Facebook and a coalition of major tech and financial companies are planning on creating a new crypto‐currency called Libra that promises to make online payment processing swifter, safer, and less expensive. Diego Zuluaga joins Paul to discuss how Libra differs from other crypto‐currencies and to provide some calm, rational analysis about a topic that has provoked intense knee‐jerk reactions.
What is Libra? What are the constitutional behaviors of Libra? What is Libra’s structure of governance? How do you switch from U.S. dollars and your Libra account? How can Libra help you send money to your families in other countries? How will Libra be regulated?
00:05 Paul Matzko: Welcome to Building Tomorrow, a show about the ways tech and innovation are making the world a freer, more prosperous, and happier place. Now, by now, you’ve likely heard at least something about Libra, commonly and somewhat inaccurately called Facebook’s cryptocurrency. But at this point, you may be a bit burned out on crypto hype, especially after the glut of initial coin offerings in 2017, and the collapse of crypto prices, and the popping on the speculation bubble in 2018. To figure out where Libra fits into all of this, I’ve invited Diego Zuluaga to join the show. Diego is a policy analyst at Cato Center for Monetary and Financial Alternatives, arguably the best dresser on our floor of the Cato building, and the author of the recent article, “Facebook’s Libra is part of a welcome trend.” Welcome to the show, Diego.
00:51 Diego Zuluaga: Thank you, Paul. You are always so full of praise when I join the show. Clearly, you’ve forgotten about last time we [laughter] recorded.
00:57 Paul Matzko: That’s right.
00:58 Diego Zuluaga: Thank you.
01:00 Paul Matzko: Our listeners probably have as well. [chuckle] Okay, so we have Facebook putting its imprimatur on the cryptocurrency world, which is a big deal simply because Facebook’s a giant company, right? It’s got over a billion users, two billion users?
01:13 Diego Zuluaga: 2.4 billion users who are active.
01:14 Paul Matzko: 2.4 billion users.
01:16 Diego Zuluaga: I forget exactly how activity is measured, but I would imagine these are people who are on the platform at least once a month, 2.4 billion of those.
01:24 Paul Matzko: So this is kind of a… It was best of times, worst of time scenario for, I think, crypto enthusiast, ’cause on the one hand, there’s a certain degree of validation when a platform of 2.4 billion users says cryptocurrency is a useful space that we’re going to enter into and have some kind of role in. On the flip side, I think Facebook represents there’s some of the early kind of crypto utopians, it represents everything that they were opposed to, the lack of transparency, the concerns about your data, just being widely available and perusable by companies, by the government, etcetera. So there’s that kind of tension there, I imagine, in a lot of crypto users. So, when you first heard about Libra, this announcement, what were your initial thoughts, and how has that evolved over the last week or so since the announcement?
02:14 Diego Zuluaga: When news came out about Libra and Facebook’s involvement with it in the form of a separate organization called Calibra, which is going to be Facebook’s financial services company. My first reaction was to think that this was a payments innovation mainly, I read the white paper. And if you go beyond the Facebook brand name, and the use of the term cryptocurrency, really what you find is that this is a somewhat decentralized new payments application that is intended to make it easier for people who don’t have bank accounts, to transfer funds both within their countries and around the world. To me, that is an extremely positive development because we don’t realize it in the United States, but there are still more than one‐and‐a‐half billion people who don’t have either a bank account or a mobile money account. A mobile money account being some sort of electronic wallet that you may have on your cellphone or your Smartphone. Some African countries have used this to try and leap frog over the lack of bank accounts, but even in a lot of emerging markets, you still have large segments of the population without even that kind of basic payments account.
03:22 Diego Zuluaga: And because of the underlying user base of Facebook, and its partners in the Libra Association, because there are some others who have also a large user base, I was hopeful about the potential for the quick emergence of a large network of people who would start transacting in Libra. And in this way, you could bring people who have social media, have smartphones into the financial system in a relatively low transaction cost way. Now, the evolution of the discussion since Libra was first announced has revolved a lot around, or has focused mostly on whether it’s a cryptocurrency, and what the implications are for Facebook existing technology platform to be integrated into its burgeoning or nascent financial services activities. And I think those discussions are valuable, but I think we have to keep in mind that they’re highly speculative. You mentioned the interaction with cryptocurrency, and a lot of our listeners will probably have seen that there’s been a cryptocurrency price rally in the last few days, particularly with Bitcoin.
