Libra and remittances

Dante Disparte, as interviewed by Ben Thompson ($$, but you should subscribe to Ben):

One example is the use case of international money transfers or remittances. Globally, the remittance cash flow is projected to be about $715 billion in 2019, and on average…you are seeing between seven and ten percent of transfer costs, and in some instances much higher than that in the teens. For a product and an outcome from the sender and receiver point of view, that is not only very slow, it often takes a few days to clear on the receiving end, it is [extremely expensive]. There are direct payment rails that are just technology powered that do a lot in terms of advancing efficiency, but pre-blockchain it would have been very, very hard to conceive of a network of international payments that could do that at near zero cost instantaneously while at the same time not sacrificing the type of ledgering and transaction information that would enable the world to begin to do that securely. So that would be one amazing use case that could put billions and billions of dollars back into the market by eliminating as many of these fees as possible, while at the same time putting billions of dollars into the hands of people around the world in real time.

Here is my current understanding of Libra/Calibra, at least within this particular context, noting again that my understanding may be wrong or incomplete.  These transfers would not go through the current banking system as we know it, but rather through a blockchain with say 100 or so (quite legitimate) participants enforcing some kind of “proof of stake” standard.  Some form of “proof of stake-equivalent of mining fees” would have to be paid, either explicitly or implicitly, and those arguably could be much lower than current remittance costs, noting that the actual operation of proof of stake in this setting remains to me murky.  Still, it would largely avoid the current mining fees associated with Bitcoin.  On net, one is trading in the current regulatory and clearing and Western Union branch costs for these future proof of stake costs.  Do you think the Libra Association can run a proof of stake system for less say than $100 billion?

“But don’t you have to convert your Libras back into mainstream fiat currencies?”  Well, maybe you might, but that is simply the cost of showing up at the relevant financial institutions and claiming redemption.  Those costs also could be much lower than the current fees associated with remittances.  What is sent through the blockchain network simply can be Libras, as I understand it, with varying assumptions on how much people will hold Libras rather than converting them.

To use a historical analogy, think of this as substituting “the transfer of paper claims to gold” for “claims to gold,” but in a one hundred percent reserves setting.  It can be (and indeed was) much cheaper to send around the paper than the gold, and yet the paper still was a claim to the gold.  The Libra is a kind of parallel, redeemable currency, legally not within standard banking systems, but still redeemable in terms of mainstream fiat currencies which are within standard banking systems.  “Create a synthetic claim which can be traded more cheaply” would be my version of the ten-word slogan.

Another slightly wordier slogan might be: “let’s actually separate the means of payment from the medium of exchange by creating a new synthetic asset, because those two things actually should not be the exact same asset.”

Of course it still remains to be seen in which countries regulators will allow this to happen.  How persuasive is the promise of one hundred percent reserves?  I don’t mean to speak for Libra/Calibra here, but I believe they are suggesting (or implying?) that the proof of stake system for making and validating transfers could in essence enforce relevant regulations against money laundering, illegal transfers, and the like.

It is a quite separate (but possible) claim to believe that libras could serve as an effective medium of exchange at a retail level, and perhaps I will cover that in a separate post.  That would mean that both the medium of exchange and means of payment should be new and different assets, a much stronger claim.

Here are my earlier questions about Libra, with responses.


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