Sean Stein Smith: How Are 5G and Libra Connected?

Much has been written about the struggles that Libra, spearheaded by Facebook, has been facing since the original white paper was launched in June. The testimony provided by the head of the program, David Marcus, did very little to take the heat off the project and may have actually increased the level of scrutiny brought to bear on the Libra Association.

In the midst of this continued criticism, with several founding members dropping out — and members of the U.S. Senate actively encouraging some of those members to leave the association — there have been numerous headlines bemoaning the demise of Libra. Whether or not Libra eventually gets off the ground (and if so, what form it ultimately takes) is uncertain, but there is one connection seemingly flying under the radar.

Controlling Emerging Technologies

5G, and the potential benefits and applications of 5G tech, arguably represents one of the hottest areas of investment and development in the contemporary technology marketplace. In order for other emerging technologies such as the Internet of Things and autonomous vehicles to function as expected, spectrum capacity and capabilities need to be increased. With the deluge of data produced by every organization (and individual), expanding the capabilities of digital infrastructure is an imperative for organizations seeking to leverage this information.

With organizations both in the U.S. and overseas committing funds and personnel toward an array of 5G projects, this might seem like a boon for advocates of private sector involvement in the infrastructure of the future. Taking a second look, however, uncovers an underlying force that is having an outsized impact on the development of 5G and related technologies: the government auction process over spectrum. In order for telecommunication organizations to gain access to the spectrum necessary to develop 5G services, there is only one supplier in the marketplace: spectrum auctions conducted by the Federal Communication Commission.

The auction process is certainly superior to the FCC simply allocating spectrum via an opaque process, but nevertheless the control over this valuable resource by a single political entity distorts the market. As a result, mergers and acquisitions in the telecom space are not always driven by business realities, but rather a desire to access the spectrum possessed by other organizations. This convoluted logic behind mergers and acquisitions also leads to antitrust motions being leveled at organizations, increasing costs without leading to much in the way of consumer or competitive benefits. Owing to these perverse incentives, the goal of much telecommunication M&A activity is not customer acquisition, but spectrum acquisition.

In other words, the lack of competition in spectrum development and strict control over the acquisition process can both distort current operations in the private sector and make developing new applications more costly than necessary.

So what does this have to do with Libra?

The Libra Connection 

Spectrum is a clear example of how singular government control over the supply of an asset can influence and distort the actions taken by market participants, but currency is the example of this concept played out in practice. Governments rely on their singular control of currency for fiscal, monetary, and tax sovereignty, yet monopolistic control is hardly a guarantee of effective stewardship. Dozens of examples in just the last few decades illustrate the damage that can be wrought when this singular point of control is abused — not to mention the corrosive effect of inflationary policies on both purchasing power and the propensity to save.

Competition and consumer choice are universally good for consumers but absent in both the case of 5G spectrum provision and currency options. This hurts consumers and organizations, and leads to unintended consequences that ripple through the broader economy. In the case of cryptocurrencies, however, a motivation driving this regulatory and governmental crackdown and scrutiny might indicate another goal: the adoption of this technology into the existing financial apparatus.

Bitcoin has lost much of its luster as a fiat alternative, and other private sector actors have developed and introduced alternatives that are simpler and easier for consumers to use. Against a backdrop of increased private sector involvement, it was inevitable that governments would become intrigued as to how these technologies could be adopted. The Libra initiative may have inadvertently provided central governments and financial institutions a blueprint for how this new emerging area can be brought under the umbrella of centralized institutions.

The People’s Bank of China Takes Notice

The U.S. and Chinese governments are, of course, in the middle of a convoluted and wide-ranging trade dispute/war; the benefits of hurling tariffs back and forth remain difficult to ascertain, but that isn’t the only story. Emerging technologies like 5G and the potential of blockchain/crypto for financial services may still be evolving quietly, but there is nevertheless substantial movement within the space.

Technology, not soybeans, lies at the crux of the tug-of-war currently underway between the world’s two largest economies, and the possibility of a crypto-fiat hybrid highlights the interest of both governments in these emerging tools. This includes the People’s Bank of China (PBoC), which more than the Federal Reserve in the United States is an arm of governmental policy and direction.

Several central banks, including the regional Federal Reserve Banks and the Bank of International Settlements, have issued similar statements. But the embrace of this concept within the Chinese banking establishment is noteworthy in no small part owing to how closely the proposed cryptocurrency mirrors the Libra structure.

The former governor of the PBoC, Zhou Xiaochuan, has argued that the Chinese state should take measures to strengthen the yuan even more in response to the launch of Libra. This follows statements by President Xi Jinping that have openly praised blockchain as central to the country’s plan to lead in several technology categories in the near future.

Given the central government ban on initial coin offerings (ICOs) and many other crypto-related activities, the launching of a cryptocurrency may seem ironic until one looks under the hood. The cryptocurrency announced by the PBoC looks very similar to a crypto-yuan: supported, controlled, and issued by the central bank, and potentially decreasing Chinese reliance upon the world’s reserve currency, the U.S. dollar.

