Rhodri Davies, Programme Leader, Giving Thought

Rhodri Davies

Head of Policy

Charities Aid Foundation

The role of giving

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What will Facebook's new cryptocurrency mean for charities and civil society?

20 June 2019

Cryptocurrency has come rocketing back to mainstream attention this week, with the news of Facebook’s plans to launch an ambitious new payment mechanism called Libra in 2020. Given the scale of Facebook’s resources, and the impressive list of partners it has already managed to sign up (including Visa, Mastercard, PayPal, Spotify and Uber); this seems like an announcement that needs to be taken very seriously. (For more technical detail on the announcement I recommend this article from Josh Constine at TechCrunch, and for broader analysis of its implications, this piece from 11:FS’s Simon Taylor).

At Charities Aid Foundation, we have been exploring for the last five years the potential opportunities and challenges that cryptocurrency and the blockchain technology that underpins it might bring for charities and civil society. (You can find most of our reports, blogs, videos, podcast etc. on the subject here). So the interesting question for us is to what extent Facebook’s new Libra might realise some of this potential we have outlined for blockchain and whether it overcomes the known challenges that have faced efforts to use the technology in a civil society context so far?

Let’s take the opportunities and challenges one by one to see what answers we can find.

 

Opportunity 1: Making it easier and/or cheaper to move money around the world

Why does this mean and why does it matter?

Since blockchains and the cryptocurrencies built on them are non-geographic in nature, the theory is that they could overcome many of the problems with existing financial systems (in terms of foreign exchange, transaction costs etc.) and thus enable much quicker and cheaper cross-border payments. Many civil society organisations (CSOs) either move money around the world themselves or receive funding from sources based in other countries, and the costs associated with doing so are often significant. If blockchain can bring these costs down, and make it easier to get financial resources to where they are needed, when they are needed, this would bring real benefits. (For further detail see this previous article).

 

Will Libra help realise it?

Transforming the market for international payments is a huge part of the motivation behind Facebook’s desire to launch its own cryptocurrency. The success of social media-based payment platforms like WeChat Pay and AliPay in China has made Facebook sit up and take notice; and one assumes that they have real concerns about losing market share in many of the regions where they operate if they aren’t able to provide something similar for customers. Hence they have a real incentive to make the Libra venture work, and with the scale of the resources at their disposal it certainly seems that if anyone is going to make it a reality, Facebook is. And given the company’s existing customer base, if Libra payments via WhatsApp or Facebook do take off, it will almost immediately be a credible alternative to traditional financial systems.

This could have a huge impact on international aid and development, as well as on peer-to-peer payments such as remittances or direct donations.

 

Opportunity 2: Enabling decentralisation and disintermediation

What does this mean and why does it matter?

The key difference between blockchain and traditional methods of record-keeping is that it is supposed to do away with the need for trusted third parties, because responsibility for maintaining the ledger of transactions is shared out (or distributed) across users of the system. For those of a libertarian bent who see blockchain and cryptocurrency primarily as a way to circumvent traditional institutions like governments and banks, the ability to decentralise and disintermediate in this way is absolutely fundamental.

But as well as affecting systems, blockchain also brings the potential for decentralisation at an organisational level. The development of Distributed Autonomous Organisations (DAOs) highlights the way in which many of the traditional functions of coordination and cooperation might be possible without the recourse to centralised models of governance. For civil society, this raises the possibility that a lot of future activity might be driven by loose, non-hierarchical networks rather than traditional charities or nonprofits. (For more on this, see our paper on decentralisation and civil society).

 

Will Libra help realise it?

To a limited extent. Libra will probably bring about disintermediation by making P2P payments far easier. However, when it comes to decentralisation, the new project seems to bring far fewer potential benefits. Whilst it might be possible in the future to use the infrastructure to develop DAOs or other decentralised governance structures; this doesn’t seem to be part of the plans at the moment (which is perhaps unsurprising, given that this is primarily about financial transactions).

The more fundamental problem, however, is that the model Facebook have chosen to use is itself pretty highly centralised. This is not like the Bitcoin or Ethereum blockchains, which are public and where anyone can contribute to the maintenance of the ledger through a process of “mining” (basically competing to solve a mathematical problem which gives the winner the right to create the next block in the chain, but don’t worry about that for now!) The Libra blockchain will be maintained by a closed group of partners (The Libra Association) who have paid up to $10m for the right to operate a node, and overseen by an advisory group. For some, this means that Libra is not using blockchain in the true sense (as they hold that a blockchain must be open and permissionless), and that we might do better to talk in terms of ‘distributed ledger technology’ (DLT) instead.

