Christian Catalini, co-creator of the Facebook-led Libra payment system and head economist at Calibra, a subsidiary of the social media giant that’s focused on developing a digital wallet for Libra, says he’d been doing research in the cryptocurrency and blockchain space for many years before joining the Libra project.
Catalini, whose comments came during a November 7 installment of the MIT Sloan Expert Series, noted that in 2013, he co-designed the MIT Bitcoin experiment with Catherine Tucker. The goal of the project was to explore what the technology had to offer in terms of “democratizing access to payments and financial services.”
After working on the project for several years, Catalini says he got frustrated with the technology because he felt it was unable to solve many of the common financial problems people were experiencing throughout the world. It was at this point that it became clear to him that a company with the type of engineering talent and reach and skill of Facebook would be able to properly design a digital payments system.
Catalini thinks Facebook can build a payments platform that will promote financial inclusion and have a “transformative impact” on the global economy.
In response to a question about major partners withdrawing from the Libra Association and concerns raised by policymakers and regulatory authorities regarding the Facebook-backed crypto project, Catilini remarked:
“This is a phase we were planning for, which was … instead of doing what is often done in tech … you deploy something, you launch something and then you can adapt after the fact. With Libra, we realized this is a very complex industry, a regulated industry, and if we really wanted to have an impact, we needed multiple stakeholders to kind of support the project and push it forward.”
“That’s why we [formally] announced [the Libra project] and we’re also planning for an extensive phase of dialogue with regulators, policymakers, with NGOs, and all [other] ecosystem participants that will have a major role in defining the success of Libra. That’s where we’re at. So, it’s been a phase where [we’ve] heard criticism coming from a number of voices. We’ve absorbed all of that. We’re iterating on the design.”
Catalini, who earned his Phd in strategic management from the University of Toronto, revealed that Facebook had incubated the Libra project for a year. He confirmed that there are now 21 entities who’ve committed to developing the Libra payments system and that there will be many more partners once the project goes live.
When asked to explain the “nuts and bolts” of the Libra initiative by Rebecca Knight, the host of MIT Sloan Expert Series, Catalini said:
“Every decision in the economic design of Libra since the very beginning was targeted at making it a very efficient medium-of-exchange (MoE) and payment tool, especially for cross-border transactions. When we were looking at all the excitement around blockchain, I think one of the things that we paused on is this concept that you have all these new platforms … for transferring value, but you also had massive speculation, massive swings in valuations of these [crypto] assets…[so,] if we wanted to make Libra actually useful … we took a step back and asked how can this actually function as a payment tool.”
Catalini went on to argue that Libra would have intrinsic value because it would be backed by a basket of major fiat currencies, which have a history of remaining stable over extended periods of time.
Responding to a question about the application of blockchain to the Libra platform, Catalini noted that several years ago, he had authored a research paper on the basics of blockchain technology. According to the research, transactions can be verified at a low cost when you use a blockchain. Another benefit of using the distributed ledger is related to the “cost of networking.”
“What [blockchain helps us do is] that [it allows us] to design digital platforms where you don’t have to trust a single intermediary, you don’t have to trust a platform architect, and so the journey around Libra … is about establishing a new model of trust in digital platforms.”
He added that blockchain allows us to build distributed governance systems that are based on open technology standards.
When asked how much Libra would actually be worth and how it would maintain its value, Catalina confirmed that the stablecoin would be backed by a basket of major currencies. He also mentioned that the goal is to make Libra “a global MoE” for remittances and international payments.
“[In] the beginning, Libra’s value might be anchored around a [US] dollar and would really depend on the assets behind it. What’s really important is that these are all assets that are managed, controlled, and governed by central banks. Not only just random central banks, but [ones] that have a history of low inflation … and really [being able] to deliver on the promise of value preservation.”
He clarified that Libra is not a speculative asset and that it is a quick and reliable means of sending remittance payments.
When questioned about whether there could be bank runs in the case of Libra, Catalini said:
“When you think about a system, you always have to plan for the worst case scenario and many of the conversations with regulators are about the black swan cases. Most of the systems can be extremely resilient, but then when you look at something like 2008 or other major microeconomic crises, you want the system to be ready for that. That’s why Libra is fully backed. So essentially for every coin to ever be minted, an equivalent amount of value has to be put into the basket. And this is different from parts of the current financial ecosystem where you have fractional reserves.”
“A classic reason for a run is that if you only have so much [money] on balance relative to your liabilities outstanding, then if I’m the first one to run to the bank, I may get my money out and later [others might not be able to.]”
Catalini claims that Libra is designed to “mitigate” these concerns by being “fully backed.”
Commenting on Libra’s anticipated launch, Michael Cusumano, SMR Distinguished Professor of Management at MIT Sloan, stated:
“The peer to peer (P2P) money exchange problem which I think Libra is targeting is not solved by the financial system we have in the United States in general. There’s a gap in financial transactions that Libra could fill even in the US.”
“For country to country money transfers among families, possibly for some purchases … [Libra] could save consumers quite a bit of money and on the side, it could make Facebook some money. However, if I use Libra to send money to my mother or brother or my friend, I have to record it as an asset sale and report it to the Internal Revenue Service (IRS). So, unless the government comes up with some accommodation for Libra or similar cryptocurrencies, it’s going to really have [bad effects.]”
