What Grinds My Gears: Welcome To FaceCoin

Meltem Demirors and Jill Carlson discuss why Facebook needs FaceCoin, how digital money in a digital world is changing the role of banks, and what does and doesn’t make sense when it comes to tech companies issuing their own tender.

WGMG S2E1 Welcome To Facecoin.png

Jill Carlson
From Meltem Demirors and Jill Carlson, welcome to What Grinds My Gears. A podcast about the bizarre and buzz worthy happenings in the world of cryptocurrency. Each week we delve into one key thing and examine it through a broader financial, political, and cultural lens to learn from the past, understand the present, and explore the future.

Announcer
All opinions expressed by Meltem, Jill, and podcast guests are solely their own opinions. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Meltem, Jill, and guests may maintain positions in the currencies, assets, and companies discussed in this podcast.

Jill Carlson
This podcast is presented by Block Works Group. The only media production company I trust.

For exclusive content and event son crypto, visit them at Blockworksgroup.io.

Meltem Demirors
Oh, hi, Jill.

Jill Carlson
Hi, there, Meltem. It's good to be back.

Meltem Demirors
Oh, we're back, baby.

Jill Carlson
All right. So we've got some stuff we need to talk about here, right?

Meltem Demirors
100%, so much to talk about.

Jill Carlson
So Meltem, did you know that there is an organization out there that consists of a consortium of private members and they're issuing a currency that's aimed at world domination. Did you know this?

Meltem Demirors
No way. No way. Tell me more.

Jill Carlson
I'm not actually talking about Libra, although that's true too. I'm talking about The Fed.

Meltem Demirors
Oh. Dun, dun, dun.

If that sounds confusing to our listeners it's because it is. The Fed is one of the strangest institutions that I've ever looked at.

Jill Carlson
That's right.

Meltem Demirors
According to their board of governance, The Fed is not owned by anyone and it's not private but it's not public. And it's not really a profit making init. Instead, what it is, it's an independent entity, but it sits within the government and it has a public purpose to manage the U.S. dollar, but it also has private aspects. So let's talk about that. 

Jill Carlson
That's right.

So The Fed is actually one of the more complex and fascinating structures that I think exists in the U.S. government and U.S. corporate culture. Because, again, it sounds like a bunch of oxymoron's strung up in a row. The federal reserve system has a, "Unique structure that is both public and private." And is described as, "Independent within the government, rather than independent of the government." So it's this very confusing structure, right?

Meltem Demirors
It is.

Jill Carlson
But the reality is, is The Fed is actually owned by 3,400 member banks who are different classes of stakeholders who contribute capital to help the stability of the FRBs.

Meltem Demirors
That's right.

And the FRBs are the federal reserve banks. There are about a dozen of them around the country. And what's really interesting to me is that the U.S. government itself doesn't own any shares or any interest in the federal reserve system or its member banks. But the U.S. government does get all of the systems annual profits after the member banks get a statutory dividend of 6% on their capital investment, which gets paid out. And they maintain a capital account surplus.

And the government also has an interesting level of control over the Fed in that they get to appoint and set the salaries of the highest level employees of the federal reserve system.

Jill Carlson
Now something really interesting here is that I think a lot of us take for granted that The Fed exists. And we assume that it's existed since the dawn of his country. And prior to that had it predecessors and the Bank of England and the other great banks of Europe.

But actually, the Federal Reserve Act was passed in 1913, this is all actually quite recent in the grand scheme of things. And it was created to address banking panics. It was created out of a sense of distrust or mistrust in the current system. And specifically it was created, in many ways, to actually centralize control over the monetary system of the United States so that panics like this would not occur again. And with every panic that has occurred since, the powers of the federal reserve have actually been expanded.

Meltem Demirors
And what's interesting, we've talked about this in some of our episodes during season one. The U.S. actually used to have many different currencies before the Civil War. There were localized currencies, there were still people using gold, there were all sorts of tokens and mechanism people were using to exchange values. Some were local, some were national, and as we know, some were global on scale.

But what's interesting is really with the introduction of the federal reserve system, which is a consortium of banks that own this entity, it's very nebulous, it's very large in its nature. It's closely tied to the monetary and fiscal policy making arms of the U.S. government. Really what you have is a fascinating experiment in how money is managed. And what's interesting, the tension in the U.S. that we've always explored is the tension we're going to talk about today, Jill. The tension between private institutions that operate for profit. Their shareholders, owners, and leaders and the public interest. This is the ongoing question in our financial system, the recent financial crisis, where we spent trillion of dollars bailing out these institutions has been an interesting experiment. So let's delve right into it. Let's talk about ZuckBucks, FaceCoin, Libra, whatever you want to call it.

Jill Carlson
Let's do it.

That fundamental question, would you rather be a slave to the state or a slave to the corporate state?

Meltem Demirors
FaceCoin, here we are, Jill.

Before we delve into FaceCoin though, let's talk about what banks actually do. And I know we've talked about this before, but let's just do a quick refresh. Why do they exist?

Jill Carlson
That's right.

So banks started quite simply as a place to put money. But they've obviously evolved into much, much more than that. So they're now institutions that actually extend the money supply in the form of credit. And they also resolve some of the timing mismatch around when people need to receive money and then when people need to withdraw that money. And so as you say, Meltem, we've covered this extensively in season one episodes on credit. But it's important to bear in mind because banks, you know, they can start to seem like these sort of opaque, behemoth institutions. But really, the end of the day, it's not rocket science, it's quite simple.

Meltem Demirors
It is.