Under the Hood

What follows are three specific ways in which the PBoC plan borrows heavily from the Libra Association model, and how easily other governments could emulate such a plan if so desired.

PBoC: The only official and authorized issuers of this cryptocurrency will be the central bank itself and commercial banks that have been approved by the central bank. According to the Congressional Research Service, four out of five of the largest banks have the government as a large if not their largest shareholder, resulting in de facto control by the central government.

Libra: The Libra Association will be selecting which third parties will be authorized to redeem and exchange Libra.

PBoC: Based on publicly available information, the PBoC will design, implement, and monitor all wallets used to access this cryptocurrency. Excluding sophisticated institutional investors or programming experts, retail investors and consumers will need approved wallets to access crypto holdings.

Libra: The Calibra wallet will be connected to both Facebook and the Messenger platform.

PBoC: Since the PBoC is only accountable to the state, and since the government is rolling out a Social Credit system, it is not unreasonable to see these financial transactions as part of that system.

Libra: How can Facebook, or any other centralized entity governing a cryptocurrency or similar product, guarantee that these financial transactions and holdings will be held separate from other services (like the social media business at Facebook) or governmental initiatives? (That is, if someone is banned from Facebook, will they lose access to their cryptocurrency capabilities and/or savings?)

The similarities between the PBoC project and the underpinnings of Libra are difficult to ignore, and just one example of how governmental scrutiny and crackdown could ultimately lead to the subsumption of a private market idea under the apparatus of centralized institutions.

Akin to the government control over the spectrum, any assumption of control over the market for crypto-fiat applications would likely lead to a distorted and stunted marketplace going forward. Projects like Libra should be scrutinized, and have controls in place to prevent abuse, but the private market for emerging technologies like 5G and crypto applications should be allowed to grow and develop, or fail, on its own. The alternative is an underdeveloped market rife with misallocations that benefits neither the acquiring organizations nor consumers.

Sean Stein Smith

Sean Stein Smith is a Visiting Research Fellow at the American Institute for Economic Research, focusing on blockchain, cryptoassets, and the economic impact of these technologies. He is an Assistant Professor at the City University of New York (Lehman College), serves on the Advisory Board of Wall Street Blockchain Alliance, where he also chairs the Accounting Working Group, and chairs the Emerging Technology Interest Group of the New Jersey Society of CPAs.  His research has been quoted in dozens of scholarly and practitioner publications, and he is a regular speaker at accounting and technology conferences. Follow him on Twitter.

Originally published at AIER.

This entry was posted in Cross Post, Cryptoeconomics. Bookmark the permalink.

15 Responses to Sean Stein Smith: How Are 5G and Libra Connected?

  1. RobK

    5G has incredible power. It might take some time to work all this out. The rug will be pulled from under some paradigms. In some respects it is a brave new world.

  2. RobK

    Is it true that as information transmission between individuals becomes virtually free and limitless , then a society becomes more like one individual , like an ant nest that covers the world. Diversity, where does that fit in.

  3. Bruce of Newcastle

    I can see why PBoC might be interested in a cryptocurrency being promoted by the narcissistic Marxists of Facechook.

    That is my throwaway comment…my real comment is about the totalitarian implications of all cryptocurrencies.

    At present once the RB issues currency that currency is effectively anonymous. It can be transacted without tracking. Not so for any cryptocurrency where there will be an indelible record of both parties in a transaction.

    More of PBoC: the Social Credit system linked with cryptocurrency means class-enemies can be frozen out of the economy almost perfectly. A more comprehensive system of oppression would be hard to imagine.

    The problem with any non-government cryptocurrency in the future is that although the currency will be fungible and anonymous the gateway into it will never be. China will strictly control transactions from their (presumably crypto) currency into the independent cryptocurrency, just as they do with US dollars today. Only there will be much less opportunity to evade controls than there are now, where anonymous physical US dollars can be carried in a suitcase if necessary.

    As for the 5G issue, the obvious way to avoid it is FTTP…rather like having plumbing to the premises rather than a communal tap at the end of the street. Of course having a government build a FTTP system isn’t the way to do it. But that’s where we will be going eventually.

  4. Rohan

    Bruce of Newcastle
    #3186470, posted on October 17, 2019 at 1:15 pm

    That is my throwaway comment…my real comment is about the totalitarian implications of all cryptocurrencies.

    This is what gets me about cryptocurrencies too. Everyone has the ledger. Everyone knows your purchasing history and what assets you have. This includes memberships and donations, therefore it won’t be hard to extract a political and social profile of that individual.

    But it can’t be hacked they say. Hangon, what’s the blockchain thing about?

    That’s right, decrypting a 2056 bit encrypted transaction and putting that information into a distributed database ledger as a block.

    Amazing.