04:31 Diego Zuluaga: And some people are relating that to Libra’s announcement, and the fact that it will “mainstream.” It’s always a bit strange to use that as a verb, but will mainstream cryptocurrencies as a technology. But to me, it’s a bit like saying that if a large car company launched a hybrid car, a car that used an internal combustion engine and an electric motor, that that put it in the same bucket as a purely electric car manufacturer. Because Libra is a hybrid of a centrally managed asset and a cryptocurrency as commonly understood. Why? Because the Libra Association, which is going to be the organization managing the governance of the Libra network, is composed…
05:17 Paul Matzko: And that’s like Facebook, PayPal…
05:20 Diego Zuluaga: It’s 28 members so far, Facebook, PayPal are among them, so is MasterCard and Visa, booking.com. A lot of the payment platforms that we… Payment and booking platforms that we’re familiar with, Uber is part of it as well. They want to expand it to 100 members by the launch of Libra, which right now is planned for the first half of 2020. But those are the only people who will have a say in governance. Whereas most cryptocurrencies have kind of an open access kind of governance. If you’re a participant user, you will be able to make decisions, commensurate with how much cryptocurrency you hold, how much computing power you expand, or some other mechanism. In this case, Facebook, and its partner organizations will be the validators on the network, which means that decision‐making is not fully decentralized, which is why I say that Libra is a hybrid.
06:16 Paul Matzko: It’s kind of in between, is my sense, where, so it’s not fully permission‐less, it’s not fully distributed, but it’s not a government‐controlled fiat currency where there is a single deciding board or federal reserve or whatever it may be that makes those decisions. It’s distributed among, well, potentially 100 validators, rather than one, but also rather than the totality of all its users.
06:42 Diego Zuluaga: That’s right. I think there are two features that need to be highlighted. The first one, as you rightly say, is the relative distribution of control among the member organizations, and the second one is the constitutional foundational principles, if you will, of Libra, because unlike central banks, which have a great deal of discretion, they could commit today to a particular rule of behavior, but nothing binds them to that rule, typically. There are no constitutionally binding rules. A lot of banks have… A lot of central banks, rather, have an inflation target, something that’s mandated by the legislature. Other times, they’ve decided to do it on their own, but those could be changed without prior notice. In the case of Libra, they’re committing to picking a basket of relatively stable fiat currencies from around the world and to purchase security, such as government bonds denominated in those currencies to back every unit of Libra that is issued. And they’re also saying that any changes to that structure of governance will have to carry a two thirds majority in order to happen. What that does, quite regardless of the distribution of control in the network, is reassure the user that the policy won’t change, and therefore that the value generation or the value proposition of Libra won’t be affected by arbitrary decision‐making from the manager.
07:56 Paul Matzko: So, this, in a sense, this basket of bonds and other kind of relatively stable investments that they’re gonna put their reserve in, it’s interesting to me, because again, it’s this middling thing, it’s not… So, unlike a fiat currency, which is backed by the full faith and credit of a government, they just say, “Trust us, we’re good for it,” but it’s not backed by bullying like it used to be, or kind of was. That’s… I don’t wanna get into it, complicated discussion. So it’s not fully detached from some kind of a store of value behind it. It’s not the same as… It’s not in gold or the like. It’s not linked to a metallic standard or anything, but it does seem to have some sort of… I suppose this is a mechanism for reassuring users. The Libra Association is new. They can’t just say, “We’re the United States government, trust us. This money is fine and stable and we’re gonna manage it well, because we’re the government of a large, powerful country.” It can’t do that. It’s interesting. So, how do you see that reserve, that basket of bonds and stable investments? Does that make it kind of like a central bank reserve currency? What’s going on there? Explain that further.
09:15 Diego Zuluaga: There are several aspects to this, and of course, it gets a little bit philosophical when you start talking about value, because we say, well, it’s not backed by gold, which obviously is valuable. Well, but value comes from… Value is in the eye of the beholder, of course. And there is trust in a lot of the international reserve fiat currencies. We’re thinking here about the pound sterling as well as the US dollar and the Euro and the Japanese yen. There’s a certain confidence that from today till tomorrow there won’t be significant depreciation in the purchasing power of a unit of that currency.