And the finance function, or the banking function is something that doesn't just exist at banks. When I was a corporate treasurer, what I worked on was internally managing a function that looked much like a bank. We had 14,000 affiliates, this company, this large corporate all over the world. And we would figure out who we were going to lend money to, at what rates. Did they want to pay that overnight, did we want to have assets on deposit. Really this function of managing capital and managing risk exists within institutions. And as a result, what's happened due to the more sophisticated and increasingly immediate needs of institutions, we've seen disintermediation or digitization of all different types of baking functions.

It started really with consumer credit. Consumer credit of all types has been disintermediated. Look at what Lending Club has done for personal loans. We look at SoFi and Lending Club for student loans. And now we even have Klarna and Affirm, which are point of sale or layaway lending platforms that allow you a point of purchase online to split your payment for a purchase up into four 12 installments. We also see disintermediation in the SME, or the small to medium enterprise or business market. There's this thing called factoring, which is, again as Jill said, if you have an invoice that you need to pay but you're manufacturing something and you're not going to get paid for another three months, factoring allows you to basically match your payables and receivables for a small chunk of money, for a small amount of interest.

There are now dozens of factoring startups raising money and being really successful at disintermediating the small to medium enterprise segment. And the last bastion that's sort of been help onto, at least in the U.S., is corporate credit and these behemoth banks. And so all of this disintermediation, digitization, and disruption has started at the edges in places where maybe banks weren't as present, at places that weren't historically large profit centers for the banks. And so the banks weren't terribly concerned. But it's moving really quickly now, and it should scare every bank in the world to see what's happening in these different parts of the world with these different types of financial disintermediation.

Jill Carlson
That's right.

And for a long time, the huge moat that was keeping the banks in this sort of position of monopoly on this power to ... whether it has to do with credit or lending, or even just taking custody of funds, money transfer, the huge moat was regulation. For a very long time, in most jurisdictions there were very ... and they still are to an extent. Very strict regulations around who can do these functions. But as FInTech, the rising tide of FinTech has taken over some of these, we've seen more and more power to go and lobby regulators to change some of these regulations and open up this world to these new participants and players.

And so that's been a huge trend over the last five, ten years that's contributed to this.

Meltem Demirors
Absolutely.

Let's talk about some of these examples, because I think they're really interesting. I look at places like China, I look at places like Korea, even places like Turkey. Alipay and WeChat, in many parts of the world, are already digitizing finance. Hawala, which is the ability for people to sort of send money in this informal way through social network has now become a real thing. Hawala systems have been implemented in real life by large social media companies that enabled, first, text messaging and connection cheaply or free in most cases. They then saw that people were using these apps to exchange money. And they said, "Hey, we can do that too."

And so now in many sense, Alipay and WeChat are full fledged banking platforms. They enable you to pay, they enable you to manage your wealth. You can even buy ETFs and financial products through these char platforms, which is pretty amazing.

Jill Carlson
And insurance products. All kids of things.

I want to dive in for a second, though, into that Hawala point. So a Hawala system is what we refer to as this process where if I'm trying to send money to my cousin in Mexico or my aunt in the UK, I may do that not through Western Union, not through a bank, but I may try to do that just by sending money to someone who lives in Mexico, for instance, who has both U.S. and a Mexican bank account. And so I would send them the money into their U.S. account and they would use their Mexican bank account to send that to my cousin's Mexican back account. And so as you say, Alipay, WeChat, and lots of these startups observed that this was happening anyway. Hawala systems, though, well in many ways they work better than something like Western Union. In many ways, they're also broken because you have to rely on the huge amount of trust in your counter party.

And you also are breaking a law, actually, in most jurisdictions in the world. Hawala systems are outlawed. And so as you say, that is a huge coo for Alipay, WeChat, and whoever else, even transfer-wise, in a way, to move into these systems and say, "Hey, we can provide a platform to do this more safe. And in many ways, cheaper, better, more efficient than the informal systems that exist today."

Meltem Demirors
But here's the key challenge, right. The ability to connect payments over messaging isn't really possible without having a strong identity system. And the one thing all of these places, where money, messaging, everything has been digitized and put into one platform or one experience, the key thing, the key features these countries have is a digital identity scheme. And the ability to link someone's information with their online transactions over these platforms.

And ultimately, we're going to get into this, but ultimately this is the last mile problem. Right? This is fundamentally one of the things that banks do, arguable, not very well given how many money laundering cases there are. I think Deutsche Bank is about to get hit with another $2 billion dollars in fines, you know. They laundered a couple bill, no big deal.

Jill Carlson
You only money lauder a little bit, Meltem.

Meltem Demirors
That's only a little bit, Jill, okay. We only do it a little bit.

But I think this is the interesting component, if you look at a banks cost today, if you even look talking to crypto companies, the majority of cost for financial firms is in compliance. The majority of the people in the organization are focused on compliance and transaction monitoring. And again, one of the really beautiful things about living in a part of the world, operating in a part of the world, where you have a national identity scheme and you connect that to a digital platform is that part of the equation, that compliance component. Suddenly becomes a lot easier because you can link users with their real world identities.

In fact, I was in China last year and I was in a cab. I realized I didn't have enough Renminbi to pay for my taxi. I also think my taxi driver just refused the money I had. He was like, "I don't want your shitty paper money." And so I was trying to ... I had WeChat on my phone. I was trying to connect my credit card and I couldn't because I didn't have a Chinese phone number, I didn't have a Chinese ID. So it's interesting that you can't even get into these digital money systems without having an ID. And we'll talk about that as well.

Jill Carlson
One more thing I want to say just on Alipay and WeChat, is that it's not just for these peer to peer ... as we call them not peer to peer in the sense of Bitcoin, but person to person payments. It's also used with merchants, it's also accepted by merchants worldwide. And I have this story where I was walking through the Miami Airport a few months ago.

Meltem Demirors
I remember this, Jill.

Jill Carlson
Yeah.

