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.

Comments

Thank you for staying on this and blogging about it. This is where I go to learn about Libra.

Question for you, as you learn more about this (which you are clearly showing us as you go), do you find your rating of the prospects for Libra rising, falling, or staying the same as when you first heard about it?

I second that opinion, TC is great. I can't speak for TC, but the stock market seems to think Libra is a bust: just look at the stock price of Western Union (symbol: WU), which dropped a bit after Libra was announced, rallied, and dropped again to about where it was before Libra, in other words, the market is betting regulatory issues (I notice pundits are already beating the 'Libra will finance terrorism' drum) and lack of consumer interest will sink Libra. I for one, who am an international guy in the 1% in net worth (relax, it's my parents money) hope Libra takes off since I pay a lot of money wiring cash overseas.

Bonus trivia: Libra is a form of currency board tied to stable currencies, of the kind constantly advocated by economist Steve Hanke. Currency boards --as opposed to a currency that's pegged to another--are actually stable and have worked in post-Czar Civil war Russia and would work in Argentina says Hanke.

Unless payments, all payments, are in Libra, its not a currency, but simply a way to collect two-three fees instead of one.

I will believe FB believes Libra is a currency when it only charges for ads in Libra and only pays workers, especially executives, and suppliers in Libra, fixed in Libra, eg, 2 Libra/ hour, or 5000 Libra per year.

FB would need to cut deals with tax collectors on fixed exchange rates when government cash in tax revenues calculated in Libra, independent of free market exchange rates. Which would be good for everyone forced to accept payment in Libra - FB would not be able to devalue Libra by printing its way to profits.

And Libra transaction costs will not be lower than EFT fees, or check fees, or paper cash, or bank currency conversion.

FB might set the fees lower than existing operators to gain market share, but setting the fees at cost would mean FB is operating a charity. Once it has the market share of say the 3rd largest funds transfer, say EFT in the EU or phone credits globally, the fees will be hiked well above costs.

Ie, why would FB charge less than the Fed and US Treasury, and Fed member banks for dollar transactions? Eg, about 25 cents to end user, which covers cost of capital assets plus operations plus return on enterprise.

Let me see if I understand.

Bitcoin has a (fairy tale), er, high-speed computer algrorythm(?)/AP Math-class fabricated "mining" operation. Libra has users remit Federal Reserve Notes in exchange for "Libras." Sounds like "deposits" to me.

What about the accounting? The Fed shows on its balance sheet FRN's as liabilities. What about Facebook's Libra?

Does the Libra holder receive a portion of the interest income on assets held in the reserves? The Fed doesn't pay on FRN's; but, pays interest to Fed member banks' on required and excess reserves.

What are Zuckerberg's plans when one or more of 50 US state AG's discovers Libra users transferring "funds" internationally which they/Facebook can't say were or were not related to drug trafficking, tax evasion, etc.?

To be fair, I don't know how Bitcoin isn't caught up in that shit storm.

Bitcoin does not get caught in that shitstorm because it’s very hard to control: If I know an address is controlled by a drug lord, Nobody can freeze it. You can kind of go against the places that transform it into dollars and back and make them regulated, but there are still borders to deal with, and those operations are somewhat shady at best.

Whigh Libra, making any transaction happen requires you to be part of the consortium, and as far as it goes right now, they could vote a misbehaving member out, and all current members are easy to locate, sanction and prosecute by the US and EU. Chances that Stripe or PayPal will fail to do what a banking regulation tells them to do are very close to zero.

So it’s a matter of enforcement difficulty, and Libra is designed to be above water, legally speaking. The question is if legislators will let it exist, and if they do, what bonus regulations are written with it in mind.

Seems to me and very likely I'm wrong (I can't imagine a million lawyers haven't massaged Libra) that Libra could be identified by the totally-empowered federal and state governments as a bank, and must apply for a national or state charter and become FDIC-insured; despite the fact that all Libra will be backed by high-quality, financial paper.

That's why Maxine Waters is hauling Facebook to Congress and telling them to stop development on Libra for now.

https://www.mercurynews.com/2019/06/25/maxine-waters-sets-house-hearing-on-facebooks-libra/

Why would somebody who uses Xoom or one of its competitors for remittances want to switcch to Libra?

Cost and convenience and (potentially) access to more markets. I work in tourism distribution and the potential, particularly for the smaller operators, is significant due to the high costs of getting paid.

