The king is dead, long live the king - Comment

It certainly looks like some significant institutional players have realized that the best way to deal with the revolution is to join it and shape it to their requirements.

By ADRIAN DANIELS
July 3, 2019 21:39
4 minute read.
The king is dead, long live the king - Comment

Facebook logo is reflected in glasses in this picture illustration taken April 1, 2019. (photo credit: REUTERS)

Revolutions are a funny business: initial uprisings against the self-serving structures of old orders often become post-revolutionary regimes forming new self-serving structures betraying the ideals that fueled the original revolution. ‘Twas ever thus. Are we living to see a digital version of this familiar cycle of history?

Much has been made of Facebook’s announcement of Project Libra – its intention to launch a new global peer-to-peer payment network in 2020. Some see Libra as the ultimate affirmation of the rumbling financial revolution which began around 2008 with the near-collapse of the global banking sector and the emergence of Bitcoin as the answer to the colossal breakdown in trust. Others see it as more evidence that the revolution has been co-opted by the failed financial establishment it was supposed to have superseded.

So who is right?

To listen to its executives, Facebook is being true to its mission statement. Zuckerberg’s company is the ultimate vehicle for “connecting people,” and Libra will serve the needs of the multitudes who until now have been unable or unwilling to open bank accounts. For instance, migrant workers around the world send billions of US dollars each year to their families using such services as Western Union, which often charge anywhere from 7%-10% of the amount sent (which includes $27 billion sent to Mexico from the US in 2106). If migrant users of Libra are able to instantaneously transmit their digital currencies through their Facebook or WhatsApp accounts for a fraction of the current cost, who can say that’s a bad thing? Sure, Facebook and its backers will generate revenues for themselves, but are not all good revolutions about liberating the disenfranchised?

According to the Facebook announcement, Libra will be managed by the Libra Association, an independent Swiss foundation, in the same way Ethereum is managed. And while Facebook will initially have a majority stake, the aim is for its voting power to be rapidly reduced to 1%. Additionally, while the Libra “nodes” (the entities which are needed to verify transactions using the currency) will initially be controlled by the founding members of the association, the aim is to transition to a decentralized permission-less system with thousands of unaffiliated nodes worldwide.

Additionally, Facebook promises that all financial data will be held on a pseudonymous blockchain and kept separate from a user’s Facebook profile data, so fears of cross-platform unauthorized data transfers are unfounded.

THE REVOLUTION marches on. Well, not necessarily. First, while Facebook intends the Libra Association to be run democratically by the votes of its members, with Facebook holding only 1% of the voting rights, the other members are hardly disinterested parties. They include such minor institutions as Visa, Mastercard, PayPal, Uber and eBay, and in time other players that will agree to commit a minimum of $10 million to the project. Facebook has also been at pains to ensure all the correct signaling to national authorities.
The company stated this week that it has no intention of bypassing the regulators. In April, it even met with the governor of the Bank of England, who said after the announcement that while Libra needed to be examined closely, he was retaining an open mind. Facebook also noted that it will be using the same AML and CFT (anti-money laundering and anti-terrorist financing) processes currently used by the banks.

It certainly looks like some significant institutional players have realized that the best way to deal with the revolution is to join it and shape it to their requirements.

Additionally, Facebook has lost a great deal of its moral capital when it comes to what it does with our data. Regaining the public’s trust that personal data will be kept separate from financial data and will not affect any decisions regarding treatment of a person’s Libra account will be no simple task. The reactions of the regulators in the US and Europe to the proposed launch provide ample evidence of this.

Interestingly, while Facebook is receiving the greatest coverage, it is only another link in a continuing trend among institutional actors. JP Morgan recently set up its Interbank Information Network (IIN) with, among others, the Royal Bank of Canada. The network will be using the Ethereum protocol for processing payments. A real-time settlement verification process is due to be rolled out by the IIN by the end of the year. The cryptocurrency firm Bakkt, which was founded by the Intercontinental Exchange (the entity that founded by New York Stock Exchange) has recently completed discussions with the US Commodities and Futures Trading Commission for the creation of the first bitcoin futures exchange. Even Binance, the world’s largest cryptocurrency exchange, has just announced restrictions on its services to US residents as it eyes setting up the first fully-regulated fiat-to-crypto exchange for the US market.

While the purists may recoil at the notion, the increasing interest from large institutional players is fueling the current buoyancy in the cryptocurrency networks. However, it is hard to see how it could ever have been any different. The institutions always had the muscle, influence and knowledge to join the financial revolution. It appears that now they also have the will. So perhaps the revolution is on the verge of an evolution. And it looks like Facebook is leading the charge.

The writer is a partner and co-head of blockchain and cryptocurrencies practice at Yigal Arnon & Co. law firm.


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