Libras Biggest Problem
Michael J. Casey is the chairman of CoinDesks advisory board and a senior advisor for blockchain research at MITs Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
Among the barrage of commentary accompanying the Libra circus on Capitol Hill last week was a single short tweet from lawyer Marco Santori that summed up the core problem confronting Facebooks cryptocurrency project – and, for that matter, any corporate-led effort of its kind.
To understand why Facebook and its 27 Libra partners are in this dilemma, lets go back to bitcoins roots – to the core problem Satoshi Nakamoto sought to solve. Its right there in the sub-headline of the famous white paper: electronic cash.
Satoshi was following a Cypherpunk dream. He/she or they wanted to bring privacy to digital payments, to translate the offline experience of cash transactions into the online realm. The idea: that a user neednt prove their identity to execute a transaction with anyone else on the Internet – just as theres no need for me to show a document proving that Im Michael Casey every time I hand over some dollar notes to someone.
This matters not because everyone using cash or bitcoin is a money launderer evading law enforcement, but because identification poses a real barrier to commerce. If society has an interest in identifying people – as financial law enforcement agents would argue – then we must recognize that this comes with an enormous trade-off in terms of foregone economic activity.
Think of the 2 billion unbanked adults from the worlds developing countries, the people that Libra, ostensibly, wants to serve. A lack of education, poor credit records, and untrustworthy state-issued ID papers means these people cant qualify for accounts at local banks (primarily because those local banks are themselves compelled to comply with strict international know your customer procedures lest they are cut off by their foreign banking counterparts.) For a very large number of the worlds adults, identity is a very real barrier to commerce.
But you can also think of the billionaires that run Wall Streets hedge funds or the giant banks and brokerages that trade on their behalf. None of those guys want their identities revealed when they place a buy or sell order for a stock, bond or commodity. The market will just trade against them.
Identity also limits fungibility. As Ive argued before , money is most useful if its past is unknown. Any single dollar, or single bitcoin, must be worth the same as any other single dollar or bitcoin. But if I receive a dollar or bitcoin that might subsequently be subject to a legal or enforcement claim due to its involvement in a previous transaction, the uncertainty attached to it will, by definition, reduce its utility. ...