09:49 Paul Matzko: ‘Cause they have a track record. They’ve been around for…
09:50 Diego Zuluaga: They’ve been around, they have a record of reasonable… Although of course, there are long term purchasing power dynamics here, which sometimes are not very flattering, but in the short term, they have a record of relatively good value preservation and you can use them to pay taxes, so at least you can always be sure that one of your most certain obligations is payable in the fiat currency issued by the jurisdiction where you reside. So, there are some elements that facilitate adoption of those. In the case of Libra, it operates a bit like Hong Kong’s monetary system does. Hong Kong has what’s called a currency board, which means that an entity set up by the Hong Kong government issues domestic currency on a proportionate basis to the number of US dollars that the board holds, and that is supposed to increase confidence in the system by giving everyone the possibility to redeem that unit that’s been issued for a US dollar. It isn’t clear in the case of the Libra Association what redemption looks like, whether there is a promise to redeem one unit of Libra for a basket of said units of the currencies backing it. Or whether it’s more like a mutual fund where there are shares that compose it, and the shares may fluctuate in value but because the assets that compose the basket are relatively stable you are not particularly fearful of momentary volatility, but no one is promising you a fixed the unit for your unit of Libra.
11:34 Diego Zuluaga: However, as you say all of those things are intended to increase trust. They’re intended to lower transaction costs and the way in which you might switch between US dollars and your Libra account, because I don’t think the expectation by any member of the Libra Association is that adoption will be 100%. It’s not like people will instantaneously shift their cash balances onto Libra. But we can probably envisage a situation in which a lot of people, who regularly use paper, regularly purchase things online, travel once or twice a year abroad and maybe send money to friends and family who are abroad, why they would have an incentive to carry some balance in Libra over time in the same way that… Because I know that I will be spending some amount of money at one of the large coffee chains every year, I don’t really mind carrying a $50 gift card for that chain in my wallet. I don’t go out instantly and want to exchange it for US dollars. I think the expectation is similar in this case.
12:51 Paul Matzko: How about to contextualize this for our listeners, let’s walk through the chain of events when you purchase something right now online using, I don’t know, say a Visa card or something, what that looks like, what the downsides are for that versus the promise of something like Libra? How that reduces friction, transaction costs, and the like? So I’ve identified… I really want a carpet. I’ve seen the carpet on Amazon. I wanna buy it. What does that process look like now? Where are the expenses and friction? Some of which are hidden currently to the consumer, but are real on the back‐end. And then how does that change in a potential Libra based world?
13:36 Diego Zuluaga: Payment cards have been a tremendous financial innovation. It’s amazing to think that as recently as 30 or 40 years ago, a very small minority of people actually used cards to pay for things…
13:47 Paul Matzko: Only rich people, yeah, yeah…
13:48 Diego Zuluaga: Exactly. And they enable a relatively low transaction cost way, high security way to pay for expenses. You defer payment in some cases, whether it’s a charge card, or a credit card that you’re using. But typically you have to have a bank account that’s linked to that card. You could purchase a prepaid card, but that has its own requirements. It’s expensive to issue and you may not be able to use it in as wide a selection of merchants as you can use a regular payment card.
14:18 Diego Zuluaga: In addition to that, the raw fees, as you say, involved in paying with a payment card, and those are somewhat invisible to the user because they’re not explicitly charged, but because the market is quite competitive the user is the one that pays those fees, the merchant typically passes on what’s called the interchange fee on a transaction to the consumer…
14:39 Paul Matzko: And how much are we talking about…
14:41 Diego Zuluaga: 300, 400 basis points, or 3%, 4% of the transaction, typically. I stand to be corrected. Maybe someone from Mastercard or Visa would argue with me and say, “Sometimes it’s 2.5%,” but it’s in that region. Of course, keep in mind that this involves a terminal that you can pay with, the guarantee that the entity issuing the card or rather the… Not the entity issuing the card because that’s a bank, typically, but the entity behind the network, Visa, Mastercard, Amex, is guaranteeing the transaction so that if I as a consumer fail to have the ready funds for it, the merchant is not left out to dry.
15:23 Diego Zuluaga: And likewise, if someone engaged in a fraudulent transaction on my behalf, I can call up Visa, Mastercard or Amex and tell them, “Please reverse this transaction. Compensate me. It wasn’t my fault or I made a mistake or whatever.” Those are all the various costs that this system pays for.