I had this moment where I was like, "Wait, what country am I in right now?" I had just come off of a month of a lot of travel. And I genuinely, honest to God, had this sort of out of body experience. Like where am I? Because I'm walking through the Miami Airport and all over the place there are signs saying, in Chinese and then also in English, "We accept Alipay and WeChat." And I was like, "I'm in Miami." I'm not even in San Francisco, which has a sizeable Asian, or Chinese population. And so that was a very surreal moment to me. And I think just goes to show how global these systems are. And in many ways, how ahead of us they are in the United States.

Meltem Demirors
One last thing I'll mention, just to connect all of the dots at this ending point on this chapter, let's also talk about the credit component. There is now the ability for people to be excluded from these systems if they are bad creditors, if they're bad borrowers. And the ability now, and we've read a lot of articles over the last few months, we've talked about this in our surveillance capitalism episode. In China, now, the ability to link up peoples credit history and their credit score with these apps and exclude them from certain types of behaviors based on some reputational event in their financial history. Or potentially some sort of event that's driven on their beliefs, what social group they belong to. Maybe they're activists, maybe they're part of a political minority.

This ability to start to censor people and limit their economic and social interactions, their ability to travel, their ability to get a passport, their ability to even pay for things, that to me starts to very much get into this scary line of these panopticon corporation states. And so it's something important to keep in mind. That I think in China, especially, we've started to see this go a very dark place with their social scoring system and including credit scoring in how people us these platforms.

Jill Carlson
100%. And that's something that we'll get into here in the next few minutes as I hope we start to dive into-

Meltem Demirors
Oh, boy.

It’s been a while since we've ground our gears. Are yours a little rusty?

Jill Carlson
I don't know. I've been grinding my gears without, Meltem, unfortunately. But it's good to have my bestie back.

Meltem Demirors
You've been cheating on me. It's okay, we're back. All right.

So let's talk about why.

Jill Carlson
Okay. So, Libra, we will get there. We promise.

But first, we want to talk about a little bit of context around why this is all happening. What has been going on with Facebook, what has been going on with the tech industry, what has been going on in the economy. So let's dive in.

Meltem Demirors
Yeah.

Macro, baby.

Jill Carlson
Macro. We start high and we go low.

Meltem Demirors
We stay high, that doesn't sound good either. We're just going to let that go.

All right. Here's what I think is so interesting and what people forget in the midst of all of this Libra news. Facebook is a company in crisis. It has been a company in crisis since October 2017 when the Cambridge analytical scandal broke. The stock price has been flat, it is not growing. At a time when companies like Microsoft and Amazon are reaching trillion dollar market caps. There's a PR crisis going on, there's a political crisis going on. And there is an HR crisis with high profile founders of Instagram and WeChat leaving the company. Facebook's co-founder writing a New York Times op ed about the breakup of Facebook and why he feels Facebook is the most dangerous company in America.

There is a lot of pressure on Facebook.

Jill Carlson
That's right.

And as you say, this in large part, has been sort of politically driven. You have Facebook being accused of meddling in democracy or degrading democracy. You have Facebook being accused of being a part and parcel of many human rights violations even around the world. Enabling these autocratic dictators to do what they're doing by being a platform for their propaganda. Then on the flip side of that, you have regulators screaming the words antitrust at them, you have regulators questioning, "How could they let this happen? Why are they not in better control of what's going on to their platform?"

In a way, I almost, almost, kind of feel for the company. And so far, as soon as anyone tries to actually do something about this, then people start screaming that they're de-platforming.

Meltem Demirors
Right.

Jill Carlson
And you have even Donald Trump, having come out this week, saying that Facebook needs to be broken up or taken down because they're not publishing enough of his own, sort of, viewpoints. And enough of that deep red Republican-

Meltem Demirors
Gotta love it.

Jill Carlson
I don't want to say propaganda, but viewpoint.

Meltem Demirors
This is not a politics podcast.

But let's talk realistically about what's happening around the world. I think the east, China primarily, India, they don't really care about this political tension. They've got economic problems to deal with, and they've got three billion people moving up sort of on the socioeconomic ladder. They've got other issues. But if we look at what's happening in Europe and the U.S. right now, Europe implemented GDPR, which is a new privacy law. My firm, CoinShares, where we operate in the UK, we're a European company. We've been dealing with GDPR. They've just started fining companies for violations of this policy. Google is getting fined, Facebook will get fined. In the U.S., there's a privacy law that is going to get implemented. It is a big topic.

Let's also not forget it's election season. 2020 elections are coming up, presidential elections. We've also got a bunch of new seats opening up in the House and in the Senate. And the biggest punching bag of all right now, on both sides of the aisle, the one thing that all politicians in America agree on is what, Jill?

Jill Carlson
Anti-tech, is that what you're talking about?

Meltem Demirors
Yeah. Facebook must go down, Facebook is a political-

Jill Carlson
Facebook is the new Goldman Sachs. Because when I was graduating from college, it was Wall Street, it was the banks that-

Meltem Demirors
It's the fat cat bankers, and now it's the fat cat Silicon Valley tech bros.

Jill Carlson
I know. And I'm like, "What am I doing so wrong or maybe so right that I keep following these people in these places."

Meltem Demirors
Okay, but look. What I also want to talk about briefly is business bottle. At the end of the day, this is about your business. Facebook is a business, right, their business model is advertising. All of their revenue primarily comes from advertising. So I want to talk about two things right now. First is, where are Facebook users today? So if we look at daily active users, which Facebook publishes in its quarterly reports, they actually have great data. Only 5% of their user base right now, actually 10%, I apologize, is in the U.S. and Canada.

