This week, Facebook and a consortium of partners announced plans to launch a new cryptocurrency called Libra. Here, Stanford Law School Professor Joseph Grundfest, an expert on capital markets, corporate governance, and securities litigation, discusses this latest news from the social media giant.
What is Libra?
No one really knows. According to Facebook, it’s a new digital global currency, to be run on a blockchain, governed by a nonprofit Swiss foundation, that operates a “stablecoin” pegged to an undefined basket of international currencies. The vision is that Libra will aid millions of people who don’t have bank accounts, reduce transactions costs associated with international remittances, and facilitate new forms of low-cost payment mechanisms while also potentially providing new financial services to all its users. An impressive array of institutions, including Visa and MasterCard, have signed on as early sponsors. It’s a fascinating vision.
So, why do you say that no one really knows what Libra is?
Because the devil is always in the details, and here the devil is everywhere. As Sheryl Sandberg, Facebook’s COO, admitted the day after Libra’s announcement, Libra is “a long way from launch.” In particular, regulators in the United States and Europe have expressed a broad range of concerns about Libra. Facebook is already meeting with legislators and regulators in the United States and abroad, and Sandberg knows that it will be a long regulatory slog. “We know we have a lot of work to do, but this was an announcement of what we would like to do with a roadmap for people to jump in and help us do it.” Facebook might have a clear idea of the functionality that they would like to achieve, but they don’t really know how they are going to connect the dots to get from here to there, and how the regulators will respond. So, Facebook itself doesn’t really know what Libra is or what it will be. As of now, Libra is more a dream than a plan.
What then do you see as the most difficult issues that Facebook will have to resolve in order to make Libra a reality?
Let’s put aside some very important technical details and confront a simpler, more fundamental problem. People, in particular legislators and regulators, and most particularly in Europe, don’t trust Facebook. That’s a big hurdle for Facebook to overcome. What will it take to authorize a major financial innovation introduced by an organization that you don’t trust? Facebook promises privacy over Libra transactions but Facebook doesn’t have the world’s best record when it comes to honoring privacy commitments. I don’t know that we have much precedent for discussions of that sort, and I suspect that Facebook might have to make concessions it would prefer to avoid in order to get the necessary regulatory approvals. The idea of having the system run by a nonprofit Swiss foundation is obviously an effort to distance governance issues from Facebook itself. But will that work? What could possibly go wrong with a not-for-profit Swiss foundation governed by members that haven’t been identified according to rules that haven’t been defined? I wonder.
Putting aside issues of trust, if that’s possible, do you see technical questions that might cause substantial roadblocks to adoption?
Yes, there are literally dozens, if not hundreds, of details that have to be ironed out in order for Libra to become a reality, and some of them raise profound intellectual legal and economic issues. One particularly interesting question simultaneously implicates legal and computational design issues: Will Libra operate on a permissionless blockchain or will regulators require that all nodes be operated by regulated entities? A permissionless blockchain allows anyone to participate as a “miner,” or as a person who validates the blockchain. Bitcoin is theoretically permissionless, but the economic reality is that only miners with sufficient expertise and scale can operate efficiently as miners.
My prediction is that regulators will not allow Libra to operate as a permissionless system because then no court or regulator will have the ability to exercise authority over the actual operation of the blockchain. It will then be impossible to implement any order or injunction issued by any legal system with any certainty. Crypto-purists will argue that the ability to avoid regulation by governmental authorities is the essence of a blockchain. However, the idea that regulators will willingly allow the evolution of a mechanism that is immune to state control and that facilitates the flow of billions of dollars a day, or hour, or minute, seems inconceivable to me, and likely to the regulators as well.
If that’s the case, will we ever see anything like Libra?
I certainly hope so. There is a real need for Libra-like functionality on the internet. Billions of people would benefit from the ability to transact through a system like Libra. Transactions costs could be reduced for every American, quite probably to the chagrin of MasterCard, Visa and other intermediaries who charge two percent or more on every transaction. A delicious irony here would be if Facebook’s Libra proposal stimulates the United States government to develop a functionality that operates like Libra, backed by U.S. dollar deposits, but operated by the U.S. government (or under the authority of the U.S. government) and available to everyone on equal terms with no advantage to Facebook, Google, Amazon or anyone else. My bet is that more than one presidential candidate makes that proposal in the not-too-distant future.
Joseph Grundfest, JD ’78, is the W.A. Franke Professor of Law and Business and senior faculty member with the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford Law School. He is a former commissioner of the Securities and Exchange Commission and served on the staff of the President’s Council of Economic Advisors as counsel and senior economist for legal and regulatory matters. A corporate governance expert, he launched Stanford Law School’s executive education programs and continues to co-direct Directors’ College, the nation’s leading venue for the continuing professional education of directors of publicly traded corporations.