Facebook has created an uproar in the high-tech and financial world with the announcement of its Libra cryptocurrency earlier this month, but in many respects the ideas behind Libra have already been implemented by Israeli entrepreneur Ido Sadeh Man with his Saga digital currency.
Libra is often compared to Bitcoin and other popular cryptocurrencies. But Facebook has designed Libra to overcome their deficiencies, which have consigned them to being used as a speculative investment, to evade taxes and to buy and sell contraband.
Libra contains four elements aimed at making it a currency that can be used in real-world transactions. One is that it is backed by bank deposits and government securities and tied to existing currencies to ensure its value doesn’t fluctuate. Another is that it follows the banking principle of “know your customers” to prevent its being used for money laundering. Finally Facebook is outsourcing management of the currency to a non-profit consortium based in neutral Switzerland called the Libra Association, rather than running it as part of its business. It’s composed as of now of 28 corporate members.
Saga, which was unveiled at the start of 2017, contains all these elements and takes the governance issue a step further by employing what Sadeh Man calls a more democratic system. Saga is also being backed by real assets with its value tied to a real currency, in this case the International Monetary Fund’s special drawing rights, or SDRs. Most importantly, Saga is being managed by a Swiss-based foundation, a feature Sadeh Man regards as critical.
“Saga wants to enable currency holders to be the ones in control of it, just like the citizens of Israel have control over the shekel – the country votes for the Knesset, the Knesset chooses the government and the government picks the Bank of Israel governor,” he explained in a telephone interview from New York. “Even if there are several layers of separation, the goal is to represent the general will of Israel.”
He compared that with a cryptocurrency business, which is answerable to shareholders, not to coin holders.
Both Saga and Libra are awaiting regulatory approval.
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In the case of Saga, governance of the currency is akin to a global central bank. It has monetary and legal committees, a board of trustees and general meetings for currency holders. Saga has even hired an ex-central banker, Barry Topf, who held top positions at the Bank of Israel during his 25-year career there, as its chief economist.
Avi Licht, who served as Israel’s deputy attorney general and now teaches law at Tel Aviv University, sits on Saga’s advisory board and is helping to develop its governance system. The technology website has gone as far as to call Saga’s product “the thinking person’s cryptocurrency.”
Saga’s structure aims to make it a cryptocurrency for real world uses rather than for speculation, where national currencies like the dollar and the yen often create problems for people conducting global business – and not just multinational corporations. One example is remittance payments that migrant workers, usually from the developing world working in rich economies, send back to their families at home. The World Bank estimates that remittances add up globally to close to $700 million a year, but the people who make them face high fees to move their money between currencies, on average 7%, and are at constant risk from fluctuating exchange rates.
“Think about a Filipina who wants to send money to her family in Manila, but the Philippine peso has fallen by 25% in value,” said Sadeh Man. “One function of a currency is to serve as a store of value. Saga will enable her to buy only the Pesos she needs and hold the rest of her money in a stable setting, in a currency that keeps its value.”
Sadeh Man said he met several times with Tomer Barel, an Israeli with a senior role in the Libra project. “Clearly there are significant similarities …. I’ve always seen Facebook as a major competitor,” he said. “We received very important validation of our model [from Libra], but there’s a fundamental difference in Saga’s functioning and goals.”
Although a tiny competitor to Facebook, Saga has blue chip backing. It raised $30 million (in dollars not in cryptocurrency as is popular for startups in the industry) in March 2018 from venture capital and hedge funds, including Mangrove Capital Partners and Lightspeed Venture Partners.
It boasts an advisory board that includes luminaries from the world of finance and economics such as Jacob Frenkel, the former Bank of Israel governor and chairman of JPMorgan Chase International; economics Nobel laureate Myron Scholes, known for creating the Black-Scholes formula for pricing options and derivatives; and Dan Galai, a co-developer of VIX, the leading measure of financial market volatility.
Sadeh Man sees these names as part of part of democratic institution building.
“Saga is built so that once the currency is out in the real world, you can remove me from the whole undertaking,” he said.