Their biggest growing user segment is in APAC and the rest of the world. Asia Pacific and the rest of the world. And the U.S. and Canada and Europe are staying flat. Those markets are not growing. And in fact, we've seen them even shrink slightly. So that's where their users are. Their biggest growth areas, in terms of platform users, are not in the U.S. and Europe. Now, let's talk about where they make money. So the places where Facebook is making money, hand over fist, is the U.S. and Europe. Over 75% of their revenue, and growing, comes from the U.S. and Europe.

So here you have a company that is completely dependent on advertising revenue in places where they're under tremendous pressure and they're seeing stagnation in their user base growth.

Jill Carlson
Where do you go?

Meltem Demirors
What do you do, where do you go? You go to where your users are. And how are you going to monetize users in a part of the world where they already have viable alternatives or there are a number of viable local alternatives springing up to your platform?

This, to me, is the biggest thing we don't talk about. Facebook needs a new business model. Facebook needs a way to make money. How are they going to do that? They need a Hail Mary pass. What's the Hail Mary pass? They become a-

Jill Carlson
Bitcoin.

Meltem Demirors
Exactly.

Let's talk about this.

Jill Carlson
I do think it's important to remember that Facebook has competitors in this realm already. We tend to talk about this, or the media tends to talk about this move as a move that is sort of unprecedented. "Oh, they're issuing a new global currency." That's fine, we'll get into that. But we've got to remember, this exists elsewhere already. WeChat, Alipay, et cetera. And it exists in the biggest markets that Facebook cannot penetrate.

But it kind of reminds me, Meltem, of a few years ago, Facebook launched Internet.org. Which is intended to basically beam internet down to the emerging world, to connect the unconnected.

Meltem Demirors
And I think, by the way, Jill. The nouns and the adjectives they use in those press releases were very similar to the ones they're using now. Quality, access, freedom, like all of these words that are literally the anthesis of what this company does.

Jill Carlson
This is exactly where I'm going with it. Because Internet.org, it is intended to connect the last users in the world, the last potential users in the world to the internet who don't, today, have internet access. That is a very feel good, do-good mission, I do believe that. But let's be honest about the incentives.

The incentives are that Facebook has massive, I think on the order of 90 plus penetration of the world that is connected to the internet. And so what do you do then? You start building the roads to get the last people there. You start building the infrastructure to get those people online because that's the only way left to grow for Facebook. Now, that is remarkable. I want to take a second and just call out, that is an absolutely remarkable feat by Facebook, firstly, to have even gotten to that point. And is also is ... I don't want to diminish, there is something to be said for connecting these users to the internet.

Meltem Demirors
That's right.

Jill Carlson
Again, we just need to be honest with ourselves about the incentives at play.

Meltem Demirors
And I think this is always the trouble. And this goes back to what we were saying about The Fed. It's very difficult to have a private company that is owned by private shareholders also operate in the best interest of humankind and its users. This is the fundamental tension of capitalists societies, right?

Jill Carlson
Exactly.

Meltem Demirors
At the end of the day, I do believe, inherently, most people are good. I don't think the executives of Facebook are sitting there rubbing their hands together Mr. Burn style and going, "Excellent." I don't think that's really what is happening here. But let's be very realistic about what the executives at Facebook need to do to get paid. Right? This is about people getting paid, this is about power, this is about control, and this is about money. And they're all intertwined.

Jill Carlson
It's quite literally about money this time.

Meltem Demirors
It is.

They need more users, and they need ways to get more money out of each user. So what are you going to do? You're going to go get more users, get more people onto your platform, that 50% of the world that's not yet on the internet to your point, they're going to try to get on their internet. And now what they need to do is figure out, "Okay, instead of making $.50 cents per user, $1 per user per year, we need to up that number to $10, $20. We need to get into higher margin businesses that aren't just selling data. We need to start selling goods and services to someone.

And so to your point, this has already been done. People are already doing this. I'm sure that people in China and the executives at WeChat and Alipay are looking at this and they're laughing. But what Libra describes, this future that they describe in the White Paper, it's already possible in many places in the world. This idea of being able to touch your phone to something and having it pay ... like that exists, I've used it. I've done it, it exists. What Facebook has done, though, is they've added this veneer of, "Blockchain," and, "Decentralization," to it.

Jill Carlson
That's right.

With that, let's dive into what actually Libra is. We've covered a little bit of the why. What is it? Okay, so what is Libra? Libra has been much anticipated, I think when they first started whispering about it a little over a year again. But just recently, just interesting eh last couple of weeks, they've come out…Facebook, have come out with more details on what it is.

If you ask me, Libra is basically creating a…of banking function, payment system. And interestingly, they're also creating a new instrument that they're issuing. Now, all these words, all of these things, they can be executed without using a blockchain. You can have a payment system that does not rely on a blockchain. Like PayPal or WeChat. You can have a new token that you've created without relying on a blockchain. Facebook, in fact, did this themselves with their Facebook credits, which they rolled out years ago. But there are elements of this that look kind of blockchain-y, or that they have borrowed from the best practices of the blockchain industry.

Meltem Demirors
Oh, boy. Best practices.

Jill Carlson
So one of these elements is the fact that it's a stablecoin. Now, of course there have been many attempts at stablecoins in the past. Ranging from the sketchy to the failed. Tether being in the former category. Basis’ Basecoin was a prominent project that shut down a few months ago to regulatory uncertainty. Die, Maker Die has been one of the more successful attempts at this. But so Libra is going to be a stablecoin that will be backed by a basket of fiat currencies and other assets. These fiat currencies are going to sit in regular commercial banks and they will allow a privileged few with the ability to create and redeem Libra at it's net asset value. So Libra, again, being that stablecoin.

Meltem Demirors
And it's not just fiat currencies. There are also interest bearing instruments inside of this basket. And what's interesting to me, and what's not really clear, again, I think the Libra White Paper for me introduced more questions than it answered. Which isn't necessarily a bad thing, I think it's common of crypto projects that publish ambitious White Papers and do these big, fluffy launches before they built things. They can change what's in the basket.