Well, that is perhaps the questions. The need for these types of payment options are not generally used by the majority of people in the developed world. It's probably more relevant for immigrants sending funds home.

But sends within a country, such as the Philippines, my understanding is there are a lot of other option for domestic transfers that are really cheap - like 20 php (less than $0.50) - plus they already have a number of other options (G-cash provided by Global) that is fairly cheep too.

I would wonder if FB can really compete in those new markets or if, as seemed implied in another comment, they are trying to compete with companies like WU, Zoom and others for international or even the existing banking transfer options over payment processor networks like Visa, MC, AMEX, Discover and others?

Xoom charges what? 5%? If Libra can get fees below that, you'll find your reason.

I can share a wallet address using Facebook text. It is a digital wallet, hot on the web, for me and my over the counter party. I just put money in the wallet, it points to the appropriate ledger, and the destination party uses the wallet password to claim what I sent. This is person to person, it only needs the idea of a web wallet. In fact, this is quite common for many digital currencies, including dollars, by the way, in which the parent puts money into an FDIC 'wallet', and the child extracts it using 'FDIC Swift'.

In terms of remittances, it all becomes easy to the extent that money systems go digital with in line ledger systems.

AppleID makes it easier, there is no need for a common wallet, each party has a secure, personal hardware wallet in the iPod, and they send secure money direct from iPod to iPod over any network, including Facebook.

Facebook talks about moving money is like moving pictures and information. They are right, and neglect to point out that anyone can move information of the Internet, so anyone can eventually construct their own zero cost transmission protocol. And we do this all the time, currently.

A proof of stake blockchain can be run more cheaply than the alternatives by virtue of having less gatekeepers. You would pay the same costs to maintain and secure your datacenter and face similar costs for compliance like KYC or AML but you don't have to pay all the various middlemen (issuing bank, acquiring bank, payment gateways, third party processor, etc.). We also don't have to waste Congress's time on setting the interchange rate. Things that don't make sense for a cryptocurrency like ATMs, armed transport, real estate for local branches, all of it can be excised. A bank is nothing more than a big database and money are mere entries. Between today's bloated banks and a room full of servers, there's a lot of ways to creatively wring out costs.

How, exactly do you eliminate all the middle men, without all trades being done in Libra including payment of sages, payments for goods and services, and payment of taxes, and with no cost of the right to access the global database.

If everyone is not providing computer servers as part of doing any trading, then third party middle men are involved, and they will demand payment of fees. There will not be 6-10 billion servers storing the blockchain, so there will be middlemen, or the system will require currecy changer intermediaries to pay the majority of the global population.

If you have one gatekeeper, you don't even need a blockchain!

“Create a synthetic claim which can be traded more cheaply”
Like chips in a casino. Frequent flier miles. Reward points. Fake money until it can be used like real money.

Mobile money has already brought the cost & delay of remittances down a bunch. According to the March 2019 World Bank report (available here), it looks like fees now average 5-7% (6.94% is the latest Global Average price and 5.20% is the latest Global Weighted Averge price).

I work in the remittance industry so glad to finally be able to add something to one of your posts Tyler.

The problem with all blockchain solutions for remittances is that they ignore the fact that almost all of the cost of a remittance is in the first mile (KYC and payment processing) and the last mile (FX costs, correspondent costs, funding costs). Most money transfer companies use a pre-funding model, which means that money does not move in real-time with the initiation of a transfer, but instead is already in-country and is paid out locally upon receipt of a transfer instruction (yes there is a funding cost to this, which is what Ripple has tried to address with their product).

Hard to see how any of the first-mile and last-mile costs are addressed by Libra (with the possible exception of funding cost). I see no explanation of how KYC will be addressed by Libra, and defining a new global standard would be extremely difficult (indeed does not exist today). Until libra becomes a globally fungible currency, users will still need to get their fiat into the system somehow, which means payment processing costs. I see no reason why a libra/fiat FX rate should trade at a narrower spread than a fiat/fiat FX rate, so FX costs will still remain (again until libras are globally fungible), and they tend to be higher for currencies where remittances are most relevant. Lastly, recipients of remittances want to receive funds in a way that is relevant to them. This could be to a bank, but it could be to an e-wallet or their local cash pickup agent. That requires a huge unified network that doesn't exist today, and the different associated costs at each of those last-mile networks.

