FACULTY FOCUS Joshua Gans

Facebook’s closely AS OF JUNE 18, 2019, guarded cryptocurrency project was no longer a secret. That’s the day the Creative Destruction Lab (CDL) announced that it would be joining Facebook and 26 other organizations as a founding partner of the Libra Association to create Libra — a simple global currency and financial infrastructure that will empower billions of people. Headquartered in Geneva, the Libra Association will govern the infrastructure and manage and evolve this new ecosystem, enabling developers and businesses to build inclusive new financial service products for people around the world.

Set to launch in 2020, the currency will be backed by a reserve of real assets, providing low volatility and encouraging widespread global acceptance. The goal is for thoughtfully designed ‘smart contracts’ operating on a widely accessible and stable global currency platform to unlock never-before-seen gains from trade, benefiting society at a meaningful scale.

CDL is the sole academic founding partner, and it is in good company. Members of the Libra Association are geographically distributed and diverse businesses and nonprofits. The organizations that are working together to develop the association’s charter include:

• From the realm of payments: Mastercard, Paypal, Payu, Stripe and Visa;

• From technology and marketplaces: Booking Holdings, ebay, Facebook/calibra, Farfetch, Lyft, Mercado Pago, Spotify and Uber;

• From telecommunications: Iliad and Vodafone Group;

• From Blockchain: Anchorage, Bison Trails, Coin

base, Inc., and Xapo Holdings Limited;

• From venture capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital and Union Square Ventures;

• From the non-profit realm: Creative Destruction Lab, Kiva, Mercy Corps and Women’s World Banking.

Not surprisingly, lots of people have questions about Libra and the Rotman School’s involvement in this disruptive initiative. Here are answers to some of the most common ones.

First of all, for those who don’t know, what is the Creative Destruction Lab?

The CDL is a not-for-profit program that initially began at the Rotman School of Management and has since expanded to sites at other universities including the University of British Columbia, University of Calgary, Dalhousie University in Halifax, HEC Montreal, the Said School at Oxford University and HEC Paris. CDL takes science-based, seed-stage start-ups and through a nine-month program of mentorship by some hugely successful entrepreneurs, takes them to market. In particular, we have focussed in recent years on AI and Quantum computing technologies. Hundreds have graduated from the program since 2012 with equity valued of $4.2 billion created to date by CDL ventures.

I am the Chief Economist at CDL and I also run an ‘incubator’ stream at Cdl-toronto that focusses on using the blockchain to generate new marketplaces, contract forms and other applications. We have 400 ventures per year in our program (including 25 in the Blockchain stream). Because the companies in our incubator stream are even earlier than our other streams, we provide ventures with economics and

business training as well as some essential technical training. It is because of our Blockchain Stream that Facebook approached us to become a founding partners.

Is this Facebook’s currency?

Facebook is not planning to issue its own currency, but instead has provided the code and development necessary for a new currency to be issued in its own right. As indicated, the Libra Association will manage that currency and will be eventually made up of 100 diverse organizations, of which Facebook (or more particularly its subsidiary, Calibra) will be just one. Each member will have one vote in making critical decisions in the Libra Association.

What exactly is the Libra Association?

At the heart of the Association is this new cryptocurrency called Libra. This cryptocurrency will not be like most of the others out there. It will be designed to have a more stable value with an exchange rate pegged to a basket of currencies — which means it will have a stable exchange rate unless those main currencies change in value against one another, in which case, the bilateral exchange rate between Libra and those currencies will change. Of course, there will be fluctuations in the bilateral exchange rate between Libra and currencies not part of the peg, but in theory, volatility should be as low as you can practically get.

This pegged currency will be achieved in a robust way: Every token will be backed by low-risk assets (currency and Treasury bills) in the currency basket. And that management will be transparent, audited etc. The idea is that Libra will be a store of value designed to ensure it is an accepted medium of exchange, but it will not be a security that is intended to change in value based on measures of success or otherwise. In other words, Libra tokens will be issued on-demand as people exchange low-risk assets to acquire them, and then retired when the reverse happens.

All of this will be made possible by the Libra Blockchain, which will store records of transactions and other relevant information. While this blockchain will be permissioned (i.e. only those designated by the association can become ‘nodes’), it will be distributed amongst the 100 (at least initially). We expect that CDL will be one of those nodes. The job will be to run a server independently that ‘votes’ or ‘endorses’ blocks to form a consensus on the network — that is, that blocks are valid, and things have not been altered. It is precisely this feature that was the key innovation in Bitcoin a decade ago that allowed cryptocurrencies to be possible.

Why will the blockchain be permissioned?

A permissionless blockchain means that anyone can operate a node because it has free entry. In the case of Bitcoin, this also allows free entry in being able to compete to mint Bitcoins which is why mining has become a lucrative activity and why ‘proof of work’ systems like Bitcoin — clever though they are — tend to be very costly to run, given that the outcome is something purely digital. The idea of proof of work is to ensure that no one creates nodes for free.