And what's really interesting here is these parties that are in the Libra consortium and that have the ability to create Libra, they also get this secondary token. And actually investors can buy a Libra investment token. Where, you know how in the federal reserve system, the banks only get 6% of the revenues and everything else goes to the U.S. government? In this system, all of the revenue, all of the income generated by these assets that people are going to basically be giving Facebook. So when I cash in $5 and I get out five Libra, and let's say I keep it in the Facebook system for three months and it gains one or 2% base interest, I don't get any of that. All of that gets paid out to the consortium. And so it's basically a kind of federal reserve hybrid.

Jill Carlson
That's right.

Now, what's kind of funny to me about this is that the parties who are a part of this consortium, who are going to benefit from this interest and potentially also have insight to the data, et cetera-

Meltem Demirors
And transaction fees, by the way. Let's talk about transaction fees.

Jill Carlson
Yeah, don't forget those.

So these parties include prominent venture capital funds, they include technology companies like Lyft and Uber. They include retail merchants, crypto exchanges, but also commercial banks, credit card processors, and also non-profits and NGOs. It's a real kind of hodge-podge of parties to this. And to be totally honest with you, if I were living outside of Silicon Valley, if I did not work in the tech industry, I would probably be looking at this list being like, "What is going on here?"

Now, the only reason why I feel like I have any more insight as to what's going on is just some of the insight I've gained over the last few years of being in this industry, of what insiders gain in this industry often is. And so I think that that is the explanation for sort of what the venture funds are doing in there, what some of these other tech companies. Whereas, then with someone like Visa and MasterCard, it's much more obvious what the overlap would be.

Meltem Demirors
Okay.

But let's go high level picture. Libra is not a cryptocurrency.

Jill Carlson
I would concur.

Meltem Demirors
It is not, okay.

So let's run down-

Jill Carlson
That's actually probably a good thing, I think.

Meltem Demirors
But let's just right now down, right.

So first of all, there is absolutely no need for a blockchain. Everything Facebook wants to do here, they can do with a regular old database just the way a bank does it.

Jill Carlson
Including the aspect of it that is decentralized amongst these consortium participants, you can achieve that with a database. 100%.

Meltem Demirors
Right.

So there's this great article that David Gerard wrote for foreign policy. Its a great publication, we'll put it in the show notes and here's the quote that I just love. "Libra has certainly demonstrated one of the main characteristics of blockchain projects, grandiose claims, and egregious nonsense."

Jill Carlson
I think a lot of the blockchain-y stuff that's described in the White Paper and all the other stuff they put on that site makes so sense at all. Here's what I was thinking ... yeah, go ahead.

Jill Carlson
Yeah.

I was just going to say, I mean look, there are aspects of it that are blockchain-y in so far as they've borrowed from the best practices of the industry. Whether that's good or bad, we can argue about, but it doesn't mean that it's a blockchain. But I just want to give a few examples of that. So the consortium model, this has been attempted by blockchain startups going back to 2015. The most prominent example of which was R3's consortium, their consensus model, they use a BFT consensus model, which is kind of similar to cosmos, although not exactly the same. They have a gas model for running smart contracts that's like a theorem. They have this dual token model you mentioned, like Basis and DAI. And then also this one stands out to me most amongst any of these points, is that they also have a Swiss foundation, which we all know many, many, many of these sort of prominent blockchain started-

Meltem Demirors
Started with a theorem, baby.

Jill Carlson
Started with a theorem...half Swiss foundations.

Now, what they're not saying is that there are huge trade-offs to all of these things. Like these are, in many ways, the best practices or the kind of kitchen sink of ideas that the blockchain space has had over the last few years.

Meltem Demirors
You forgot one key characteristic that they also borrowed, it's that they keep the profits for themselves and their friends.

Jill Carlson
Oh, God.

That's not just a crypto thing, Meltem. I think that that's just like a-

Meltem Demirors
I think there's some deep ironies here. If you read the White Paper, one of the principles of Libra and something I've heard Facebook employees say to my face, which I find fascinating, is that Facebook wants to give people an inherent right to control the fruits of their label ... labor. And I know-

Jill Carlson
Illegal labor.

Meltem Demirors
Illegal labor, yes.

So here's my question, if you keep all of the interest on assets you're buying with other peoples float, how is that accomplishing that goal? I don't understand.

Jill Carlson
Yeah.

Let's just, hang on, I want just do a diversion here on that point for a second. They want to give people the right to control the fruit of their illegal labor. Like there is a lot to unpack there. But mostly, more than anything, there is just a lot of this very hand-wavy language in the mission statement. And that's fine, every corporate project, every startup has a lot of hand-wavy, high level language. But because this is kind of our area, it grinds our gears. And so I think we nee to talk about it for a second.

At this point, in particular, I mean this is just some iron ran fever dream of, "I want to have the right to control the fruit of my legal labor." Sounds very anarcho-capitalist, very libertarian. And I'm not really sure what it has to do with banking the unbanked. Which is the other really hand-wavy part of this. It's extraordinarily vague, their language conflates problems of financial access with problems of poverty, with problems of access to loans and loan sharks. Like if you want to solve about solving one of these problems, I strongly believe you've gotta just be specific.

Meltem Demirors
No, Jill, hold on, hold on. You're asking for way too much. Okay?

