Facebook will be unable to control Libra

Libra  / Photo illustration: Shutterstock, Shutterstock.com

Libra’s distributed governance will encourage a new wave of innovation and competition in financial service - Facebook will only have one vote out of at least 100 - Libra's founder says.

Three months ago, Facebook and a number of other organizations from around the world announced their plans to create Libra - a stable digital currency backed one-to-one by a basket of highly liquid assets that aspires to become an affordable payments and financial services platform. Since then, there has been substantial debate about the project, its viability, and its potential impact.

But what’s often lost is why Libra is designed the way it is. The Libra network distributes governance, rights, and responsibilities among multiple parties - 100 expected at launch, and potentially many more at scale. This approach is unusual for a new digital platform - it means that Facebook, through its subsidiary Calibra, gets just one vote among numerous players in guiding the evolution of the Libra network. Yet the move has garnered negative reactions and mistrust from some individuals and organizations concerned about the role digital platforms play in our lives.

But distributed governance is there precisely to maximize participation by multiple firms and organizations in the Libra network - in order to increase innovation and choice for consumers. Without distributed governance, organizations and individuals might be less willing to build on the same platform, reinforcing the fragmentation in payment services we see today.

The Libra network is modeled after an open technology standard, akin to those used for ensuring that mobile phones can communicate across different carriers. Open technology standards encourage broad participation, provide shared infrastructure, and can benefit consumers by allowing firms and public organizations to develop a variety of products and services that are compatible with each other. Standards are particularly valuable for new entrants and small firms because they lower barriers to entry, avoid costly duplication of effort, and allow everyone to build on the same intellectual property.

The creation of a more open network for payments and financial services stands to enable broader consumer participation, particularly among the unbanked and underbanked, and ultimately get a significant number of firms to support technology that - if it were widely adopted - would lower costs and benefit everyone.

Early in the design of the Libra project, it became clear that a protocol for moving money across the globe should not be controlled by any single entity. Hence, at each step of the design process, a key internal test was to make sure that the Libra protocol and incentives were such that members and non-members will be able to compete on the same terms. To achieve that, it was also apparent that Facebook would have to open-source the technology it had incubated, relinquish control over the Libra network’s development, and let the network and its governance be shaped by market forces.

The Libra Association is tasked with ensuring safe and smooth operations of the Libra network, development of upgrades to the protocol, and interoperability across wallets, merchants, and other service providers. It will also maintain standards around user identity, auditability, and processes for fighting financial crime. This will ensure healthy competition in the downstream market for wallets, payments and other financial services.

Interoperability on the Libra network, combined with lower switching costs relative to current solutions, will allow consumers and businesses to easily choose products that best suit their needs. Consumers will have choice, and that means Facebook's wallet Calibra - just like everyone else - will have to compete on dimensions such as security, privacy, and cost.

The hope is that this will lead to more competition and innovation, and that in turn will dramatically lower the cost of financial services and improve access to them.

Christian Catalini is Co-Creator of Libra and Head Economist for Calibra; he is currently on leave as an Associate Professor at the MIT Sloan School of Management. Scott Duke Kominers is the MBA Class of 1960 Associate Professor at Harvard Business School and an Economic Advisor to Calibra.

Published by Globes, Israel business news - en.globes.co.il - on October 16, 2019

© Copyright of Globes Publisher Itonut (1983) Ltd. 2019

Libra  / Photo illustration: Shutterstock, Shutterstock.com
Libra / Photo illustration: Shutterstock, Shutterstock.com
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