15:42 Paul Matzko: You’re getting real value for that 3% to 4%.
15:44 Diego Zuluaga: Exactly. Now, where I see Libra and the financial applications that it will hopefully give birth to bringing new benefits to the system, is first of all, in enabling people to access the same benefits that card holders have today without having to own a bank account, because you would link your payments directly to your social media account, or Calibra, where your identity is linked to your social media account, and Facebook has promised the separation between social media and its financial services provision, but I think that’s separate. In terms of ID verification it’s useful for your information to be already contained online, and for you to be able to load cash say into your Libra account.
16:30 Diego Zuluaga: So that’s one benefit. And then the second one is a more competition. I mentioned that Visa, Mastercard are involved in this, and I think the reason they are is that, first of all, they are very expert in the market, they have contracts with a lot of merchants, large and small around the world, they know a lot about payment security, they’ve been doing this for a long time, but I think they’re also interested in finding out what comes out of this and increasing their user base. And particularly in incentivizing merchants to accept Libra payments eventually where they’re using the card terminal that you use typically now when you go to pay at a store, or in some other capacity.
17:11 Diego Zuluaga: And I think that holds a lot of promise in terms of increasing both competition within the Libra ecosystem, which we find with platforms a lot, and maybe we can discuss that in a moment. But also outside of it, in that Mastercard and Visa and other networks will continue to enable transactions in domestic fiat currencies, but they will also have specific operations for Libra.
17:35 Paul Matzko: You see the prime benefit is people who currently, the one point however many billion…
17:40 Diego Zuluaga: 1.7 billion.
17:41 Paul Matzko: 1.7 billion…
17:42 Diego Zuluaga: It’s a rapidly decreasing number, by the way. Although, the more we reduce the number, the more difficult it becomes to scrape the barrel, the people at the bottom. But in the US, we still have about eight million households who have no basic bank account. And in addition to that, another 20 million who have a basic bank account but don’t have access to cheap payments and credit.
18:15 Diego Zuluaga: I think a lot of the time we focus so much on price that we don’t realize how much we value instant settlement, the ability for I as a merchant to know that regardless of what happens and I don’t need to know your name or have served you before, I know that I’m gonna get my money and I know that I’m gonna get it now and there’s a receipt and I can give you the receipt and you sign it or you type in your PIN code or whatever it is. And the same with this, that there will be someone standing behind the transaction, and I as a customer just value the fact that I know wherever I walk into, there’s a pretty decent chance, almost overwhelming chance, that one of my payment cards is accepted at that venue. So that’s very convenient in terms of, as you say, not having to walk around with a lot of cash everywhere.
18:56 Paul Matzko: So if you’re PayPal or Mastercard or Visa, all of whom are already on the Libra association why would they… If we’re talking about competition, is this their competition? Who is this competition for? Why would they be encouraging or promoting something that promises to compete with them? So if you’re PayPal, why do you want a PayPal‐like crypto‐currency competing for payments processing?
19:20 Diego Zuluaga: It’s a good question. And it’s one that I think is quite speculative, because I don’t even think the businesses realize the full implications of this technology, it could be that it flounders, that it doesn’t really take off or it could be that it takes off and takes over a lot of the payments market in a relatively short span of time. And I’m not voicing an opinion on that and I don’t think we should be in the prediction business. We should be in the allowing 1000 flowers to bloom business. But I think from the perspective of these networks, they say we are involved in this, there’s a latent market that we’re not covering right now, and we have expertise sufficient to be competitive even when the technology is not the one that we’re currently using.
20:09 Diego Zuluaga: It’s a little bit like if you… If a large car manufacturer came up with a way to build highways more cheaply and that get people faster to their destinations and you can reach more distant and remote locations than the way we currently do things, would it be in the interest of other car companies to join that effort, or to block it? Again, it’s not obvious, some car companies might choose one path, others might choose the latter, but the idea is that this is so attractive, as a complement to what already exists, that perhaps it’s a mistake to let it pass or at least not to be informed about what’s going on.
