so the way you apply that tool really defines the emergent properties of that system. So, with Libra, what was important to us was that the emergent properties were close to some of the western values.
That, you know, you can think about dimensions like privacy, dimensions like free market competition on top of the network, ability for startups to enter and compete. All these different elements that have been seeded into the economic design, stability, monetary policy, and that’s why, you know, the basket, the proposed baskets, as those currencies in it set, all these different dimensions were there to really build a network that can offer a lot of choice and can port over some of those values.
But of course, I think we’ll see innovation from many different entities in many different countries. There’ll be different approaches, and I think what would be interesting to see is which one of these networks can actually ultimately deliver the most value to users across the globe, but it is important to keep in mind that I think there’s a tension between different approaches, right? So more controlled versus more distributed ones, and that’s the fascinating part of the entire blockchain space.
Issues of free speech and financial power have come up a lot in the last month, both around Facebook, especially with political ads, and around the NBAs and Blizzard Entertainment’s sort of voluntary censorship or punishment of free speech to please the Chinese Communist Party. Is there some sense within Facebook now that financial freedom and free speech are related in some fashion or that financial freedom is an extension of free speech, and if so, is that kind of part of your mission now with Libra, as well, or in general, how do you think about those two themes?
I mean, those are really complex issues that, you know, transcend money and the flow of value, but I think it’s really important to realize that if you’re able to build a network that allows for competition and allows for different types of players to come in and build different solutions, eventually, consumers will have choice, and so through that choice, they have an indirect way to vote with their wallet…no pun there, and express their preferences.
So, you know, this relates to everything, from issues like privacy to would you rather have a subscription model or pay as you go? When consumers have choices, there’s a mechanism on a platform like Libra to express their values and to have a low-friction way to participate in governance, and so that’s I think what’s really important in a network like Libra, is that you allow for all those different approaches to come in and coexist, and then the market can sort out, you know, which ones work in certain regions and not in others.
That I think is an important property, combined with the fact that, again, in Libra, at scale, no single entity can unilaterally shape the evolution of the network. I think that’s an important guarantee to really reflect a democratic representation of different stakeholders and users on that system. So that’s where I think it will also matter for issues like free speech and other values that people deeply care about.
The countries whose citizens could benefit most from Libra, I guess leaving China aside, although I guess they have plenty of other options now, those are basically also the countries that have an incentive to either block or at least put up hurdles to the adoption of Libra, and I mean, you can already see I think, like, India, this is even before Libra came on the scene, has been really opposed to cryptocurrencies, and I’m wondering, does Calibra or the Libra Association have any ideas on how to overcome this fact that the countries that could benefit from Libra the most are also the ones that have an incentive to kind of block it?
So, you know, those are real challenges and relate to our conversation that we were having before about last mile frictions. I think more broadly, if the network provides value…take the example of remittances. In some regions of the globe, remittances are larger than FDI, so foreign direct investment. They’re a meaningful economic flow that can have really positive impact on the ability for an economic region to develop. You know, when I was at MIT, my colleague told me a story.
Did a lot of work on mobile money, and what’s interesting about mobile money, for example, in Kenya is that when these flows of remittances reach directly women in the household, they’re way more effective in being converted into, for example, school tuition fees and things that really help that family entity to grow and kind of withstand economic hardship. So I think the reaction by some countries…and some countries are already banning cryptocurrencies more broadly.
And so Calibra won’t be able to operate in those regions. Some others may try initially to just block this because they see it as a threat in different shapes or forms, but going back to that conversation with different regulators, I think, you know…and things like the G7 stablecoin report, I think it’s really important to take the concerns of different types of countries seriously and work through, you know, what is the scenario in which Libra can still fulfill its mission within the specific needs of a certain locality? It would be a work in process.
