The Breakdown - Why Vodafone’s Defection Won't Matter For Libra

Episode Date: January 22, 2020

News broke yesterday that the Libra Association had seen it’s 8th high profile defection, this time from the telecom giant Vodafone. In today’s episode of the breakdown, @nlw argues that Association members are far less of a factor in Libra’s success than key regulatory questions around domiciling, the value peg, and the US’s fear of a Chinese digital currency.  Also in this episode, Square Crypto announces its plans for a Lightning Development Kit while Square also announced a new patent that could make crypto easier to use. In regulatory battles, meanwhile, both the Blockchain Association and the Chamber of Digital Commerce have filed amicus briefs around the SEC-Telegram lawsuit.

Welcome back to The Breakdown, an everyday analysis breaking down the most important stories in Bitcoin, crypto, and beyond, with your host, NLW. The Breakdown is distributed by CoinDesk. Welcome back to The Breakdown. It is Wednesday, January 22nd. And today we're going to kick off by looking at the latest high-profile defection from the Fledgling Libra project and what it means for Facebook. Second, we're going to be looking at Square Crypto, which has just announced. a new lightning-related project, as well as breaking news of a new patent that has implications for their efforts with crypto. And third, and finally, we'll be looking at some interesting legal intrigue around

Telegram's case with the SEC. Yesterday, Vodafone became the latest company to leave the Libra Association, and in fact, the eighth overall to leave the association. Before it, the companies that had left included PayPal, MasterCard Visa, Mercado Pago, eBay, Stripe and Bookings Holdings. So this is obviously a different category. Most of those players are in the payment sector. Most of those defections came all at once. It had to be a very bad weekend for David Marcus and team. Vodafone is a large telecom conglomerate. And the difference in this case is a few parts. First, it seems to be amicable. At least they're presenting it that way. Vodafone is going

to Pains to say that it doesn't have to do with regulatory concern or delayed timing or anything like that. And the reason that they are leaving Libra is they want to direct those resources that they might have spent on the Libra project to their own internal project M-Pesa. M-Pesa is one of the best established and best-known digital payment services in Africa. It currently serves six nations. They want to expand it. And so that's the logic. That's the reasoning that they're giving for why Vodafone is leaving the Libra Association. If your Facebook, the first instinct and the first instinct to market commentators has been, uh-oh, it's another bit of bad news, right? It's another negative news cycle where some big company has lost faith in the mission and doesn't think it's

going to actually be brought to bear. And that's generally the attitude. Very few people think that will actually see a Libra launch in this calendar year, right, in 2020. I tend to have a slightly different opinion in terms of the significance of this defection for Facebook, which is frankly that I just don't think it's that important. I think when Libra launched, they wanted to show that they could go rally big, big companies to the cause, right? It was meant to be a first impression kind of thing. It wasn't meant to be done, right?

They had something like 30 Libra Association members when they announced it. They wanted to get it up to 100. And they've continued to say that they have something like 1,500 companies on a waiting list. They wanted to launch with a big set of people. They were able to do that. What's happened since then is we've seen the fragility, let's say, of many of those relationships. And informality and the still kind of in progress nature of those relationships, as particularly payment partners have tended to exit the project at this point.

Why I say that I don't think this is particularly significant for Facebook and the Lieber project right now as it stands is a couple parts. First, I think that it was a much bigger deal to see those payment partners go. That first wave of defections, I think, was much more demoralizing and probably has a much more significant impact on the project itself than this particular partner in Vodafone and in terms of what Vodafone brings. Second, it feels to me likely that many of these quote-unquote partners and members of the Libra Association were not and are not particularly enthusiastic about the idea of a Facebook-led initiative that has the potential to disrupt their

core businesses. But they feel it's important enough. The actors who are involved are significant enough that they have to have a seat at the table. So there's a pressure to do it. That's why you saw, I think a reversal that was so quick is that as soon as that pressure was released, everyone left all at the same time. These things, to me, are not what Facebook's real challenges are with the Libre Project. After watching all of the hearings, after seeing so much commentary from central banks around the world, I think that they're going to face three or four big issues. and that those issues are much, much more significant than who is or isn't in the Libra Association at any given time. So what are those four issues?