Cusumano gave the example of WeChat adding WeChat Pay in China, which he said has been very successful. He believes Libra is at least in part influenced by the success of WeChat Pay. He pointed out that WeChat Pay is not an open platform and it’s not compatible with other payment systems. Meanwhile, Libra is “trying to position itself as a more open platform,” Cusumano argued.
Cusumano added that while Facebook claims the Libra Association members will share the responsibilities and control over the Libra initiative, he believes that the social media giant will actually be in charge of the digital payments project.
He also thinks the scheduled launch of the Libra project is being done at a bad time because the company has been accused of serious issues involving data security and the misuse of user data. He went on to mention that “the feelings of trust” towards Facebook are “pretty low right now.”
Catalini noted that we have to ask ourselves why there are still so many problems with the existing financial system, with around 1.7 billion people in the world being unbanked.
He added the main idea behind Libra is to introduce interoperability in the global financial system and make it affordable to switch between different payment platforms. He also mentioned that Libra aims to enable “equal access” for everyone.
In response to a question about how Libra will protect user data and keep their social data separate from their financial information, Catalini said:
“[Users’] social and financial data will not be connected. There’ll be measures in place from encryption to access control, to ensure that the [different sets of data] don’t get linked. More importantly, if you don’t like the Calibra wallet, then there will be other wallets competing on different features. Privacy will be a dimension where wallets will have to compete. [As a result,] we’ll see different business models and different approaches.”
“From Facebook’s perspective, I think the idea here is to not to use the data to show more Ads or to sell more Ads. The Calibra wallet will have new features and we’ll build on those and that will be a new business model for the company.”
When asked about how “safe” Libra will be, Catalini said that blockchain technology could help Libra survive different types of cyberattacks. When it comes to fighting financial crime, the Libra Association has adopted an extensive framework which includes comprehensive anti-money laundering (AML) and know-your-customer (KYC) checks.
[These measures] will ensure that the [Libra] network is not only fast, cheap, and efficient, but also meets and exceeds current standards around AML and KYC. I think often what [we] hear is ‘Ohh, remittances are expensive.’ And that’s because of compliance costs.”
Catalini claims that Libra will use special technology to lower the costs of compliance. He also noted that when we apply new technologies such as artificial intelligence (AI) and machine learning (ML), we will be able to deliver “low cost, frictionless” MoE systems, “while also making the network safer.”
Commenting on financial inclusion, Scott Onder, senior managing director at Mercy Corps Ventures, a global humanitarian organization, said:
“There’s a real and pressing need to address what we see as a flaw in the global financial system that leaves the world’s most vulnerable people caught in a poverty trap, which is almost impossible to escape.”
“It’s very expensive to be poor. The cost of transactions, especially remittances, can make the cost of being poor even higher. We’re excited about … borderless cryptocurrencies and low volatility … and [those which] are low cost to users… With Libra, we see the potential to have a truly global, low volatility, and open-source currency that can meet the needs of people that are currently unbanked or poorly served by the financial system.”
“Libra has the potential, because it is open-source, to foster an ecosystem around it that could design a lot of different use cases and applications that are very relevant to people that are currently excluded from the financial system. We’re excited as an aide organization to see how aide could be transformed through a truly frictionless payments system.”
Commenting on the fact that there are around 1.7 billion people in the world who’re unbanked, Catalini pointed out that most of them have a smartphone and a large percentage also have access to digital data.
He further noted that with blockchain, we have this great digital verification machine, but then we also have to actually “reach the people” by delivering the services.
“Part of the goal of the Libra Association and the NGOs is ensuring that [users] can cross that last mile. It’s a complex issue and it’s not one that Libra will be able to solve immediately. It will take time and there are many pieces to the puzzle.”
“[One piece of the puzzle] is identity. You want to lift identity standards so you can bring more people into the financial system. You can provide them services. I think we’ve seen very successful efforts, for example, in India where with a stronger identity system and then a unified payment system … you suddenly have a number of people who were on the fringes of the economy, of the financial system, having access to credit, having access to all sorts of new functionality that they were excluded from.”
He went on to mention:
“With Libra, I think the goal is to rely on this element of distributed governance and open platform to ensure that if I’m an entrepreneur of a region where I feel there’s a lack of financial services…there’s lack of access to basic payments functionality….[then I can use the Libra platform.] Maybe you’re a small business and you’re dealing with cash and it’s risky. Now you build those services and you don’t need to be a member of the association to build those services. And so I think what we’ll see across the globe from Africa to Asia to many of these regions where users are unbanked of severely underbanked…they can start building new types of products that lower costs, lower frictions, and take advantage of [Libra’s] global network.”
Responding to a question from a social media user who asked how the launch of Libra will affect other digital currencies such as Bitcoin, Catallini said:
“Libra and Bitcoin and other crypto assets are complements. I don’t see them as substitutes [or replacements for each other.] They can all solve different types of problems for different audiences. I think what’s exciting is that the space has a lot of experimentation and all these different experiments are going in different directions. So, over time, I think this will lead to more choice and more types of solutions. In fact, I see them building on each other and rewiring a lot of our financial ecosystem.”