In other words, if you want to be part of voting for a consensus, then you have to show something for it. One way around that is to prove something else of value. The most common idea is a proof of stake system whereby you put something of value and make it illiquid, and that gives you voting rights. A final way of ensuring that bad actors won’t just populate nodes is to simply regulate who can run a node, and this is what a permissioned system does. It is not a free for all, and some power likely comes from being part of the conversation. But this is also what you need to run an efficient network. Libra made a different choice between decentralisation and efficiency than other blockchains.

It is critical to note that Libra will be distributed. Its 100 nodes have pretty diverse interests. Some care about payments; some care about start-up innovation; some care about social goals; and some care about a mixture of these things — like CDL.

Facebook chose not to make this a Facebook thing, which makes it an exciting development in this space. I should add that Facebook’s clear push for having Libra be more open and independent of it squares well with my expectation that Facebook’s interest is not in payments per se but, instead, in activities that will enhance its platform objectives based on connections and interactions.

Facebook’s interest is in laying down base infrastructure that will allow transactions to be conducted at low cost (even for tiny transactions) around the globe. They have worked to develop their own wallet for this purpose that will be integrated into Messenger and Whatsapp and elsewhere. If others build use cases for the currency that only helps in the currency’s popularity and usefulness as a medium of exchange on Facebook’s platform.

This brings me to what is essential here: the code. The

Libra will enable developers and businesses to build inclusive new financial service products for people around the world.

advantage of having a digitized currency is that it can be easily transferred with a rich code base. To be sure, banks and other financial institutions have digitized money but, to the extent there is code, it is not something that anyone would describe as interoperable with what is, these days, some surprising distance from the rest of the economy. This has happened because security and money are not tied to one another. But with cryptocurrency, security is, literally, there and in the name. That means that more can potentially be done.

One example of this potential is, of course, what has come to be known as ‘smart contracting.’ There is an excellent potential to use a code layer integrated with a payments mechanism to solve the ‘fundamental smart contract challenge’ that arises because contracts interact with human decision-making. (Other examples include voting mechanisms such as quadratic voting or token reputation registries. These latter mechanisms also require a means of identity verification that is something that the Libra infrastructure could potentially support.

Alongside this, a new programming language, ‘Move,’ has been developed and will be launched with the Libra Blockchain. Unlike Ethereum, which pioneered this idea, initially the code will be restricted to a set of templates until it can be proven to work in the ‘wild’. So while the promise of the code will be there, there will be some caution in the roll-out. It will be up to the Association to manage that process. In my mind, this will be a critically important set of decisions.

What does CDL hope to gain from this?

CDL does not have a financial interest in this association — or in any of the ventures that come through our program. Our mission is purely social. We are in the business of creating start-up ecosystems that do not require a fixed physical location. In that regard, we see Libra as a public utility that can support just that — taking digital payments to the next level to allow an application layer that could transform economic transactions and more.

While we believe that there is an opportunity for startups going through our program (especially those in our Blockchain stream), in the longer-term the real opportunity is for all start-ups, and that is our focus. By participating in creating a better start-up ecosystem, we will be fulfilling the CDL’S core mission.

We take the ‘Lab’ part of Creative Destruction Lab very seriously. Everything we do is an experiment.

Where do you think all of this will lead?

We take the ‘Lab’ part of Creative Destruction Lab very seriously. For that reason, we believe that everything we do is an experiment — and Libra is no different. While there have been 18 months of technical development on the part of Facebook into this, as we know from our experience with entrepreneurial ventures until something hits the market, you cannot truly obtain signals as to its potential. There is too much uncertainty associated with innovation.

The range of outcomes is broad. Libra could be simply a new payments mechanism that improves financial access for many people in the world. Or we might look back in a few decades and see this as the seed of a new wave of global connectivity not seen since the establishment of the modern monetary economy post-world War II. Or this may be the first of several new monetary platforms to emerge that began with Bitcoin. So the short answer is that I don’t know where this will lead, but I am very excited that it is happening.

What is next?

For six months post-announcement, the founding members and partners have been meeting to work out the by-laws. My expectation is that there will be a series of meetings that will work similarly to a Constitutional Convention. How those will operate is anyone’s guess at this stage. However, I will be leading the CDL contingent in that endeavour. For interested readers, you can find the very latest on Libra at libra.org

Joshua Gans holds the Jeffrey S. Skoll Chair in Technical Innovation and Entrepreneurship and is the Chief Economist of the Creative Destruction Lab at the Rotman School of Management, with a cross-appointment to the University of Toronto’s Department of Economics. He is the co-author (with Andrew Leigh) of Innovation + Equality: Creating a Future that is more Star Trek than Terminator (MIT Press, 2019) and the co-author (with Rotman Professors Ajay Agrawal and Avi Goldfarb) of Prediction Machines: The Simple Economics of Artificial Intelligence (Harvard Business Review Press, 2018).