5 Challenges About Libra's Governance

Top Reasons Why Libra is Revolutionary (№4 of Series)

Governance is a comprehensive term. Essentially, it’s about a set of rules and norms to identify the stakeholders, and how they make decisions in a specific network, no matter in public sectors (e.g. government) or private sectors (e.g. corporate). The purpose of having governance is to reach a consensus on actions and hold stakeholders accountable to them. Governance practice is usually guided by laws and regulations. The more stakeholders and public interests are involved, the more guidance is usually required to follow. For instance, compared with private companies, public companies have a much higher degree of responsibility to deliver clear and sound governance practices.

Given to the distributive nature of blockchain projects, governance has always been a tough issue. Theoretically, stakeholders could be anyone from anywhere and consensus should be able to be reached without a centralized administrator. Thus, unconventional consensus mechanisms are created through algorithms like PoW (Proof of Work) or PoS (Proof of Stake). These enable decisions to be made through pre-agreed algorithms by parties without trust rather through made based on trust through meetings and written agreements. These programmable consensus mechanisms have many upsides, such as the ones Libra has pointed out, providing low barriers to entry and innovation, being resistant to censorship attacks, and encouraging healthy competition. But a big challenge at present is that they are out of touch with many potential stakeholders who are used to the conventional decision-making process only.

It’s the same tough situation Libra is facing. Libra has made many preparations to develop a permissionless network through Libra Blockchain which is the ultimate goal of Libra. However, Libra is very practical and it offers a compromised proposition by initiating a permissioned network through Libra Association (“Association”). The Association initially consists of a geographically distributed and diverse set of Founding Members, starting with the 28 partners led by Facebook. But over time, the membership of the Association is expected to shift from being selective in accordance with a set of criteria to becoming open and based only on an organization’s holdings of Libra tokens.

There is no doubt well-balanced governance for the current permissioned network will build the bridge leading to the ultimate goal of building a permissionless network. Below are the 5 aspects to measure Libra’s governance. I consider them to be the most important but are often either absent or done poorly in blockchain projects.

1. Clarified Stakeholders And Clear Governance Structure

Governance serves for the stakeholders, subject to the laws and regulations. Libra has been clear about who the stakeholders are during this current phase. They are selective companies and social impact organizations designed to boost the ecosystem. These partners become members of the Association and then govern the Association through (i) the governing body the Libra Association Council (“Council”), (ii) the oversight body the Libra Association Board (“Board”), (iii) the executive team led by the managing director (“MD”), and (iv) together with an advisory board consisting of social impact partners the Social Impact Advisory Board (“Advisory Board”). Below is a chart summarizing the structure for reference.

Based on Libra’s governance framework, such a governing structure resembles company governance:

  • the Council acts as company shareholders which consist of stakeholders with the highest power to decide on major matters and personnel appointments;

  • the Board is like a company’s board of directors which consists of individual representatives of the key stakeholders to propose on major matters and provide operational guidance to the executive team;

  • the MD is like a company’s chief executive officer who is in charge of day-to-day matters and recruits a senior team to carry out business plans; and

  • the Advisory Board is similar to a company advisory board which has the rights and obligations to advise on certain specific matters.

Libra has made great strides by providing a relatively clear governance structure and framework. There are certain mindful designs to avoid power centralization, such as the voting cap set for the founding members and membership criteria shifting from the investment of Libra Investment Tokens to holding a share of Libra tokens (refer to item 3 in the Notes of the chart above).

One big uncertainty is the regulators’ role. As mentioned, governance is usually guided by laws and regulations, even more so if it’s involved in public interests. In other words, in an infrastructure project like Libra, lawmakers and regulators are stakeholders and they will dictate how Libra works. A particular challenge is that Libra potentially faces global regulatory monitoring with major pressure coming from the U.S. where the actual operation takes place and Switzerland where the legal structure is set. Conversations are taking place at a national level (such as hearings at the U.S. Senate and the U.S. House of Representatives) and potentially at an international level. The said framework can be deemed as a preliminary draft and proposal from the business side. It is foreseeable that the final charter will have more balanced opinions from the lawmakers, regulators inside as well as outside the U.S.