20:54 Paul Matzko: One of the other things you mentioned was the benefits to speeding international payments. So you’ve been talking about paying for things online, but I’ve heard you, and actually in your previous episode you recorded with us, you talked about folks who send remittances overseas, and so if right now, baked into our payment process in the developed world, it’s a 3% or 4% price that we pay for all these upsides, this convenience or whatnot, that the remittances market, the international money transfers it is much… There’s a great deal more friction in cost and that Libra promises to make that… To streamline that. I mean the benefits there would be even greater potentially. Can you unpack that for us?
21:38 Diego Zuluaga: It increases the transaction costs of making payments internationally that these happen relatively infrequently and less is known about the counterparties interaction. So the fee can run anywhere between 7% and 10% of the value of the money transferred which is expensive on any amount, but particularly when you are someone not making very much but sending a lot of your paycheck to relatives abroad on a frequent basis, can really add up. And the promise of Libra is to reduce the number of hoops that you have to jump through, increase the speed, but also lower the cost of the transaction. So the promise of Libra is to reduce the cost of sending funds abroad, reduce the time that it takes. And because every… Not everybody, but because a large share of the people who engage in these activities also have an account with one of the members of the Libra Association, bringing them in might not be as difficult as it is in other areas.
22:40 Paul Matzko: I mean, so to put this on the ground, let’s say you are a, I don’t know… You’re a day laborer who immigrated from El Salvador. You’re working in the US, right now you have to go to the money transfer desk at Walmart and pay a very large fee, up to 10% of the amount to send money from your weekly paycheck back home to your family that you’re waiting to bring with you or whatever, you’re trying to support your family back home. Well, this makes that… But folks in El Salvador, they might have Facebook, they might not even have Facebook. They might be on PayPal, and any of these association members using Libra, they could make that transfer much more quickly, it would arrive almost instantaneously compared to the current process, and at a fraction of the cost potentially. So real benefits for ordinary working folks.
23:31 Diego Zuluaga: Absolutely. And you would have more certainty, you’d receive a notification when you get your funds, you would have it on your phone rather than have to go to a venue to collect the money. You wouldn’t have to walk around with any cash unless you really wanted to. And keep in mind that for a lot of people, if the costs are already high in the United States for a lot of people who live in rural areas in developing countries, they’re just even harder.
23:54 Diego Zuluaga: The fees that I mentioned, don’t include the cost of a bus ticket to get to the center of town, somewhere in Burma or Thailand or Guatemala and so on. And so, it’s… From a developing market’s perspective, it’s a very interesting proposition. Another thing that, from the bank’s perspective is attractive is that right now, I don’t think this is quite as widely understood as it should be, in order to be able to make foreign transactions, banks have to set aside an amount of money, what’s called pre‐funding, that they will essentially draw on each time that they conduct a foreign transfer. It’s the only way that the transaction could even get to the recipient’s account within three to five days.
24:35 Diego Zuluaga: If there wasn’t that pre‐funded amount, it would take even longer. Now, Libra is doing essentially the same thing with the Libra reserve. It has a reserve which is essentially pre‐funded and collecting interest. But it’s likely collecting more interest than the pre‐funded amount by the bank will do. And because of the technology involved, and the instantaneous nature of the payment, the cost of putting it through is lower so that you can charge people less as a result, the opportunity cost of that money that has to be set aside is less or could be less in the case of Libra, than it is for existing foreign transaction services.
25:17 Paul Matzko: So when it comes to requirements like how much, and I forget the term… How much you have to… A bank has to hold in its reserves…
25:23 Diego Zuluaga: Sure, yeah, the reserve requirement.
25:24 Paul Matzko: The reserve requirement. And different countries have different amounts or percentages that are required as part of their… The total money.
25:31 Diego Zuluaga: This… The pre‐funding is separate though.
25:33 Paul Matzko: Pre‐funding is separate from reserves. Okay.
25:35 Diego Zuluaga: The pre‐funding would be an account that you have with… Or you will have it with your correspondent bank, or you will have it in an association of member banks that are all involved in transferring funds. It depends, but you have to set that money aside and draw upon it to make a payment, sooner rather than later.
25:56 Paul Matzko: Yeah, sure. Okay. So, you have this reserve of money that’s required… Or no, you have this pre‐funding that’s required, and actually even talking about money in reserve or pre‐funding money, makes me wonder to what extent is Libra and the Libra Association acting in a sense as a central bank? And to what extent… How will regulators respond to the idea of, there’s this large multi‐national conglomerate that has a currency of its own, has reserve backing it, that pre‐funds so that you can speed international money transfers, that works as a payment processor? Are regulators just gonna respond by saying, “Hey, look, you look like a bank, so we’re gonna regulate you like a bank?” How is that gonna shake out? Where do you see the role of regulation of the Libra Association?