I'm going to go up here, I'm going to wave this magic wand, decentralized, it's open, it's fair, it's better. My favorite phrase, which we're going to talk about in a minute, but we're going to bank the unbanked. Like holy shit, I feel so bad for whoever the unbanked is, because every watching project is going to do something for the unbanked when all they do is keep the profits for the insiders. Like it has nothing to do with that at all. So, look, there's nothing crypto about it. It's not decentralized, it's a fully centralized system of 100 people who know and trust and moved daddy Facebook to love them and give them their dividend. It's not open, right? Facebook gets to decide who is in or out. And in what world are VCs are going to be central anchors?

We've talked about this before, this is one of the interesting points about Basis. Like are central bankers are now going to wear Allbirds instead of Ferragamos, but same thing.

Jill Carlson
Oh, God.

Meltem Demirors
And the path to decentralization that they talk about, like it makes no sense. There is going to be a bank somewhere that has to hold these currencies. It's crazy. So there's a Sarah Jamie Lewis quote. Do you want to say it, Jill, because I think she nailed it. And Sarah Jamie Lewis runs a project called Open Privacy. She's great.

Jill Carlson
Yeah, follow her on Twitter, for sure. Because that's where we got this from.

And she says, "I can't wait for cryptocurrency with the ethics of Uber, the censorship resistance of PayPal, and the centralization of Visa all tied up under the proven privacy of Facebook."

Meltem Demirors
Exactly.

Okay. So let's talk about the most offensive piece of Libra to me, which is the great mass of the unbanked. Can we please just ... this vague hand-wavy like, "Oh, we're going to bank the unbanked." It very much feels like this is an ideological project. Like some people at Facebook got together, they smoked some good, legal California weed, you know? Legal, because California does that. Maybe they had a few CBD drinks too, and they sat down and they got a white board and they threw up all over the hot phrases they thought would get people all hot and bothered for Libra. And the great unbanked masses made their way into it. And it's so offensive.

Jill Carlson
As you would say it, this is not just a Facebook thing, this is really an industry thing. This is the FinTech industry, this is the cryptocurrency space. And as you know, Meltem, this is one of the areas that really grinds my gears. And this was, in large part, the inspiration behind the work I've been doing over the last year with the Open Money Initiative.

Meltem Demirors
100%.

Jill Carlson
You can't sit in the Silicon Valley office and say, "We're going to bank the unbanked."

Meltem Demirors
Right, hold on. Let me paint the picture for you though.

David Marcus, who is the Facebook executive in charge of Libra, he's been telling the press, "The problems of banking the unbanked are technical," that they just can't move money fast enough because they don't have blockchain. And that's not true at all. Moving numbers around on a computer is like pretty fast. Elizabeth Rossielo, who is the founder of BitPesa, I've known her and worked with her for five years now. She is sitting in Kenya and in Senegal with her team helping people figure out how to send money. And she will tell you, and every entrepreneur who's actually worked in these regions, and how are not David Marcus. No offense to David, he's doing great things, but you're sitting in the most luxurious office in Silicon Valley, eating catered, organic, farm grown vegetables having like a $17 kombucha.

These people are sitting in these parts of the world where people actually are unbanked. The problem is not technical, it's last mile. How do you get the money into an out of the system and how do you get the money to someone who actually doesn't have an identity? On paper, these people do not exist. They are just a cell phone number, they are a SIM card number, an EMEI number. These people technically do not exist, that is the problem. It's not a technology problem, it's a systemic, social problem.

Jill Carlson
Right.

And here's the real problem, is that the problem is going to look very different depending on what demographic you're targeting, depending on what geography. Most of the payment solutions, remittances solutions and solutions to these last mile problems, they look very different from geography to geography. And that's why we've seen a lot of the payment systems that have merged out of the developing world. They're very geographically localized. What works in Kenya, say PayPesa, it's going to look very different from the kind of Go-Jek system that exists in parts of Southeast Asia, where you have the equivalent of Uber divers working as the cash in and cash out ramp. Right?

Meltem Demirors
Right.

Jill Carlson
Then that system is going to look very different from what works in Latin America and so on and so on and so on.

And not even to mention the unbanked problem in the United States, which is also part of what they mentioned in this White Paper. So you just run into this issue where you're trying to paint with such a broad brush stroke in order to create a vision people can really get behind. But what you really need to be focused on are those details. Because those details are what's going to influence product, they're what's going to make your product actually work for a given population. And it's very hard to do otherwise. And I will give Facebook the credit that they managed to pull this off with WhatsApp. They did manage to pull this off with their messaging system.

Of course, WhatsApp was created outside of Facebook, it gained a lot of its traction prior to Facebook. But they did manage to create a system of communication that works across geographies, across borders, et cetera. So kudos to them for trying here with money and not just messages. But I do think that the problem is much, much more difficult than maybe they're admitting to.

Meltem Demirors
Right.

But I also think, look, when you have a hammer everything look like a nail. This is said often. And I think what we have here is a case of ... and by the way, this is not unique to Facebook, this is basically every crypto project, it's a lot of FinTech projects. And again, I think later on when we talk about what we think is going to happen, right now everyone is in the ideation phase, the White Paper just launched, everyone is super excited, it's buzzing. Everyone wants to be in the consortium, Libra is super hot. I think over the next 18, 24, 36 months as they actually try to build this, the reality is going to set it. And I think that's when you start to realize that most of the problems that exist are not technology problems. Most of the problems that exist are social coordination problems and they're systemic problems.

But I think it is naïve for a company to attempt to say that somehow with this magical blockchain wand, all of the problems in the world of finance and banking the unbanked are just going to magically evaporate. I think that's ludicrous, I think it's offensive. And it's completely inaccurate.

Jill Carlson
Time will tell. Maybe the blockchain will magically make everything possible.

Meltem Demirors
I'm still waiting, Jill.

Jill Carlson
I hope so. I'm like you, I hope so. I hope so.

Meltem Demirors
Okay.