This could all be turned upside-down at some point, but it would be promising to see some of these blockchain/crypto projects at least recognise the challenges they face when it comes to remittances. I'm also somewhat surprised to see Facebook taking on a highly regulated industry given the current calls for regulation.

Libra has both Mastercard and Visa as founding members. Also Stripe, and Paypal. I'm pretty sure they have the same concerns you have and are working towards solving them. If anybody knows KYC, its those guys. Facebook is smart enough to know they can't and should not go at this alone.

https://libra.org/en-US/association/#founding_members

Something I read said that those "partners" had signed non-binding letters of agreement, and paid no fees. So .. sounds like FB gave them a costless option on the effort, without demanding much commitment.

I just realized the Libra project does not needs to turn a profit to be "successful".

We're on 2019 and this is a Silicon Valley company with 40+ billion cash reserves. Operating costs may be irrelevant if they want to subsidize their clients as Uber.

Put billions and billions back into the market?

Western Union has half a million of local partners. From mom and pop corner stores, to postal services or local banks. Only in India there's 100K of places where you can pick up the money.

I am lazy to read the 10K form of Western Union to find out the fraction of their revenue they pay to local partners. But the cost of setting up and running the retail network must not be neglected. Therefore, some billions go to the local economy, to the retailers.

On the receiving countries, showing up at the retail location has a significant cost in cash, time or in the risk of being robbed. The solution to this would be a direct payment to a mobile wallet. But, is Facebook partnering with these companies?

The Feb 21, 2019 Form 10-K of the Western Union Company: http://d18rn0p25nwr6d.cloudfront.net/CIK-0001365135/42da46b0-ca05-4d4d-9b8e-991e2592fbd2.pdf

The revenue/expenses overview on page 51. For 2018 they had 5.59 billion revenue. They classified their expenses in two categories: (i) cost of services = 3.3 billion and (ii) SG&A = 1.167 billion. Cost of services is agent commissions, the first- and last-mile costs described above by Shane. ~60% of WU revenue goes to local agents. So more than half their fees/revenues goes to post offices, corner shops, convenience stores, etc. Net margin for 2018 is around 15%. Good, but not that good, and with great risk of more regulations aimed at minimizing money laundering (KYC).

On the other hand, Facebook has 40+ billions of cash. If they follow the current Silicon Valley trend of subsidizing growth by charging consumer less than the operating costs (e.g. UBER), they can make things work, at least in the short term. The money transfer solution of Facebook does not need to be good if they subsidize its operating costs to be able to offer low rates to customers.

Indeed, for the next 5 years this will probably be the story we'll read about: user base exponential growth and transactions volume exploding. Only the boring people that reads financial statements will raise an eyebrow when looking at the operating margin.

KYC should be easier for Facebook than literally anybody else on the planet because of the NSA-style data collecting they do on their users.

Facebook doesn't need to subsidize cost. If you make it convenient enough (a quick swipe on your phone), a large portion of Facebook's 1 billion users will use it since they already have the app. Zuckerberg wants to be the Alipay/WePay of the world. Libra has the potential to make Facebook the world's middleman.

Except Alipay/WePay filled a gap in the market. Libra might do the same in Africa, where Facebook is already a major ecommerce player and a payment solution is needed. It's less clear how widely it will be adopted in other parts of the world.

Creating a new payment system?

Only MR could fall for this!

But first, Zuck:

"Years ago, Mark Zuckerberg made it clear that he doesn’t think Facebook is a business. “In a lot of ways, Facebook is more like a government than a traditional company,” said Mr. Zuckerberg. “We’re really setting policies.” …The way we structure money and payments is a question for democratic institutions. Any company big enough to start its own currency is just too big" [SNIP]

But perhaps another angle would be domestic remittance, which is noteworthy through end-user dispersal, or peer-to-peer transfer.

Anyone has thoughts or opinions on how domestic remittance might be affected and shaped by the introduction of Libra?

Cryptocurrencies could make paying taxes very efficient. Instead of making each individual file taxes, just treat the blockchain as one whole entity that the government can tax. The IRS would only need to make one big audit instead of handling millions of individual forms. Since the blockchain has a record of every transaction, it should be straightforward to do.

Crypto and fintech enable vast, digital shadow banking networks. They are doing this mostly, now, and growing some 5-10% a year, currently. They have one huge advantage, no compliance officers. Transaction cost would go down abut 15% with compliance salaries paid.