Interestingly, Facebook has been at pains to make it clear that the Libra Association will be totally independent and that they as a company will only be one member among many (and the voting power of each member will be capped). Furthermore, they have outlined a longer-term ambition to open up the ability to contribute to maintenance of the blockchain to all (based on something called a Proof of Stake consensus protocol, which so far no-one has made work at scale).

Away from any of the more technical detail, the key point for civil society is this: If your interest in cryptocurrency or blockchain is primarily in the way the technology can be used to disrupt existing power structures through decentralisation, then Libra is unlikely to meet your expectations (in the short term, at least). Power in this system will reside with the organisations that have control of the ledger; so we may need to ask some pointed questions about who those organisations are and the extent to which we are willing to give them control of the infrastructure we use for financial transactions.

 

Opportunity 3: Radical transparency

What does this mean and why does it matter?

Assets on a blockchain ledger are unique, as each one is essentially just a string of cryptographic code. When combined with the public nature of the ledger (i.e. everyone can see it) this leads to a form of “radical transparency”, where each asset can be uniquely identified within the system at any given point in time. In the context of philanthropy, this raises the possibility that donors would be able to track their individual gifts and thus see how they were spent by any organisation or individual they gave to.

This could bring benefits in terms of overcoming concerns about financial mismanagement and corruption, particularly in the context of international development, and thus lead to improved levels of trust. However, there are also clear potential downsides. For instance, what if donations are going to individuals or organisations working on rights issues that contravene existing laws in their country (e.g. LGBT campaigners in Uganda)? If those financial transactions were recorded on a fully public ledger, the government would immediately have a list of targets to imprison and the donor or funder would have inadvertently made it possible.

Even in less extreme cases, radical transparency might bring challenges: many charities already have a hard time convincing supporters of the need to spend money on core costs, which are often perceived as overheads. If those supporters were suddenly able to see not just how money is spent overall, but literally how their individual donation was spent, the chances are that this problem would get much worse before it gets better. (For more on this, listen to the guest appearance I made on the BOND podcast).

 

Will Libra help realise it?

Yes. Libra will bring the same cryptographic traceability as other cryptocurrencies, and as far as I know the ledger will be publicly viewable by anyone (even if the ability to write new blocks is limited to partners, as outlined above). So all of the potential opportunities and challenges of radical transparency seem to hold true.

In reality, this is only likely to become an issue as and when someone builds a third party API that makes it easy for people to track donations on top of the Libra blockchain (as they will be able to, per Facebook’s plans). Up until that point, whilst it would be theoretically possible to track donations using the public ledger, it would be a bit like trawling through pages and pages of a particularly boring spreadsheet so most people are unlikely to do it. However, the fact that we have already seen a number of attempts to use blockchain to enable radical donation transparency (mostly unsuccessful it has to be said, although GiveTrack and Alice are honourable exceptions here), suggests that someone will try to do this for Libra sooner rather than later.

 

Opportunity 3: Smart contracts

What does this mean and why does it matter?

One of the interesting possibilities afforded by blockchain is the creation of “smart contracts”. These are self-executing computer protocols which perform defined functions when agreed criteria are met (i.e. “If X and Y happen, do Z). These bring the potential for automating many existing financial processes, and thereby reducing much of the cost currently associated with using intermediaries to execute contractual terms. But they also bring the possibility of further innovations such as “programmable donations”.

 

Will Libra help realise it?

Potentially. Once the full system is up and running, it appears that the ambition is to enable third parties to develop applications on top of the Libra blockchain, including smart contracts, so developers would be able to build applications that harness this functionality for donations.

 

Opportunity 4: New models of digital identity

What does this mean and why does it matter?

Some of the most exciting developments so far using blockchain technology have been centred around the idea of “sovereign identity”. This is where the traditional model of online identity, in which various aspects of you persona are owned by different third parties (governments, companies etc.), is flipped on its head and instead you as an individual are given control over all aspects of your digital identity and the power to choose which to share in any given situation. (For more on this and the implication for civil society, see this previous blog).

 

Will Libra help realise it?

At first glance, it doesn’t seem likely - particularly given that many cynics are assuming that Facebook’s main interest in developing Libra is to find yet another way of harvesting data about its users. However, in the white paper outlining their plans, there are some tantalising mentions of a longer-term desire to shift towards a new model of online identity that gives control to the individual. So perhaps watch this space?

 

At this point, you may be asking “if blockchain genuinely brings so many potential advantages for civil society, why hasn’t anyone just got on and done this already?” Which bring us to the main barriers that have prevented this potential being realised so far.