But really, what we're describing when we talk about Libra, we're talking my fac take is it's a shadow bank. The Libra token, I've heard it described as a foreign exchange derivative, a synthetic asset drive from a basket of other assets.

Jill Carlson
An ETF.

Meltem Demirors
Yeah.

The BitMex take. So we'll put this in the show notes. BitMex wrote a great analysis where they compared the basket Libra is making to an existing ETF that's like a global market ETF that returns, on average, 2.6% to users for an expense of five basis points. And it's shockingly comfortable.

Jill Carlson
So the big question is, it's June 2019. Who knows when this thing will get built, who knows when this thing will get implemented. I'm of the viewpoint, look, Libra is going to get built, it's going to get rolled out. It's other going to be a stunning success or it's going to be like Internet.org, where it kind of gets talked about and then it kind of fizzles out and it's this weird zombie thing that kind of exists. Who knows what's going to happen. I think it's great that people are talking about Bitcoin. I think it's great that people are talking about the sharp contrast between what Libra is and what Bitcoin is. And if this is a way to get Trojan horse, effectively, two billion people who use Facebook to be really into Bitcoin, I'm 100% okay with that.

Meltem Demirors
I mean, we're already seeing it reflected in the price, this run you from 7K to 14K, Jesus.

Jill Carlson
It's great.

Meltem Demirors
I don't know if that was just Libra or if that's the happening or what. But we can get into that next episode. But I do think that there is something there to this being an on ramp for people.

Jill Carlson
Totally.

And you know what I will say? Facebook builds beautiful, easy to use products supported by amazing engineering teams who know how to build stuff for scale. So I know, Jill, this week you were tweeting about the Coinbase outage and why it keeps happening every time users get on the platform.

Meltem Demirors
That was a genuine question. I wasn't trying to grind any gears.

Jill Carlson
No, no, no. It happens with a lot of really large platforms who see a lot of volume. It's very computationally expensive.

Meltem Demirors
Not with Facebook.

Jill Carlson
No.

And that's the great thing, right? Facebook is going to have great SDKs and developer tool kits. Facebook is going to have great reference libraries. The language they're using, Move, is really simple. It's even simpler than Solidity. Facebook has an army of top, top engineers who are going to build something really beautiful, really usable, really reliable, and I think it's going to be great.

Now, my hope is that all those engineers, after working on Libra, will have a crisis of conscious and go work in Bitcoin or star Bitcoin companies. But that's just my dream, what can I say?

Meltem Demirors
You never know.

Jill Carlson
Let's talk about, again, the macro picture here. What does this mean? What do we think is going to happen?

Number one, the big thing I'm excited about is every single bank, every single corporation is looking at issuing a digital currency. I can tell you, they did it in 2016, they did it in 2017 because I sat through hundreds of calls and meetings with companies working on this. Alibaba, if you'll remember, they did tons of PR around their blockchain and how they were going to roll out a currency. And they basically decided it wasn't worth it because they got to do everything they wanted without the complexity.

But look, J.P. Morgan has their J.P. Morgan coin, they're going to expand its use outside of just their internal system. Right now, it's one J.P. Morgan coin equals one USD. But J.P. Morgan has 30,000 middle market and 1,700 corporate banking clients. They're big. Rocaton is rolling out a coin, the online giant has over 100 million users. Annually they pay over $9 billion dollars in loyalty rewards, similar to what Wally does business tin U.S. dollars. They want to roll out a Rocaton coin. SBI Holdings in Japan has already rolled out their S coin, which allows for mobile phone payments and also allows people to mint their own tokens on this platform. And then famously, Telegram has ton. They're ton token is going to be used in application. They have 250 million users, not really clear what it does yet. Supposedly going to get Testnet soon.

Goldman, just this week, announced their intention to potentially issue a coin. Every corporation, every bank, every player is going to have a coin because it's so easy at this point. Why wouldn't you?

Meltem Demirors
Wouldn't you recognize though, that doesn't necessarily mean blockchain. And the fact that it doesn't necessarily mean blockchain, that's actually not a bad thing. I think it many ways that's a good thing.

Jill Carlson
Totally.

Meltem Demirors
I think that the Facebook position is actually much stronger when they're not using a blockchain. Right?

Jill Carlson
Agreed.

Because I actually will say-

Meltem Demirors
You're selling this building products that have strong uptime, strong network effect. And I think that they'll be able to do that here, but it doesn't need a blockchain and that's fine. That's great.

Jill Carlson
What I will say here is there is starting to be bifurcation between companies who are building their own private permission chains. All the things I talked about are that. Versus companies like Square and Fidelity who are building on top of public chains. Microsoft, building on top of Bitcoin and Ethereum. You have a number of companies who are building on public networks. And what's been really interesting, actually, is if you look at the earnings, companies who are building on public chains and touching actual cryptocurrencies versus companies who are doing private chain stuff, guess which ones are seeing a bigger pop in market cap?

Meltem Demirors
I can only guess.

Jill Carlson
Public chain.

Meltem Demirors
Of course.

Jill Carlson
100%.

Meltem Demirors
Of course.

Jill Carlson
100%.

Meltem Demirors
Yeah.

Jill Carlson
So that's my number one takeaway.

Meltem Demirors
Yeah.

Jill Carlson
I think that's absolutely right. And for the record, I actually think that Libra will work provided it gets launched. I don't think, as I say, it'll be a blockchain. But I think that it'll work. And I think it will potentially be revolutionary. Now, will it be revolutionary from the perspective of banking the unbanked? Jury is out, mostly because we don't even know what that means. That could mean so many different things. But I do think that regardless of what happens, we know that it's already been successful at one thing, which is putting central banks under pressure.