But the traders still come up for air now and then; and face the compliance and tax officer.

Libra is much ado about something, the something being the excessive fees charged by big banks (big is beautiful?) for international transfers.There's a reason there are no big banks participating in Libra: big banks are the target. If the threat of Libra forces big banks to become more efficient and to reduce their fees for international transfers, great, but that's all there is here. The rest is just window dressing. Indeed, worse than window dressing. My question to Cowen: if big business is so great, why does it take a threat to monetary and economic stability to get banks to do what they should do on their own? Greed.

That was then, this is now: I have been working on large business transactions for over 40 years in which payment is made via wire transfer. Yes, the dreaded wire transfer. Why dreaded? Because one never knew how long it would take to receive the funds. Sure, so-called wire transfers 40 plus years ago were not the wire transfers we know today: in the old days, wire transfers may have been electronic but they were done manually. But the greater problem with wire transfers was the sticky fingered banks through which the funds flowed: one never knew if a sticky fingered bank would hold the funds overnight to make whatever profit the bank could generate. Thus, we avoided Friday closings for fear a sticky fingered bank would be too tempted to hold the funds for three days. Rapacious banks, indeed.

Let's see. Who should we hate the most--big oligopolistic banks or big oligopolistic tech companies? Maybe big government?

Anybody who hasn't watched the podcast of Cowen's TED talk on "stories" should. "Stories" mislead. There's another story in today's NYT about the Boeing 737 Max: it seems there's another "software issue" with MCAS that needs to be resolved before the Max is put back in service. The problem with the Max is't a software issue, it's a defectively designed aircraft issue. The MCAS, which makes the Max self-driving if the defective design causes the aircraft to approach a stall, can only reduce the risk of a catastrophic failure (i.e. a crash) but it cannot eliminate entirely the risk of the defective design. Story after story, in the NYT and elsewhere, present the problem as a software glitch but it isn't. Stories mislead. Ask Cowen. What's the "story" with Libra?

Proof of shortest path is better.

AppleID is proof by shortest path. Since my AppleID sends directly to you, it is impossible, except by counterfeit fraud, to intervene with a third party. The fact that my AppleID received money form a valid AppleID elsewhere is proof enough, as long as the AppleIDs are counterfeit proof. AppleID has these qualities.

The whole idea with AppleID is to put the security in the hands of each party trading by treating the digits as a counterfeit proof digital $20 bill for example. That is why it is so important to understand the $20 dollar bill, how it is made counterfeit proof. AppleID exactly duplicates that feat with no third party.

Where is the ledger service in AppleID?

Why I am glad you asked. AppleID can send, in public, a key to Apple headquarters and they have a protected computer there that can decode the key and verify this is a valid AppleID. But the number of counterfeit iPods is miniscule, they have very strong protections against reverse engineering the key generator system. With great security than trading a $20 in paper, the iPods can exchange $20 in digits.

Everyone misses this point about the market, Timmy is now in the drivers seat, what Zuck is doing is strictly in response to AppleID. Zuck will lose, Timmy wins, Google loses. Timmy and his iPods disintermediate like crazy, throwing the search engines into a tizzy.

I'm curious about a "Soros bet" on Libra

Let's say I make a huge bet - long Libra as a store of value, short the underlying currencies.

That would drive up the price of Libra versus the underlying basket.

The central entity would then need to buy more underlying currencies and print more Libra to hold the PEG.

How big a bet would it take to crush their liquidity?

Or is there something I don't understand?

Soros was betting on changes in base interest rates between nations.

Cryptocurrencies have no interest rate associated. Ie, no central bank paying and charging interest, no government paying and charging interest on past or future monetized labor.

Remember, the value of money is based on labor, labor required to produce everything, and government takes a share of work in the form of production exchanged into money, so it can pay for production, like police, judges, general, soldiers, arms makers.

Given division of labor, production and consumption involvee thousands with production and consumption separated by days to decades, thus bankers trade labor across time, charging interest, and paying it to those who delay consumption long after producing.

A car is labor consumed over 20 years typically, so you produced more than you consume, save, or borrowed to consume before working to pay for the durable good, aka capital. Capitalism is about "banking" labor. Bankers trade labor across time in abstract form, so abstract most people forget its just labor.