26:53 Diego Zuluaga: So the Libra Association is a body that sets standards. It isn’t a financial institution as far as I can understand. It’s got a membership of 28, and the expectation is that those 28 either are already financial institutions, like MasterCard, Visa, PayPal, or they will become financial institutions in whole or in part, which is the case with Facebook’s division that will be providing payment services called Calibra. And so, it is those individual organizations that will be regulated according to the services they provide. Whether they will be regulated by banks, depends on what definition of a bank you want to give. It isn’t clear yet what, for example, Calibra will be providing. It’s clear that they will be providing what’s called a Digital Wallet, which is where you will hold your electronic currency, your Libra, and you will be…
27:42 Paul Matzko: It’s like a checking account in a sense.
27:43 Diego Zuluaga: Yeah.
27:43 Paul Matzko: Yeah.
27:44 Diego Zuluaga: Yeah, it will be like a cellphone app, like a smartphone app, and you’ll be able to scan a code, and in that way, make a payment, and you know, that sort of… The things we already know from Apple Pay and various other electronic payment services providers or digital payment services providers. If they start taking deposits beyond this Libra reserve, beyond the one‐to‐one Libra to basket of currencies, they could be subject to depository regulations, might have to apply for deposit insurance, might have to secure a charter from the FDIC or one of the other bank regulators.
28:26 Paul Matzko: But as currently constructed, none of that that really applies…
28:30 Diego Zuluaga: No, and it’s unclear and it’s unclear whether even Facebook could be ’cause according to old banking regulations that are still in place, the Bank Holding Company Act of 1956, a commercial company may not own a bank. This is what Walmart ran up against when a few years ago it tried to apply for a bank charter. And the banks, particularly, the smaller banks in various states were up in arms about it and states threatened not to recognize the charter, or not to allow people… Institutions holding that kind of charter to operate in their jurisdiction.
29:08 Diego Zuluaga: And so, Walmart had to withdraw, but the rise of Libra does again raise the issue of whether this is good regulation. I don’t think it particularly is, because first, it deters competition. And then secondly, it is not obvious that integration between a commercial company and a financial services business is a bad idea in any ex ante way. It maybe that it raises anti‐trust concerns, but let’s deal with that issue as we get to it, as we do with mergers, whether vertical or horizontal in every other industrial sector.
29:48 Paul Matzko: There’s something that’s… I mean, even mentioning Walmart and Facebook, there’s one similarity which is that they have their sets of critics which are just worried about their sheer size and a certain kind of sector dominance in their particular fields. Though it’s starting to feel a little bit quaint in Walmart’s case. I mean, you’ll notice that the antitrust talks today aren’t talking about Walmart like they were. I remember the ‘90s, “Break up Walmart, you gotta break up Walmart, they’re too big. Too big to… You know, they’re… They need to be shrunk down to size,” that feels quaint in the era of Amazon, right?
30:22 Paul Matzko: But be that as it may, there’s a certain kind of baked in distrust the big corporations, particular… In general, and Facebook and something like Walmart specifically, how would you respond to someone who says, “Look, Facebook is already this giant platform with 2.4 or 2.5 billion active users. They own WhatsApp. They own a variety… It’s kind of almost a corporate empire at this point with their tendrils expanding into all these different sectors and fields. And now, they’re gonna be getting into payment processing through the Libra Association. We shouldn’t allow them to do that because they’re so big, it’s scary, they’re hegemonic.” How would you reassure someone who’s worried about Facebook’s influence in the Libra Association?
31:17 Diego Zuluaga: It hasn’t launched yet.
31:18 Paul Matzko: Okay. [chuckle]
31:19 Diego Zuluaga: All we know is that this is a project of companies that are quite innovative.
31:23 Paul Matzko: Yeah.
31:24 Diego Zuluaga: That do have large networks, and that’s part of the reason why we should be hopeful that this will succeed. So it goes hand‐in‐hand in response to your question, size goes hand‐in‐hand with ability to succeed.