The first has to do with where they're domiciled. One of the biggest red flags for U.S. regulators was the fact that Facebook was saying to them that they wanted this to be an America-centric project and good for the dollar and good for the dollars place as the reserve currency of the world, yet they were domiciling the project in Switzerland. And they had a very ham-fisted answer when people pushed on that, saying that, you know, Switzerland was where international organizations set up. Many congressmen pointed out rightly that New York is also where many international associations set up. So that's one. I think domiciling is a huge issue for U.S. regulators in particular. Second, the basket of currencies approach. This is one of the

most novel parts of the design of Libra is that rather than being pegged to any one currency, it's pegged to a basket of currencies. And that basket of currencies has the dollar in it, but not weighted more than 50%. At least that was the intention. Now, this was another major bone of contention for U.S. regulators, who again said, if you really want this to reinforce the dollar's central role in the world order, why would you have it not pegged to the dollar? By the time that Mark Zuckerberg was testifying, after David Marcus had testified, it was clear that this was something that they were potentially willing to give up. Meanwhile, however, other actors in the central bank digital currency space or just the general

digital currency space have picked up on this idea. You saw Mark Carney, the Bank of England governor, propose a synthetic hegemonic currency, which would be basically a central bank association or consortium creating a digital currency that was like Libra pegged to a basket rather than just one dollar denominated currency. So I think that that basket of currencies issue is another huge barrier for the Libra Association. Third, speaking of competitors, it is not just individual governments creating a digital version of their fiat that have entered into the scene in the wake of Libra, but many discussions of regional consortiums. Lee Quinn from Coindesk has been reporting from Davos,

and pointed out conversations along those lines with Asian nations talking about regional digital currencies, with African nations talking about regional digital currencies. You have Binances Project Venus, which is basically aiming to enable that type of activity. So you have this new competitor, right, that's a new way of thinking about digital currencies that is neither the totally radical model of a corporate-led coin like Facebook's Libra, nor a traditional model of just a digital fiat, I guess. Who knows whether that will take root? Certainly the euro and the eurozone show just how difficult this sort of project can be,

but it also shows the possibilities of it. So that, I believe, is another big challenge that Facebook faces. But by far, the number one most determinant issue, I think, in terms of whether Libra will proceed and how it will proceed, is how U.S. regulators come to understand the threat of a Chinese digital currency or not. China has made it clear that they are bulldozing their way into this new space and that they are going to be the first to release of the major powers of digital currency. The U.S. right now continues to seem to have this attitude that that's not particularly important

to them or that that doesn't worry them. Now, that's obviously not the case for all regulators. We've seen Congresspeople ask and request the Fed start thinking about a digital dollar. But at the same time, we've also seen those requests more or less ignored, rebuffed, dismissed. And I think in some ways, Libra's destiny may be tied up at least a little bit in whether the U.S. at some point wakes up or turns around and says, my goodness, we are behind the eight ball, and we have to work with what's in front of us, which is Libra, right? don't have time to do a unique government-led R&D effort for another five years, like China's

put into this. We have to go now. So we have to work with some actor that already exists. That, to me, is the most likely scenario to really accelerate Libra as a force, is basically having it be effectively a proxy for a U.S. digital dollar. Who knows if Libra would even be willing to do that or interested in doing that, but they seem to give signals that say yes. Either way, lots of really interesting stuff to think about, right? The Davos context of this conversation around central bank digital currencies has lived up to the expectation that it would be a major point of conversation and contention. And I think it will continue to be throughout this week and beyond.

But with that, let's turn to our second topic for the day, which is Square and their new efforts around lightning. Even as Bitcoin has settled into its digital gold narrative, and it's competing against central banks, not competing against Visa narrative, there are many folks who are very conscientiously looking to layer two developments, particularly Lightning, as a mechanism that Bitcoin can also play a role as a medium of exchange, as a mechanism for people to actually make payments or buy things or just transact more easily. And Square Crypto is Square's project that was basically convened as a way as a skunk works

for the people who were hired to really figure out just what they could best offer to the Bitcoin space and do it without any real consideration of how it impacts the company directly, right? The mandate that they were given by Jack Dorsey was not to improve Square's Bitcoin efforts or cash apps Bitcoin efforts, but to just do things that were good for Bitcoin. Well, what they've come with most recently is that they are going to build a Lightning development kit. This is effectively infrastructure to make it easier for other Bitcoin projects to integrate Lightning. This is a developer-centric bit of infrastructure. So the new kit is going to include

an API, language tools, demo apps, and basically all these other features that are designed to integrate payment into other wallets that already exist or to build new wallets that have this built in. They said in a medium post, quote, for Bitcoin to become a widely used global currency, one that can't be stopped, tampered with, or rigged in anyone's favor, improvements to Bitcoin's U.S. security, privacy, and scaling are required. And they are trying to, rather than, again, own some centralized thing like a wallet, they're trying to provide infrastructure for the rest of the markets. This was greeted, as you might expect, with a ton of enthusiasm from Bitcoiners who, I think,