 

Barrier 1: Use cases

What does this mean and why does it matter?

One of the big challenges in the context of civil society has been to find use cases where blockchain technology can demonstrably be used to address a real problem; and furthermore to do so in a way that isn’t massively over-engineered or couldn’t be done much more simply using an existing technology. (Humanity X have a useful decision tree tool that allows you navigate this challenge by exploring potential humanitarian sector use cases and see whether blockchain might be appropriate).

 

Will Libra help overcome it?

In one sense, yes; in that Libra itself is essentially a gigantic use case for blockchain (albeit an iteration of the existing cryptocurrency use case that is still the main basis of most claims about the value of the technology). But in another sense, even the value of Libra as a use case for blockchain is not assured: there are critics who are already questioning whether Libra needs to employ blockchain, or whether Facebook could have achieved the same goal using much simpler technology.

 

Barrier 2: Cryptocurrency volatility

What does this mean and why does it matter?

One of the major problems with existing cryptocurrencies like Bitcoin and Ethereum is their volatility. Whilst they have at times gone up enormously in value (and thus looked like amazing investment assets) they have also suffered crashing losses (and thus looked like insanely risky gambles). Given that three of the key functions of money identified by William Stanley Jevons in 1875 are to act as a medium of exchange, a measure of value and a store of value, and this level of volatility undermines all three; many critics argue that cryptocurrencies like Bitcoin aren’t really money in any meaningful sense.

This presents big challenges for CSOs in terms of whether they can justify using crypto. Can holding such assets be squared with the fiduciary duty of trustees? And even if the CSO doesn’t plan to hold on to any crypto, is the potential value of using such an asset to reduce the costs of moving money across borders fatally undermined by the risk that its price will drop enormously during the time it takes to make the transaction and thus potentially cost far more than traditional FX ever would?

 

Will Libra help overcome it?

Yes. Libra is designed to be what is known as a stablecoin: where its value is pegged to some existing asset, rather than simply dependent on the whims of the marketplace. In actual fact Libra will be pegged to a basket of global currencies (including the dollar, the pound, Euro and Yen). There will also be a financial reserve, so that whenever people buy into the Libra system an equivalent amount of the respective fiat currency is put aside. This should help minimise concerns about the liquidity of the system (i.e. people’s ability to withdraw their money at any given time).

 

 

Barrier 3: Complexity and adoption

What does this mean and why does it matter?

One of the big barriers to realising the potential for blockchain and crypto in the context of civil society is that most transformative use cases rely on the assumption of widespread usage of the technology, but that is still far from being the case. Whilst there was a surge of interest in crypto in late 2017 when the prices went through the roof, the subsequent crash left many feeling sceptical about the long-term prospects of the technology. Additionally, even for those who remain optimistic, the actual process of buying and using crypto is still not especially user-friendly (although it has improved enormously from a few years ago).

 

Will Libra help overcome it?

Almost certainly yes. The fact that Facebook has such a vast pool of existing customers base through its various products and platforms means that it doesn’t face the same sort of challenges as someone trying to launch a cryptocurrency from scratch and convince people to use it. There is, of course, still no guarantee that users will want to use Libra to make payments (and Facebook has had a bit of a track record of trying and failing when it comes to payments: it scrapped Facebook Messenger payments earlier this year, for instance- although that might of course be because they knew that Project Libra was on the cards). However, if even a small proportion of people using Facebook or WhatsApp get on board (or indeed users of the other companies signed up as partners, such as Uber or Spotify) then the system will be of enormous scale very quickly.

For those interested in philanthropic applications, the benefit of building on top of Libra will be the ability to tap into that existing user base.

 

Barrier 4: The “Last Mile” problem

What does this mean and why does it matter?

One of the particular problems faced by CSOs who have been interested in using blockchain or crypto is how to get money or other assets to those on the ground, particularly in poorer countries or war-torn regions of the world. These are the people who really need the help, but they are the least likely to have the resources or technological capability to adopt cryptocurrency or make use of blockchain, so the danger is that a proposed system using this technology only gets the money to a certain point but never quite to the people who actually need it.

 

Will Libra help overcome it?

Possibly, to at least some extent. As already mentioned, Facebook’s products have a huge user base and deep penetration into many markets in emerging economies, so by integrating financial functionality into WhatsApp and Facebook it is quite likely that Libra will be able to reach people who have up to now been left excluded by traditional banking.

However, there are still many people around the world who live without access to the internet or smartphones, and this will include the most deprived and marginalised communities- who are presumably going to be the focus of many philanthropic efforts that might want to use Libra to move money around the globe.

