If Facebook's Libra is the answer, what on earth is the question?

If Facebook's Libra is the answer, what on earth is the question?
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Facebook’s Libra is just the latest entry into the world of cryptocurrencies and electronic "pseudo-currencies," and the response has not been uniformly positive

Libra is sort of a hybrid between Bitcoin and PayPal, offering the convenience of PayPal and the anonymity of Bitcoin. But unlike PayPal, it’s aimed at the billions of individuals without access to traditional bank accounts. 

So, what should we expect from Libra? I have been consistently unimpressed with digital cash, and I remain skeptical of Libra. 

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DigiCash was introduced in 1989, and the company filed for bankruptcy in 1998. Mondex was developed by National Westminster Bank in the early 1990s, had the cooperation of a number of banks around the world and was eventually acquired by MasterCard. It doesn’t appear to have shut down, but it certainly does not appear to have had the transformational effect anticipated by its developers. 

Bitcoin is based on some truly innovative technology, and blockchain will continue to have an impact wherever secure storage and encryption are required. But Bitcoin itself remains marginal in the world of financial transactions.

Why would anyone use a cryptocurrency? I can think of at least three reasons:

1. Increased convenience and reduced transactions costs 

Credit card transactions are easy, but they are expensive for small transactions. Mondex was developed as a low-cost alternative for small commercial transactions and as an easy way to transfer funds between individuals.

However, PayPal, Venmo (now owned by PayPal), Alipay, Google Pay, Square and Apple Pay have largely eliminated any market opportunity that Mondex may once have had. There are so many services available now that we may not need another form of electronic near-cash.

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2. A private, safe and secure mechanism for illicit transactions

The history of prosecutions for drug deals conducted on Silk Road and AlphaBay suggest that the “golden age of dark web drug markets” may be over. Bitcoin argues that the use of cryptocurrency in illegal transactions is on the rise.

Other uses of Bitcoin appear to involve making ransomware payments. None of these argues for a legitimate use of cryptocurrency.  

3. As an investment 

This is the part of cryptocurrencies that makes no sense to me. If you assume that Bitcoins have value only because they are scarce and not because any government is committed to backing them, then they will increase in value only when supply is carefully limited and when demand increases.

That assumes that governments around the world will remain ineffective in limiting illicit transactions involving cryptocurrency.  

To the extent that enhanced software security limits the effectiveness of ransomware attacks and to the extent that governments become more effective in tracking and shutting down dark web services, the demand for cryptocurrencies will decrease.

If governments become more effective in identifying and prosecuting individuals involved in illicit transactions and confiscating cryptocurrencies from dark web services, the demand for cryptocurrencies could significantly diminish.

This would reduce the value of existing cryptocurrencies that are not explicitly tied to and backed by real forms of currency. 

Facebook’s Libra coins will be tied to the value of “real world” currencies, and as a result they will not be investments. So I don’t see Libra coins either as a necessary convenience or as an investment.

Still, let’s assume that a secret mechanism for illicit transactions represents a viable business model. If I were looking for a private, safe and secure mechanism for illegal transactions involving sex, drugs or arms smuggling, I cannot imagine a less likely service provider than a consortium established by Facebook. 

Few firms have shown as little respect for their users’ privacy. Few firms have a business model more firmly based on privacy violations. And few firms have shown as little respect for their own public privacy policies.

In fact, Facebook has recently set aside $5 billion in anticipation of fines that will be imposed by the federal government as a result of these infractions.

So, what’s the case for Libra? 

Do we need another service for convenience? Probably not. Is Facebook going to argue that Libra will become the payment mechanism of choice for sex trafficking, drug trafficking or illegal arms sales? Again, probably not. Do Libra coins have investment potential? Certainly not. Libra has value tied to existing currencies. 

What sources of value are left? 

The only one I can see is as payment service for individuals who do not have access to existing banking services. 

How large is this market? It includes billions of people, but represents only a tiny fraction of the world’s wealth, and their transactions represent only a tiny fraction of the world’s transaction value. 

Could Facebook and its partners in Libra capture this market, despite the very real credibility problems that Facebook faces whenever privacy is mentioned? Possibly, but only if the world’s existing and more trusted payment networks choose not to enter.

Eric Clemons is a professor of Operations, Information and Decisions at the Wharton School of the University of Pennsylvania. He is the author of “New Patterns of Power and Profit: A Strategist's Guide to Competitive Advantage in the Age of Digital Transformation.