• by Jeffrey Dearth , July 8, 2019

Oh dear, what has Satoshi Nakamoto wrought?  Resting firmly in the realm of unintended consequences, the invention of Bitcoin, the first cryptocurrency, and its underlying blockchain technology, will soon lead to another paradigm shift in the overall digital ecosystem.  
 
I’m referring to two recent announcements, by Facebook and Microsoft. Both will impact our collective digital future, though one has gone largely unnoticed. Let’s start with Facebook’s Libra cryptocurrency.  
        
Along with founding partners Visa, Mastercard, Uber, Vodaphone, Ebay, Shopify and others, it is developing a cryptocurrency called Libra. If Libra succeeds in taking root with even a relatively small percentage of Facebook’s 2.4 billion users, it could become the leading transactional cryptocurrency overnight.  

What makes Facebook’s entry into the cryptocurrency arena so different (and potentially so disruptive) is the company’s global footprint. More astonishing, Facebook is encroaching on one of the last preserves of the modern nation-state — the ability to propagate and control its own form of money. With Libra, Facebook is essentially attempting to become a digital nation on its own. 

In Facebook we trust? Talk about chutzpah!

Facebook describes Libra as a digital currency supported by a “permissioned” consortium of developers and backed by a basket of fiat currencies that allow it to remain stable in value. Thus, a “stablecoin” in crypto speak.  The blockchain technology that will underpin the Libra cryptocurrency is not the same as the blockchain underpinning Bitcoin or Ether. Libra will be a “centralized” blockchain solution to digital money. Bitcoin and Ether are not. Anyone can become a “miner” of Bitcoins and/or Ether and lend their computational power to assure the integrity of the overall blockchain. This is not the case with Libra.  
Bitcoin and Ether are also open-source and “permission-less” platforms. Libra is not.

What this means: The attributes (permission-less and decentralized) that create trust in Bitcoin’s blockchain — ironically by operating in a cryptographic “trustless” distributed network — are missing with Libra.  Bitcoin’s blockchain is supported by thousands of “nodes” distributed throughout the world. Libra will be supported only by the “nodes” of its partners in “The Libra Association” — a Swiss-based not-for-profit that will ostensibly manage the Libra currency.

And this raises the key question: Will Facebook users, who already have their personal data leveraged and monetized by Facebook for ad purposes, openly embrace a unit of currency closely associated with one company, or collection of companies, operating under the Libra “Association”? 

The mere hint that Facebook, or others in the consortium, could eventually leverage the data surrounding an individual’s spending habits should give everyone pause. Indeed, in a recent Pivot podcast, Scott Galloway, author of the book “The Four,” and an advocate of breaking up companies like Facebook, pointed out one of Libra’s major flaws. 

For a currency to be accepted universally, it needs to be trusted. The problem, he says, is that Libra “is from Facebook. And nobody trusts Facebook.” 

The Bitcoin blockchain has been dubbed the “the truth machine” for a reason — it is decentralized and virtually mathematically impossible to be manipulated or controlled by a single entity. Can the same be said of Libra?  Unlikely.

Facebook’s claims Libra was born out of the altruistic motive of creating banking for the estimated 1.7 billion people in the world who have no bank account, the so-called “unbanked.”  Let’s not place too much credence in Facebook’s sudden shift from a company that soaks up close to 30% of all digital ad dollars to one focused on lifting humanity into the broad, sunlit uplands of digital banking. 

No doubt there are many unbanked Facebook users.  However, Facebook has always wanted to be deeply embedded in ecommerce.  Libra is an attempt to add the sort of digital payment capability to Facebook’s WhatsApp franchise akin to what Tencent has done with WeChat in China. (Digital payment mechanisms in China have obviated the need for credit cards.)
Any centralized payment system will throw off lots of data. Are we to believe this gold-mine will be left unharvested?

With Facebook behind it, Libra is likely to become a major stablecoin.  Given the amount of inefficiency in today’s financial system, Libra could develop into the most widely used cryptocurrency for daily transactions.  But Libra brings with it major risks for Facebook. Libra poses a threat to many of the fiat currencies of smaller countries in which it operates.  Coupled with Facebook’s recent troubles related to Russian election interference and data privacy, the timing is not propitious.  Many countries are already reacting negatively to the Libra announcement.

Perhaps even more ominous: Libra may spark a further backlash to Facebook’s current business model, i.e. its leveraging of personal data for profit via hyper-targeted advertising.

And consider the following scenario: Facebook launches Libra and creates a user-friendly interface that exposes billions of members to cryptocurrency for everyday transactions.  As people become more familiar with digital money, they realize Bitcoin and other cryptocurrencies fulfill the same function as Libra — but within a permission-less and completely decentralized environment. 

Thus, Libra’s worldwide introduction could result in driving increased usage and acceptance of decentralized, anonymous cryptocurrencies like Bitcoin.

Enter the other recent game-changing announcement: Microsoft’s introduction of ION, or Identity Overlay Network, in May.
Microsoft used to be distrusted as much, if not more, than Facebook. The company was considered by many to be the Darth Vader of the software world, part of an evil empire of proprietary software and a “walled garden” approach to business that stifled competition.

It has evolved from those days and, with its acquisition of GitHub just over a year ago for $7.5 billion, it has fully embraced the open source software development community. Microsoft saw that open source software development was and is the future.  After all, it was the programming fuel that propelled the Internet to where it is today.

It is still astonishing that Microsoft is embracing the Bitcoin blockchain as the foundation of its Decentralized ID (DID) initiative, the most ambitious (and potentially revolutionary) attempt to solve digital privacy.

Microsoft’s ION, or Identity Overlay Network, as the name suggests, will be built on top of the Bitcoin blockchain.  ION employs “off chain” batching of millions of interactions using these anonymous ID’s to create an immutable ledger of ID activity. In theory, ION will permit every individual in the world to have a “private key” to their own data, thus enabling total control of its usage. 

Somewhat similar to Facebook and its focus on the “unbanked,” Microsoft pitches ION as a solution to the estimated 1.1 billion people on the planet who do not have legal ID.The implications could be profound. In the current digital ecosystem, identifiers such as email addresses and log-in information are maintained by third parties on centralized servers.  Combine this information with the ubiquitous pernicious “cookies” that extract detailed data about our online behaviors, and suddenly our online profiles and identities become the source of vast data riches.

(Digital advertising alone will be a $129 billion industry in the U.S. this year.)

ION would fundamentally change how our personal data is stored and controlled. Taken to its logical conclusion, one can even envisage a decentralized ad exchange where companies pay individuals for the right to send certain content or advertising based on access to our data that we permit, not a third party. 

Who would turn down a small slice of the digital advertising pie?  Is it any wonder Facebook has declined thus far to participate in the ION project?  Without the billions of data points Facebook (and others) use to optimize their digital advertising offerings, where would they be?  What the blockchain giveth, the blockchain may taketh away.

What is clear: Open source, decentralized blockchains will drive seismic changes in the financial and digital advertising landscapes in the years to come.