Bitcoin, when it was first introduced, was the first instance of stateless money.for the first time in the sort of modern, industrialized world, we had this ability to have money that could exist outside of any particular sovereign state. Now, suddenly we have corporates riffing on this. As you say, Meltem, everybody wants to be their own emperor, everybody wants to be their own king. I remember reading some article a few years ago that was sort of piling on the Facebook fear mongering saying that, "Zuck has always had this obsession with the Emperor of Augustus," who sort of conquered the known world to the Romans, et cetera, et cetera.

But every king throughout history has wanted his face stamped on his own coins. And I think that suddenly now we're seeing the corporate kings of today, they're no exceptions. But I think that that can be a very scary thing. But if we think about that versus government entities doing this, is it really that much more scary? I don't know. I don't know.

Meltem Demirors
Right.

Well, another thing is very clear. Banks generally are under pressure. Right? And we talked about this at the start of the episode. In the banking sector, the financial services sector is continuing to be under attack by smaller, nimbler, and hyper specialized players. They don't have the technical debt, they don't have the regulatory complexity of having many different functions and many different types of services crammed into one bucket. And I feel like every five to ten years, and every industry we see this verticalization where people bring everything in house, try to streamline, create efficiencies of scale, synergies, if you will, in consulting speed. And then ten years later, they un-bundle it all.

I feel like in finance, right now, we're going through the great un-bundling where everything is getting chopped up and rolled out and spun out as its own business unit because it’s more valuable that way. I wonder if the next way of re-centralization and verticalization is going to be these pieces that have gotten shopped out of banks getting folded into other platforms that aren't necessarily financial services platforms. But arguable, my view is every company is a bank in some way, every company already has a finance function. And so we're going to continue to see this move. It's already happened. The WeChat and Alipay are the great examples. TenCent is an absolute killer.

Jill Carlson
That's a really good point though, Meltem, is that really what we're talking about in many ways is just replicating what already exists in the banks. And maybe it's replicating it with a better product wrapped around it, maybe it's replicating it in a new more global way. But at the end of the day, I have this sense of, "Okay, the new banks, same as the old banks." Because at the end of the day, all of these corporate coins, all of these new corporate payment systems, whatever, they're going to continue to be regulated. And people love to say, "Code has no jurisdiction." People think it's a Bitcoin.

And I always think of Marco Santori, who is a prominent lawyer in the space, what he said which was, "Bro, code high school like every jurisdiction."

Meltem Demirors
Well, didn't you guys hear? The Trump administration is looking at banning encryption again. It's like 1980s all over again.

Jill Carlson
Oh, I know. Oh, I know. It's all very exciting. But as you say, this is not a political podcast. But we do have to bring it up because Libra doesn't exist in a vacuum. These trends don't exist in a vacuum, they exist as part of these greater macro changes that are happening. And we have to acknowledge that whatever, say Libra, will offer, it's going to be regulated, it's going to have to comply with the KYCML standards. It's going to need, probably, a money transmission license in the United States, or at least any wallet provider will.

And so at the end of the day, we have to ask ourselves, in what ways is this different? In what ways is this an innovation over what exists today? And I do think that there are reasonable answers to that. But they're probably not the same answers that Bitcoin offers us.

Meltem Demirors
And I think that's fine.

The last thing I want to say, and I want to go back to one of my favorite episodes from the last season, episode ten, surveillance capitalism. Brilliant book by Shoshanna Zuboff, if you haven't read it yet.

The evolution from the physical realm to the digital realm is continuing. And panopticon money is coming and you better bet your assistant that there is no way you can escape it. It's coming. Money is being digitized, finance is being digitized. And to me, the biggest implications of a money system tied to Facebook for the first time Facebook will be able to assign identities to all its users across all of its platforms. And on top of that, they'll be able to link those users to real world identities if they want to use Libra, if they want to use this money.

Jill Carlson
We have to acknowledge Facebook does say, Libra, excuse me. Libra does say, "We're not going to do this, we're not going to use your data. We're not going to monetize your data off of the Libra platform." That, they say, is part of the reason for having this independent Swiss entity run it. But if you read the fine print, they can still do that. And of course, from a technical perspective, they can absolutely still do that. There is a difference, as the block stack guys like to say, between don't be evil and can't be evil.

Meltem Demirors
Exactly.

But look, at the end of the day, I think this is just one step towards a future that we all know is inevitable. And if anything, my hope with all of this, and my takeaway from all of this is, Bitcoin matters now more than ever. It matters more than ever, and people are going to need to learn the difference between Bitcoin and something like Libra. It's already being talked about, the level of dialogue is still very basic. But as people get more familiar with these concepts as they become part of the mainstream media, people are going to get more and more familiar with it. Just look at however different peoples perspective of Bitcoin in 2015 was versus how it is now.

People are moving up the learning curve. And because of this Libra news, journalists are now talking about the features of Bitcoin, that in my view, make it so valuable to individuals who crave privacy and self-sovereignty. And so to me, this is just the start of the great battle that is coming. It's a battle I'm really excited about. And we haven't even seen it yet. But the battle is the battle between decentralized permission lists open systems like Bitcoin and closed walled gardens controlled by centralized powerful entities. It's a battle between the old guard and the new guard. And it'll be interesting to see who wins.

Jill Carlson
We got front row seats, baby.

Meltem Demirors
That is happening for sure.

Well, Jill, it feels really good to be back grinding gears with you. This was fun one.

Jill Carlson
It does, it does.

Meltem Demirors
All right, friends. We'll be back. We love you. We can't wait to start season two.

Jill Carlson
All right. See you next time.

Hey, This is Jill and Meltem. Thanks for joining us for another week of What Grinds My Gears. We love hearing from you so, please, hit us up on Twitter, send us feedback, join the conversation. Follow us on Medium at What Grinds My Gears, where we share a summary of each week's episode, references, reading materials, and of course, memes.

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