continue to feel that Square is at the forefront of how a big company can interact with this new ecosystem. Speaking of Square and speaking of interacting with this new ecosystem, it was also announced just today that Square had won a patent for basically any currency to any currency transaction network, which obviously has really interesting implications for crypto. The application that Square filed said, the present technology permits a first party to pay in any currency while permitting the second party to be paid in any currency. And the CoinDesk article about this points out that this could be really advantageous for contexts such as retail where maybe you don't accept the cryptocurrency that I want to pay in. And we don't have time to obviously

negotiate or haggle over that. We're worried about settlement issues because if you have to go convert it, there's potential losses there. The technology that Square has just patented basically would allow for real-time settlement that moves from the currency that I want to pay in with the currency you want to be paid in, which could be huge, right? So taken together, it's just an indicator of how aggressively Square is moving in this space, how important they see cryptocurrencies in general, but Bitcoin in particular to the future of what they want to do. So really exciting stuff, I think, for anyone who is invested in more and more people coming into this ecosystem. Our third and final topic for the day has to do with Telegram.

Two interesting little bits of news around that from the last couple days, both having to do with blockchain advocacy associations, filing briefs in support of Telegram effectively, and asking the SEC for either more clarity or for a specific designation. So the first of these was the Chamber of Digital Commerce, which basically is pushing the SEC to be able to distinguish between, on the one hand, an investment contract and on the other hand, the underlying asset. So the point of this, obviously, is that even if purchase agreements for tokens were

securities, that doesn't necessarily mean that the tokens themselves are securities once they are released, once they are used in the network. This goes back to the idea that something can start a security and become something that's not. That's a commodity or some other designation. This is a real wrinkle in the whole token ecosystem that is incredibly important. There's a lot of common sense logic to this idea that the sale itself constituted securities offering, even if the underlying asset in the long term is not actually a security. So the Chamber of Digital Commerce was not necessarily taking a huge, side one way or another in terms of what they were asking the SEC, but they were very strongly

asking the courts to be able to distinguish between investment contracts and the underlying assets. And of course, this has much bigger implications than just Telegram itself. The second amicus brief that was filed was from the Blockchain Association. And whereas the Chamber of Digital Commerce wanted the U.S. courts to make this distinction, but wasn't going to take sides on the lawsuit itself. The blockchain association is a more straightforward supporting brief for Telegram. They basically are arguing that Telegram made sufficient effort to meet all of the criteria put forth by the SEC and arguing and worrying that the court's action could harm not only Telegram's investors, but the market in general. So the quote from the brief says

the court should not block a long-planned, highly anticipated product launch by interfering with a contract between sophisticated private parties. Doing so would needlessly harm the investors that securities laws were designed to protect. The SEC's lawsuit also raises novel questions regarding whether companies are forbidden from raising funds from sophisticated U.S. investors under well-established regulatory provisions to build blockchain networks. So the point here that they're making is that Telegram did everything it could to actually ensure, sure the protection of investors, it only worked with the credited investors. It jumped through all the hoops, and they're still subject to this litigation, which makes it seem like it's something about the crypto space in general, which is potentially not what the SEC is supposed to do to single out industries just because they don't like them. So interesting stuff, I think for me, the reason that I

wanted to share it is that we saw last year kick and their kin token try to sort of rally the crypto community behind their cause and to go fight the SEC, right? They started their big Bollyhoo defend crypto campaign, which no one ended up contributing anything to. It felt so much like it was just a marketing effort in some ways and trying to leverage the broader discontent that the crypto industry had for their own personal gain. I don't necessarily want to say that anyone who's involved with that was insincere in their belief about how the SEC should behave, but it didn't really hit, The campaign just didn't hit. It didn't see people rally around kick and kin. And in fact, part of why they didn't is that they weren't necessarily supportive of that project. We're seeing

something a little bit different when it comes to telegram. We're seeing these advocacy groups be willing to put themselves on the line, actually filing legal amicus briefs in the context of these court cases to support them. It's a different tone. It's a different time. And I think that it's hard to deny that this will be the most significant case, at least that we know of now, with regard to the designation ultimately of cryptocurrencies and crypto sales in the U.S. regulatory regime. So really important stuff to watch. For now, though, that's it for today's breakdown. I hope it was helpful. I hope you enjoyed it. Subscribe, as always, iTunes, Spotify, wherever you listen to podcast, just search for my name. Hit me up on Twitter at NLW or get all of the breakdown

by email by going to nlw.substack.com. Thanks as always for listening and I will catch you tomorrow.