I think some regions have been extremely successful at digitizing cash. Think about China, or even in India, first starting with the identity system and then the unified payment solution, but all these systems are not really interoperable with each other, and so you land with a system of very national payment infrastructure that doesn’t talk to each other, and there are global needs, and so I think, more broadly, if Libra can become this efficient medium of exchange across different regions, over time, I think it’ll be in the interest of many of these regions to come online and be connected to the rest of the globe, but again, I think it’ll be a process that takes a number of years to unfold.
Well, one other thing I was wondering was, so, if Libra does become widely adopted in weaker economies and soon we see a majority of citizens and let’s just say, you know, one of those economies starts holding their savings in Libra, then couldn’t that weaken that central bank, and then would Libra, in effect, play a similar role to that of an actual central bank, and what kind of effect do you think that would have on the stability of that country?
Yeah, so, first of all, it’s important to remember that, you know, Libra is really optimized for cross-border transactions. It’s unlikely that you will be using Libra to pay for coffee domestically, because now you’re kind of taking on foreign exchange exposure, and so it is a medium that’s really optimized for that country-to-country payment. Now, in some regions, of course, the local currency may be highly volatile.
So people may look at Libra as a store of value of sorts, but here, the challenge, again, is one where the wallets and the entities operating in that region will have to comply with the region’s rules, and so if there are capital controls, they’ll be applicable to Libra in a very similar way that they’re applicable today to banking and financial institutions, and so the idea is that, you know, that really kind of changes the relationship with local monetary policy.
The idea is, again, for Libra to integrate and not be a threat to monetary policy, whether it’s a large nation or a smaller one, and I think it will take a number of years for redeveloping a framework that allows, for example, for cross-border payments to come in, especially in regions that are way more worried about capital outflows or people running away from their own currency.
You know, as you were talking about, there is going to be friction for people when they’re converting in and out of Libra. So then I just want to talk about this tension of how much it is that Libra really will help the unbanked. Let’s say that I’m in India and I’m having to convert from rupees to buy Libra. I pay little fees. I pay some fees. I lose a little in the exchange rate, but then later, when I want to use that money, then, again, I’m going to pay some fees and lose in the exchange rate to convert back to rupees. So in what scenarios would it make sense for somebody to buy Libra? Would it literally be just if they’re sending money somewhere abroad?
So, of course, it starts with the receiving and sending of money. So think about the remittance use case, but then over time, I think this is where the founding members and the broader set of initial participants in the association is really important. You could imagine all sort of new use cases. So maybe you received a remittance for your telco operator, and that telco operator is part of the Libra association.
So now you can use it to buy airtime, to spend it as mobile money, or maybe, you know, the partner of the association that you’re relying on is a merchant, a merchant that is active in that region, and now you can take your remittance and spend it and exchange it for goods and services. Removing those last mile frictions I think is something that, again, will take a long period of time, but it’s really important for ensuring that not only you’re cutting and reducing fees on the sending the value from A to B.
But also what can you do once you received it? How much friction are you now incurring in a specific region? An important feature here of the design is that there’s an incentive for different private entities and exchanges and other intermediaries to come in and fill that gap. So when you look at the reserve, the reserve will interface with a group of authorized resellers that will make a market for Libra, and essentially, these will be the entities that will capture and transmit market demand. Do you need more coins? Do you need less coins?
So, essentially, do we need to mint and burn at the reserve level? They will be able to charge a small spread and similarly, they will be interfacing with exchanges, including some of the crypto ones, for example, and these exchanges will also be able to charge a small fee. Now, the good thing about this spread is that if I see someone in my region charging too high of a spread, maybe that’s a big opportunity for me to come in and compete with them.
And so, over time, the competitive forces on on- and off-ramps hopefully will drive people to be very creative and entrepreneurial and allow all sort of on- and off-ramps to develop. I think there’s an opportunity here and that, you know, other startups in the crypto space have tried this before, but there’s massive friction. Building different types of on- and off-ramps where, if you do have KYC, you can really allow, for example, a convenience store or some other endpoint to become a way where consumers can come in and out of the network.