So unless those people are given support to access the system, or additional mechanisms are put in place to integrate Libra with other payment mechanisms (either digital ones such as MPesa, or just traditional cash), then there will still be a last mile problem. (Or maybe we will bring it down to a ‘last half-mile’, but the fundamental problem will be the same).

 

Barrier 5: The environmental impact of Blockchain

What does this mean and why does it matter?

As cryptocurrency has become more prominent over the last few years, people have also become aware that the processes used to maintain the blockchain - which are necessary for keeping records of crypto transactions - are hugely energy intensive. In particular, the proof of work (PoW) consensus protocols at the heart of the ‘mining’ process that keeps Bitcoin and other crypto currencies going are essentially wasteful by design (because the enormous amount of energy and processing power that would be required to cheat the system is basically what is supposed to keep everyone honest). This has led to concerns about the environmental impact of crypto and blockchain.

 

Will Libra help overcome it?

They are certainly aware of it, and trying to mitigate any criticism. For a start, it is important to note that the way the Libra blockchain is designed to work is fundamentally different to the Bitcoin one. That is what is known as a “permissionless” blockchain, where anyone can compete for the right to place a new block in the chain, and it is here that the ‘proof of work’ consensus protocol mentioned above is required in order to maintain the integrity of the system. Libra, on the other hand, is a “permissioned” blockchain- in that only a select group of individuals and organisations (the Libra Association) will be able to create new blocks (at least in the short term). Whilst the energy costs associated with this model are still not negligible, they are far lower than those found in PoW-based systems.

Facebook has outlined plans to shift to a more open model in the future, but if that does happen the blockchain will be based on what is known as a “Proof of Stake” (PoS) consensus protocol, rather than Proof of Work. (In very basic terms, honesty here is supposed to be guaranteed by ensuring everyone has sufficient skin in the game to provide them with an incentive to maintain the integrity of the ledger, rather than by making the cost of cheating too exorbitant). Again, while this will still require energy consumption, the hope is that PoS systems will have a much lower environmental impact.

 

Barrier 6:  Regulation and legislation

What does this mean and why does it matter?

One of the biggest practical challenges for CSOs when it comes to using crypto is that there is currently little clarity about regulation or legislation. Regulators in different countries, and even different regulators in the same country, take widely differing views of how these assists should be viewed and regulated. For organisations working across multiple jurisdictions, this adds significant complexity and undermines the promise for crypto to offer a simpler, cheaper way of moving money cross-border.

 

Will Libra help overcome it?

Probably not, to be honest. Many experts have already highlighted the fact that regulation is likely to be a major challenge for Libra itself; as there is no way at the moment of knowing how different governments and regulators around the world will choose to view it. Many are already viewing Facebook with suspicion, given its highly publicised issues with data usage and concerns about its role in enabling online misinformation and propaganda, so the likelihood is that regulators will not be especially sanguine about the idea of the company setting up a rival to existing financial infrastructure and may look to put obstacles in the way of Facebook’s plans. And even where governments and regulators are open to working with Libra, there will still be a lot of details to iron out in terms of how the new payment mechanism fits with existing financial rules.

 

Barrier 7: Concerns about data

What does this mean and why does it matter?

A criticism voiced by many in the wake of Facebook’s announcement of the Libra project was that it would simply be a way for the company to gather more personal data on users and thus strengthen its market position. Given the highly-publicised controversies surrounding Facebook and its use of data that we have already alluded to, this is a justifiable source of concern.

The company is obviously well aware of these criticisms, and went out of its way in the documentation outlining details of the Libra project to make it clear that it would not be used to collect data on users. And the fact that the Libra Association will be a separate company, plus the ambitions outlined earlier to play a part in shifting to a model of person-centred online identity certainly lend added credibility to this claim. However, Facebook’s inexorable rise so far has been largely fuelled by its ability to capture and use data, so many are likely to remain sceptical on this front for some time.

 

Conclusion

So is Libra going to be a game-changer for civil society, or a dud? And if it does have an impact, is that going to be primarily positive or negative?

It is hard to say for certain at this point. There are still many questions to be answered (e.g. how it will be regulated); many elements that are impossible to predict (eg. whether people will actually use it); and many concerns about the potential for it to be misused (eg how any data is used).

However one thing that seems certain is that this is by far the most ambitious attempt yet to use blockchain technology to disrupt the global financial system; and given the roll call of organisations involved in it already it deserves to be taken very seriously.

It will almost certainly drive a wider resurgence of interest in blockchain and crypto over the next few years too, and this could have a major impact on turning some of the theoretical benefits of blockchain for civil society into reality. I for one will be watching this space extremely keenly.

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