31:35 Paul Matzko: Yeah.
31:36 Diego Zuluaga: And they’re entering a new market where there are already an existing number of incumbents, some of whom do very well and know their markets very well. I mean, you know, it seems a little bit misplaced to feel pity and compassion for the very large financial institutions [chuckle] of the United States which are extremely expert at navigating both the regulatory system and the business environment. It’s good that we have more [32:05] ____ coming in…
32:05 Paul Matzko: Poor bank of America. That’s right, yeah. [chuckle]
32:06 Diego Zuluaga: Exactly, I mean… Or small banks too because small banks have been around and they know their customers well and they have particular sets of expertise. I don’t, and you haven’t had that much antagonism come from the banks. It’s funny, because from what I’ve seen so far, and maybe you’ve seen otherwise, it’s very much your priors and specifically your policy expertise, that is likely to determine your status on Libra. If you’re a privacy or antitrust expert, you’re much more likely to feel negative with regard to Libra.
32:42 Diego Zuluaga: If you’re a monetary or financial regulation policy person, like I am, I’m a FINRA guy, you are much more hopeful because you see it as capable of finally addressing some of the important issues about financial exclusion, lack of competition, stagnation in innovation, lack of choice, lack of switching between accounts. The fact that in the United States, the leading financial services market in the world, we still don’t have mobile money accounts which Kenya has led on tremendously, all of those things finally may be addressed by this.
33:12 Diego Zuluaga: And it may even be that, as you were saying, that Libra doesn’t become actually the most successful one, that, we have other tech companies coming in as a result, or, Walmart coming in. All it takes really, from my perspective, to actually begin to establish a foothold in this, is to have a large enough customer base that you know… You get enough information from your customers, you have them transacting regularly with you, they have an incentive to adopt whatever currency you’re offering because they know they will be coming back, that’s essential.
33:41 Diego Zuluaga: And then secondly, some degree of ubiquity and efficiency in your supply chain, that be it online in terms of having a platform that provides internet services, that enables messages to be transmitted very quickly, or on an offline basis, having a lot of branches, or a lot of offices or outlets that make it easier for people to use you in different locations. And the moment you have those two, you can, you are very much on a level playing field with everybody else to succeed.
34:15 Diego Zuluaga: Network effects are very powerful forces, but if they were the only forces around we would never have moved beyond whatever was the first institution or company with network effects. Be it A&P in the 1930s, or perhaps even further back, the Roman Empire, I guess, in a way was a network. Roman law was a network, but we overcome networks when a truly radical and beneficial innovation comes around.
34:44 Paul Matzko: It is striking to me, we’ve had a number of episodes talking about ways in which countries, outside of the developed world even, have been leapfrogging places like the US with technological development and roll‐out, kind of consumer roll out. So whether it’s a sub‐Saharan sheepherder using digital payments through M‐Pesa, right? In northern Kenya, or it’s in China where, I think, my understanding is a majority of consumers use digital payment systems for a majority of their transactions. I mean, our adoption rate in the US is in the single digits percentage of consumers.
35:21 Paul Matzko: The rest of the world is ahead of us using the kind of network effect‐based platforms that we’re describing here. So, we shouldn’t be afraid of the underlying technology. And even if you’re skeptical of Facebook, and I share a sense… They obviously messed up with their transparency and use of data privacy in the last couple of years. But even if you’re skeptical of Facebook, they’re clearly trying to gear this Libra Association to assuage some of those concerns. They are one of 28 folks on the board right now, they want 100 each with a single vote. So, if this is your plan for world domination it’s a pretty bad evil plan. They should go back to the drawing board to give themselves one vote over the governance structure of the Libra Association.
36:10 Paul Matzko: So, it appears they are trying to do their best to say, “Hey look, this isn’t just a Facebook thing. Yes, we’ll be benefit from it. Yes, this plays a role. We want the Calibra wallet to be kind of a dominant position here.” But hey, look, if you go to their website, within two clicks, it’s… Here’s how you can program a node for yourself. Here’s… Please other folks who wanna offer competing services to Calibra, their own kind of Libra wallets, and Libra‐based systems, start working on it now. We’re open to that. This is not what you do if you’re trying to establish some kind of hegemonic market control. So I find that reassuring myself, which is that… And who knows what the future holds. It could be all the worst case fears could come true, but we shouldn’t assume that’s going to be true.