This is really interesting, and now I really see what the potential would’ve been if you had had VISA and MasterCard as part of the association, but I guess from what you said earlier, it sounds like they can still build something on the Libra network, maybe just not as part of the association itself, but obviously, then, if that were the case, they would have a ton of different merchants in countries all over the world, obviously, where users receive payments, and Libra could then just also make payments in that Libra.
So, okay, why don’t we move on? I’m conscious of the time. One other thing, obviously, here in the US that’s been hugely important to the regulators and obviously, to everyday people, just like if I think about discussions I’ve had with people outside the crypto world, you know, the number one thing they say when they hear that Facebook is building a cryptocurrency, it usually has something to do with data and privacy.
And I noticed in the Congressional hearing, that Mark Zuckerberg said that Facebook is building a privacy program for people’s data that’s equivalent to Sarbanes-Oxley, and he said that it will apply to your handling of people’s financial data. Includes things like quarterly audits. Can you tell us more about this problem? Like what data it covers? How does it work against things like law enforcement requests? What level of detail you’ll have about particular users or transactions, stuff like that.
Yeah, so I can speak more about, you know, Calibra, of course. The idea here is that how do you ensure that those two datasets are not connected? You have a number of solutions, and essentially, over time, the goal is really to push this to encryption and all these other mechanisms, access control. There’s a number of different technical and of course, organizational solutions that really allow you to prove at any point in time that it’s actually the case.
And so from the early design…and this actually required a massive engineering effort really to think through, you know, how do you keep these two systems completely separate? How do you, essentially, ensure that what you’re promising is actually always true? And so that work, I think it’s really important because at the end of the story, a wallet like Calibra will have turned user’s trust. Otherwise, there’ll be other alternatives on the network, and so it’s really important that those controls and those different data check boxes are always maintained.
Okay, and so then I actually just want to ask a little bit more about this Bank Secrecy Act and AML. Just on the ground, can you walk me through what it will be like as a user when I try to open a Calibra wallet? What steps will it walk me through? What information will it want from me, and I want to think about this in the context also of your target audience, which is the unbanked. You know, what kinds of data do they normally have or ID verification do they normally have, and how are you thinking about both the requirements of these regulations as well as just sort of how things operate in the real world for this unbanked population?
Yeah, I think, you know, from Calibra’s perspective, it’s really important that the network is safe and secure and cannot be abused, and so that would be a very strong AML and KYC program, which, of course, you know, will be a friction on onboarding. So sometimes people think about Facebook has more than 2 billion users, and so this network around the wallet could grow really rapidly, but they do forget that there’ll be substantial friction in joining Calibra. You will have to upload our national document.
And I think here, through a combination of new technological solutions, the goal is really to not only meet, but really exceed the current standards around AML and KYC. I think we tend to forget how ineffective the current system is at blocking different types of financial crime. So, yeah, the user experience, again, will require a full KYC process, and the other expectations of systems like this will all be fulfilled. You know, from your point of view of the unbanked, that’s going to be a challenge.
And so this is where I think the association working collectively on standards like an open identity protocol and also solving on the ground through NGOs some of these issues in regions where you don’t have a reliable identity system will take time. I agree it’s not optimal in the sense that it excludes some segments that are probably the ones that would benefit the most on day one, but you know, this last mile issues are real and will need a lot of work by different stakeholders, not just Calibra, to be resolved.
And so have the NGOs given you ideas on how to resolve that tension?
I think there’s been small-scale experiments in different regions. You know, take, for example, refugee camps, and there’s many international organizations, including the UN and others, that’ve done work around this. So, again, I think from the NGO perspective, they realize this is a massive challenge that not even a network like Libra on its own can solve.