  5. Bill

    Government already knows most of what people do with their money. Especially the ones who do not use cash at all. If You do all your transactions electronically including credit along with eftpos and your pay is also placed into your account electronically then the govt knows to within minutes where you are and what you have been doing with your money. Further, if you do all your banking and transactions via your phone with various apps, I can assure you that the little bureaucrats know everything including you real time position anywhere. In Australia we are well on the way to outlawing cash transaction using the current paper fiat currency.

  6. Entropy

    an underlying force that is having an outsized impact on the development of 5G and related technologies: the government auction process over spectrum. In order for telecommunication organizations to gain access to the spectrum necessary to develop 5G services, there is only one supplier in the marketplace: spectrum auctions conducted by the Federal Communication Commission.

    The auction process is certainly superior to the FCC simply allocating spectrum via an opaque process, but nevertheless the control over this valuable resource by a single political entity distorts the market. As a result, mergers and acquisitions in the telecom space are not always driven by business realities, but rather a desire to access the spectrum possessed by other organizations. This convoluted logic behind mergers and acquisitions also leads to antitrust motions being leveled at organizations, increasing costs without leading to much in the way of consumer or competitive benefits. Owing to these perverse incentives, the goal of much telecommunication M&A activity is not customer acquisition, but spectrum acquisition.

    In other words, the lack of competition in spectrum development and strict control over the acquisition process can both distort current operations in the private sector and make developing new applications more costly than necessary.

    I have never seen this line of argument t before with regard to frequency spectrum. It is a limited resource that requires near universal access. If anything needs government control it would be frequency bands,
    Also, business merge for all sorts of reasons, fiscal, market growth, because business a has something business b doesn’t, or because the owner of business A fancies the wife of business b’s owner. sometimes it can result in befit to one and all, and sometimes it doesn’t. The line of argument above seems to imply competition is an end in itself.
    Personally it all looks like a reasonable solution to an extremely limited resource, and bugger purity.

  7. Nob

    Bruce, “fibre to the 5g tower” seems to be the model pursued by the fibre companies in the UK, currently laying fibre with great speed and efficiency. With optional FTTP branch connections at every premises they pass.

  8. There is no way in hell I’d use Libra.

    Compared to BTC, it is just another shitcoin (JASC).

  9. If anything needs government control it would be frequency bands,

    The internet has actually made this no longer true – TCP/IP or the concept of phone call means there is no need for regulation. More so if the band is encoded.

  10. Bruce of Newcastle

    “fibre to the 5g tower” seems to be the model pursued by the fibre companies in the UK

    FTTN’s problem is the N. There’s a fair bit of anst right now about 5G emissions frying your cojones or DNA or something.

    FTTP as a long term answer is a good one once the costs become low enough. Which they aren’t now, and certainly not in the hands of government.

  11. Nob

    Bruce of Newcastle
    #3186731, posted on October 17, 2019 at 7:38 pm
    “fibre to the 5g tower” seems to be the model pursued by the fibre companies in the UK

    FTTN’s problem is the N. There’s a fair bit of anst right now about 5G emissions frying your cojones or DNA or something.

    We had that with all mobile towers before.

    Gone into the forgettery now but same anti-science mentality as anti-frackers. Probably even the same people, now getting angry if there isn’t enough signal in Lower Woop Woop North to organise their demo.

    Quotes our UK office is getting for FTTP are cheaper than current FTTN broadband, includes phones and connection fee. Maybe introductory, but the fibre junction is like 2m from people’s doors .

    I have consultants and techs working from home using 4G hotspots with no problems except a bit slow when they tried to synch all their files to the cloud at once for the first time.

  12. Barry

    It is an olde wives tale.
    Fibre to the curb is very close to FTTP as the copper is very short compared to the distance to the exchange.
    Afterall with FTTP you still have copper running around the building.

  13. Diogenes

    The internet has actually made this no longer true – TCP/IP or the concept of phone call means there is no need for regulation. More so if the band is encoded.

    Que ?

    I set a transmitter blasting out at any frequency x like, you set up a more powerful competing transmitter broadcasting nothing but white noise, how is my signal going to get through ?

  14. You can’t do what you’re saying. You’d need a shit tonne of big towers, labour, capital etc.

    Your hypothetical is not feasible.

    If I’m sending out an encoded digital signal, your chance of blocking me with an uncoded, white noise analogue signal is pretty low. You’d basically need to broadcast the antinodes of my signal. Or have a stupendously high amplitude.

    Subscription TV uses a number of bandwidth channels (not per the “channels 101 thru 999).

    Jamming that would seem pretty damned hard. You’d have to have multiple jamming signals at preposterously high amplitudes and mimicking the exact signal, across a whole range of frequencies.

  15. flyingduk

    It is true that your use of BTC (and most, but not all other cryptos) can be forensically unpicked by governments with sufficient motivation and resources to do so. This is no different to how governments can, but generally don’t, go back and link together phone records if they want to see who talked to who when investigating a crime. What is different with BTC is that they CANNOT inflate it, nor seize or censor it without your consent. This is a major advantage over digital fiat, and the newer centralised private offerings like LIBRA. It means, for the first time in history, that you retain some bargaining power if they come gunning for your money.

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