When robots replace workers, everything has to be free. Workers exist to produce what workers consume. If robots produce everything, the consumers return to nature, like birds who do not toil, never producing, just consuming what god produces.

Birds don't much enjoy the fruits of our economy. I don't see why humanity (writ large) should necessarily expect to enjoy the fruits of whatever post-labor economy comes to be...

If each Libra coin is fully backed by fiat on hand meaning it is fully convertible then a Soros bet will make little sense and even fewer dollars. Libra also has the freedom of not worrying about unemployment, interest rates, or inflation which no central bank can choose to ignore.

Proof of work solved the fundamental issue of making currency creation costly - the difference between using wampum for money and using tree leaves. Since the verifiers can be placed anywhere to minimize costs, the energy POW uses tends to be surplus energy.
Proof of Stake is the equivalent of making money from landownership and a misguided attempt to push artificial scarcity to raise the price. It's not like a bank where money put aside is invested elsewhere. It also doesn't build security as each block is created like Proof of Work. It's a bad idea.

I was just reminded today that Zuckerberg's old frenemies, the Winkelvoss twins, launched a crypto called Gemini a while ago. I'm not saying Facebook is doing this out of spite, but it is weird.

As a related aside, I bought something from Banggood yesterday. My first time. I was pleased that (1) Banggood takes Paypal, and (2) Paypal offered me $20 to apply for a line of credit.

So my $21.78 purchase cost $1.78 net.(*)

I suppose if LIbra offers me something like that, I might use it, at least once. But the field is crowded with low cost offers, even without them.

* - I hope PayPal doesn't try to sneakily push things onto the credit line, rather than take the immediate credit card debit. I have to admit I did not read all the fine print.

Why do the current banks have to play along? My father in another country sends me 50,000 Libras, and I want to convert to USD. Well, they say, we're not set up to handle Libras, we're not comfortable with the sufficiency of their KYC compliance, we think adoption of Libras introduces systemic risk/instability into the system, etc etc

maybe a non-bank third party is willing to give you dollars for your Libras and take that risk, or find others who are

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.
---------
100% backed is a deceptive term, especially if you are a jeweler and have a late delivery of gold, thus paying overhead costs for your labor. Paper does not guarantee you first place int the gold delivery line, it only bounds it.

Countries who use gold as a monetary asset will, from time to time, redeem the paper they have and recover gold, for the very reason that queue size can exceed bounds.

In essence, this is exactly like a fiat currency banker works. The real difference being that a gold backed currency will foul up the precious metals market and cause legislatures to reprice gold, default.

My answer for any crypto currency is to set up a savings and loan auto-banker which matches deposits to loans within an announced bound. Turn on the auto banker, leave it alone and clients will use the auto banker to estimate velocity equations for things like cans of beans. It is mathematically optimum, you can do not better.

I have just been through this list of comments on LIbra - and I hope the following may help as a short note. We will be releasing a fuller version in the next week or two, but as general points:
We concentrate on family remittances as being the key benefit of using Libra. This is a $1trillion pa market (that is the formal market, plus those non-criminal transfers where there is no route other than via the informal (frequently illegal) market.
The current average rate is 7%, as per the World bank statistics. Libra will bring this down to less than 1%, so a saving potential of $60 billion for those often in the greatest need.
To put that is perspective, the total US government aid, including USAID, is $50 billion pa, i.e. $10 billion less than can be saved by using Libra!
The unique aspect of Libra is Facebook's network of 2.4 billion people, many of them unbanked (or under-banked) in all parts of the world.
As a method of communication, this can enable families to arrange payments over Libra with a high degree of security; it also enables law enforcement to identify (and control) transfers that are small, regular and between connected parties. The separation of larger, or grouped transactions, out of character becomes far simpler when the core structure is repetitive - and backed up by personal messages.
Regarding the security of Libra, it is 100% covered by a basket of leading currencies, similar to the IMF's SDR, so more sold as to its value than any single currency on its own (even the US dollar).
The other main questions relate to how governments with volatile currencies can protect against Libra acting as an alternative currency in their countries, they can limit the holding of Libra by citizens, either to zero or a small amount, say $300, on an overnight basis.
In this way, the big beneficiary is the remittance family .. with much lower costs, while the government benefits from moving some unregistered, informal transactions into reportable for GDP data.
For the record, we are a non-profit consultancy, and not linked to Facebook in any way. I hope that helps..

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