37:00 Diego Zuluaga: And my understanding is that this is an attempt to move away from the business model that Facebook has had until now which I am, first of all not an expert on, but secondly agnostic about, in the sense of whether you finance yourself with advertising revenue and people clicking on your ads or through a fee or something else, is not really of great concern to me. Although I would caution people that these things emerge because they are the most efficient way of allocating cost. The reason the merchant pays 300–400 basis points or however much the fee is, is that that encourages both the customer and the merchant to join the network.
37:37 Diego Zuluaga: So we have the maximum number of interactions which is a good thing. So, to mess with those things can be tricky. But my understanding is Facebook is trying to move away from that model and toward one that is more based on direct charging for the provision of particular services. And particularly, that the future of communication and social media is more on the messaging apps than it is in the news feed. I don’t know if that is the case. But frankly, if you’re concerned about the current operations of social media networks, particularly Facebook shouldn’t you welcome a turn that gives Facebook an economic incentive not to conduct business in that way, and to do so in a different way?
38:19 Diego Zuluaga: You read a lot of the accounts about Libra so far. And they begin with a speculation, which is acceptable, and they move on to a very slanted discussion of the potential negative implications of that speculative outcome. And on that basis, they call for draconian regulatory action in response to what is, again, questionable effects, from a low probability outcome, from something that hasn’t launched yet.
38:51 Paul Matzko: [chuckle] Yeah, right.
38:52 Diego Zuluaga: That’s a very bad way to do policy. If you went to the doctor, with one symptom, that you’d begun to feel a few minutes before, and the doctor gave you the low probability, highest danger, highest risk disease as the only suggestion as to what you might have…
39:10 Paul Matzko: “This is definitely a rare bone cancer.” [chuckle]
39:12 Diego Zuluaga: And then prescribed the most radical treatment to be had immediately, you would probably run out of the room [chuckle] as fast as you can. And yet, when it comes to policy prescriptions, we take those, we take that kind of attitude at face value.
39:26 Paul Matzko: Yeah, that’s a great scenario for, I think, contextualizing how crazy that approach is. And it’s possible that that paranoid doctor is correct. It could be a very rare form of whatever disease or disorder, but is it likely? Have we done due process? Have we pursued a second opinion, or a referral to a specialist? We have to follow that process, double‐check, realize that the worst‐case scenario might not be the most likely scenario.
39:57 Diego Zuluaga: I was just going to add to that, that some people will know that the chairwoman of the House Financial Services Committee, who is a seasoned politician and a progressive firebrand, Maxine Waters, called for a moratorium on the development of Libra until somebody else said, “We can figure out what the hell is going on.” She basically made that statement. And an esteemed columnist in one of the main financial papers wrote the other day, that Libra shouldn’t proceed or shouldn’t be allowed to proceed by regulators until the full implications are known. Now, picture that line when people were coming out of the cave in the, whatever it was, the Paleolithic or the Neolithic period. If the leader of the tribe had said, “No, we shouldn’t leave the cave until we know the full implications of this.” [chuckle] Well, we’d still be figuring it out, and…
40:46 Paul Matzko: Yeah, yeah, if we’re waiting on Congress, we’re never figuring it out. [chuckle]
40:49 Diego Zuluaga: That’s right. The full implications of innovation or any transformative phenomenon in human life are never predictable. But one thing we know for sure, that if we use that as the standard, the losses we incur as a result of not doing things that would be beneficial, are almost always greater than the potential downsides. And we have a much easier time dealing with the potential downsides once the innovation is around, than before it.
41:17 Paul Matzko: The question is, I suppose, do we want to live in a low‐risk, low‐innovation society, or one that accepts higher risk in exchange for the higher rate of innovation and arguably, across the scope of human history, much greater potential benefits than the potential downsides? What kind of society do we wanna live in? And here at Building Tomorrow, we are definitely on the side of leaving the cave. [chuckle] So, Diego thanks for coming and leading us out of the cave. Until next week, be well.
41:45 Paul Matzko: Thanks for listening. Building Tomorrow is produced by Tess Terrible. If you enjoy Building Tomorrow, please subscribe to us on iTunes or wherever you get your podcasts. If you’d like to learn more about Libertarianism, find us on the web at www.libertarianism.org.