Another uncertainty is the transition of stakeholders from selective members with its entitlements tied to the financial contribution of Libra Investment Tokens to any members tied to the holding share of Libra tokens. This vision has been laid out but details on how to achieve it are not given at this current stage. This has never been done in history. It requires the selective members to selflessly limit their rights and powers and transit to the permissionless Libra network. I hope more precautions about the transition could be given in the final charter of the Association as that is where problems could arise but also be solved.

2. Independent Operation

Independent operation separated from the stakeholders especially Facebook will set good foundations to carry out Libra’s mission. Otherwise, unclear boundaries will lead to confusion and conflicts of interests, and ultimately the project’s failure.

A practical touchstone with this regard was hiring. Whether the executive team is independent of the members of the Association and whether they are incentivized solely from Libra are important indicators. Libra has the career section on its website which has not announced any openings. But according to Libra’s LinkedIn profile, some key members of the executive team have already come on board in the past two months, which include deputy MD/COO, Head of Business Development, Head of Policy and Communications, Head of Product, and Head of Developer Ecosystem. All of them are veterans in their own domains. Except for deputy MD/COO and Head of Business Development both having worked several years at PayPal in Switzerland, the team came from diversified backgrounds beyond the 28 founding members of the Association.

Misalignments will happen eventually along with the growth of the Libra network. Independent hiring and separate incentive plans based on milestones set by Libra are keys for its success. We look forward to seeing more executive team members from diverse backgrounds to join the team, in particular, the MD who will play a critical role in the Board and the Advisory Board.

3. Consistent Policies

An issue that is not uncommon to see is that blockchain projects, especially crypto exchanges change rules often. The rule change was made for many reasons, the most being to address market demands actively or passively. Certain rules are keenly relevant to the entitlements of the ecosystem’s stakeholders. When those rules are changed, they influence stakeholders one way or another. We can surely expect satisfaction from some and displeasure from others. Random changes without solid ground and procedures lead to a breach of trust. I’ve seen projects often make one change to satisfy one group and quickly make another change to appease another group who criticized the previous change.

There is legislative law to ensure proper procedures to be taken to make and change a law so that public expectations and monitors can be set. Libra has shared a detailed governance framework, from the structure to economic rights. But they are preliminary until the charter is made. A much more detailed charter with proper incorporation of the provisions to make sure that the policies that have been made and to be made will be done in accordance with a set of agreed procedures.

4. Transparent Communication

A key feature of the decentralized network is transparency. Few projects truly meet a high standard of being transparent, but efforts are being made. Being transparent about the organization and the business, whether good or bad will build up public trust. An infrastructure like Libra which involves public interests also has the obligation to be transparent.

Libra has done a good job so far by making the important documents available to be read or even downloaded. But as mentioned at the beginning of this article, in the absence of laws and regulations, Libra should consider making the transparent communication as part of its policies to self-regulate the information disclosure which may include purposes, scopes, and frequencies. Libra may refer to the rules that regulate listed companies’ disclosure obligations. For instance, a document similar to a prospectus with all the detailed business, finance and risk disclosures before Libra’s launch will help governments, partners, and individuals have a better and more in-depth picture of Libra. Further, a quarterly and monthly report to share major progress and events would also help. A well-designed disclosure arrangement takes time but it will benefit Libra to have sound governance in the long run.

5. Evolving Mechanism

The last point deals with the problems of uncertainties and development. Though Libra is expected to deliver as a clear picture as it can, there are still many areas with unanswered questions. Among such areas, the transition from a permissioned network to a permissionless network is probably the biggest challenge. So the charter and other policies should be prescient about the possible changes. It’s impossible to have all the decisions now but it’s possible to have all the mechanisms and precautions now to ensure that the decisions can be made in a timely and efficient manner when they need to in the future.

It’s also about having an open and creative attitude to follow the spirits and principles that are already agreed upon. Like I’ve shared before about how vision and mission to influence startups, sticking to Libra’s mission and Libra’s governance’s goals and principles (refer to item 2 in the Notes of the chart above) could be an effective solution.