Exclusive: The Libra White Paper Has Been Edited, With Notable Changes

Under the original Libra white paper, members of Libra’s governing body, the Libra Association, would receive dividends for profits generated by assets in the reserve. This created an incentive for decisionmakers to invest in risky assets for higher returns–at the expense of the retail public.

I spent a little time looking at Libra’s white paper, and noticed some slight changes from the document first published in June. So I decided to compare the two documents and found a number of changes. (Here’s a link to a pdf tracking the revisions).

Some changes are what you’d expect — indications that the members of the Libra Association have changed with the departures of payments firms like Mastercard and Visa. Original members had been replaced and new ones added.

But the really interesting changes involve the operation of the reserve itself.  The original version of the Libra white paper reads:

“Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem (read “The Libra Association here), and support further growth and adoption. The rules for allocating interest on the reserve will be set in advance and will be overseen by the Libra Association. Users of Libra do not receive a return from the reserve.”

Now, however, the paragraph merely states (deleted text mine):

“Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem (read “The Libra Association here) and support further growth and adoption. The rules for allocating interest on the reserve will be set in advance and will be overseen by the Libra Association. Users of Libra do not receive a return from the reserve.”

The disappearing dividend (and Libra investment token)

The key change, of course, is that interest earned from reserve assets will not be used to pay dividends to investors.  This is a considerable departure from the plans first spelled out in June.  Indeed, on the Libra website I don’t see any obvious mention of dividends at all, or for that matter, any mention of Libra Investment tokens to be offered to early investors. (The “Reserve” tab that would ordinarily direct one to this information has been removed altogether, but can still be found on the site if you know the web address).

I can imagine several theories to explain this particular change. One theory says this is an attempt to minimize the risk that Libra coins are considered securities. The Howey test, adopted by the U.S. Supreme Court to indicate which financial products may be securities, indicates that if the purchase of a financial product is not motivated by profit, that financial product is not a security. Here, by deleting references to dividends, any explicit profit motive on the part of any actor in the transaction is removed.

Yet while this theory has merits, it also has limits.  Most obviously, Libra investment tokens were always intended to be securities.  So removing references to dividends would have little impact–and in any event, it appears that investment tokens may no longer be a part of the transaction.

Meanwhile, removing references to dividends would do little to impact the legal status of Libra coins.  Precisely because Libra coins are stablecoins, and not intended to increase in value, a claim could have always have been made (though not without complications) that the coins were never securities.  If that argument is correct, a change in the dividend policy would have had little impact.

In any event, I think that the better theory is that removing the dividend policy eliminated a bigger problem in the original white paper: that there was a conflict of interest between the Libra Association members, who were to hold Libra investment tokens, and the retail public, which will hold Libra coins.

Libra Investors vs. Coin Holders

The original Libra White Paper, as I allude to above, really involved two financial products:  one for the initial investors, who received Libra investment tokens, and another for the retail public, which would receive Libra coins.

Libra coins were intended to be stable stores of value.  Otherwise, no one would want to use as a means of payment something that could collapse in price quickly. Thus to provide comfort to potential users of Libra, the coins were intended to be ‘backed’ by safe and ‘low-risk’ assets to ensure a stable price.

But just as the white paper laid out this vision, it also introduced a financing scheme with real problems.  The primary decisionmakers of for the Libra ecosystem would receive dividends.  And these dividends would be paid at least in part from the interest generated by the assets that were invested in to back the Libra coins.

This all created incentives to load the reserve basket with risky investments to maximize investor returns. It also introduced the possibility of other nightmare scenarios, including risks that the Libra association could start leveraging the reserve or lend against it to make a profit/dividend for the members who own the reserve.

This core structural problem goes far beyond the legal question of what is a security. It goes to the existential question of trust. If there are incentives to make reserve assets risky, holders will have less trust in Libra coins since they could lose their value. Without trust, there would be fewer purchasers of the Libra coins, and less incentive to participate in the Libra ecosystem.

For this reason, in the end, I think the edits are actually a positive development. It appears to remove a real structural problem that presented a serious risk to holders of the coin.

But at the same time, it’s hard to get carried away.  There is something odd, and discomforting, about continuously editing marketing materials of a global financial product online, with no clear indication to people as to what material aspects of the product have changed since the last time they visited the site. I’ve heard that some of these changes may have been made, quietly, as early as September.

Still, I’ll try to play the optimist.  Of the 99 problems facing the project, it appears problematic dividends are no longer one.  At least not today.

Chris Brummer is a law professor at Georgetown University Law Center, founder of fintechpolicy.org and host of the Fintech Beat podcast. 

 

December 10, 2019

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