I think my personal hope is that an open identity protocol that the association may develop over time could really help, also because it could lower friction for different governments and different entities across the globe to coordinate around shared infrastructure, and also ensure, at the same time, that all of this is developed with privacy by design in mind. So the association I think in its early works frame has been thinking really seriously about how to ensure privacy by design and how do we scale this up over time on different elements like identity, KYC, and everything else?
Okay. Yeah, I want to ask you more about this open identity standard, but I wanted to make one comment, too, which is that I think one idea for the NGOs is also to train people in using non-custodial wallets, right, because if those are going to exist on the network, then that would be a way of them kind of becoming “banked” without having to use a bank, but I wanted to ask about this open identity standard.
So I read that in one of your white papers, and I wondered if you guys were still going to work on that based on the reaction, as you could see, from the wider public about the idea of Facebook having more data on users, but it sounds like you’re saying this could be something, like a protocol, that the Libra Association creates. Is that the idea, and if so, what would that look like? Would it be based on your Facebook identity, or how would that work?
Yeah, so, and again, a lot of this is early-stage work at the association level, and so I can only really speak on behalf of Calibra on this, but the intention is definitely not to make it a Facebook standard, but to make it something that is fully interoperable, that gives users control over their data, and you know, ultimately, that avoids fragmentation. It’s actually a very similar problem to the one that we face on cross-border payments. We have all these siloed solutions that don’t speak to each other.
I think David was joking that after he guided the acquisition of Venmo at PayPal, you can still not send a payment between those two different platforms. Identity I think is in a similar spot. You need something that is an open standard so that people feel comfortable building on something where they know that they’ll be on a leveling playing field with their competitors. I think, from an economics perspective, what is interesting about all of these problems is that they’re massive coordination challenges.
Would we all benefit from cross-border network that allows for cheap, fast, and secure payments? I think the answer is yes. How do we get to coordinate on that is the big challenge. Similarly, on identity, I think there’s been a number of projects around more open structures for identity, and some of these I think are getting traction, and I’m sure the Libra Association will be interested in partnering and opening up to what’s happening already organically, but more broadly, identity is a massive challenge for many of the initial founding members.
They operate in many different countries. They maybe interact with users or suppliers or different workers in different regions, and so lifting up standards on identity I think is the best way to eventually deliver on the mission of financial inclusion, and also going back to your previous point, non-custodial wallets can play an important role in seeding some of those early use cases, and even if they are mostly focused on small balances and small cash-like transactions, that could be very meaningful for some of the segments that are severely underbanked.
And so, going forward, do you still think that the association will be able to launch the network in the first half of 2020?
Again, you know, the timeline is in the hands I think on many dimensions of different regulators and regulatory bodies. The goal is, of course, to meet that deadline, but also to get things right. So it’d be useless if we launched early and we didn’t have kind of the blessing of the core institution.
So I think it will really depend on how much we can improve the design and really show concrete proposals. I think, again, what’s been exciting for me is that now we’re working together with a number of founding members that have really clever ideas around issues like AML and KYC or are really thinking about privacy and other dimensions of the whole ecosystem.
And so now there’s a lot more talent that is thinking about the same problems, and so, hopefully, we’ll be able to show that not only we have taken a lot of the feedback at heart and very seriously, but we’re also really iterating on that and trying to find a solution to often being pulled in many different directions, but one that can satisfy, again, everybody that really matters for making this network a success.
Great. Well, thank you so much for coming on Unchained.
Was my pleasure. Thanks, Laura.
Thanks so much for joining us today. To learn more about Christian, Libra, and Calibra, check out the show notes inside your podcast player. If you’re not yet subscribed to my other podcast, Unconfirmed, which is shorter, a bit newsier, and now features a short news recap, be sure to check that out. Also find out what I think are the top crypto stories each week by signing up for my email newsletter at UnchainedPodcast.com. Unchained is product by me Laura Shin with help from Fractal Recording, Anthony Yoon, Daniel Nuss, and Josh Durham. Thanks for listening.