Spotify’s Crypto Strategy

Given the volume of chatter in the music business around blockchain and cryptocurrencies, this week’s confirmation that Spotify has signed on to Facebook’s planned launch of a cryptocurrency-based payment system called Libra will no doubt set tongues wagging anew.

So far, Spotify is the only music or media-related organization among the launch partners, but its presence and prominence is sure to fuel speculation about the intentions of other steaming services and media providers regarding blockchain.

In truth, though, the move likely reveals more about Spotify’s own ambitions that about the future prospects for blockchain in the music business.

For starters, Libra isn’t very blockchain-y. Transaction data on Libra will not be bundled into blocks and will not be chained, although transactions will be recorded sequentially by time-stamp. Nor will there be any mining. Libra coins will be backed by a reserve made up of fiat currencies and fiat-denominated instruments and will be issued by the Libra Association, a not-for-profit foundation being established in Switzerland, much as a central bank controls the fiat monetary supply.

In lieu of miners, Libra will have “validator” nodes, and consensus will be established by an internally developed protocol rather than by a proof-of-work or proof-of-stake type consensus mechanism used by fully decentralized blockchains like Bitcoin and Ethereum.

The Libra blockchain, in fact, will be permissioned, at least initially, and the right to run a node on the network will run you at least $10 million.

With no mining as an incentive, node operators will be rewarded by being granted separate, registered Libra Investment Tokens, which will appreciate in value based on earnings from the reserve.

Not exactly how Satoshi drew it up.

There are legitimate reasons to design the system that way. Mining is a slow, resource-intensive process that constrains through-put on other blockchains and undermines their scalability. Any system meant to operate at Facebook scale will need to be faster and more scalable than even Ethereum and other blockchain 2.0 protocols.

Pegging Libra coins to a reserve of fiat-based assets will enhance price stability and discourage speculation, while assuring users that they will easily be able to convert their coins to fiat.

Facebook is also launching a crypto-wallet for use with the service called Calibra, which it has registered with the U.S. Treasury Department as a money service business and will comply with anti-money laundering and know-you-customer regulations.

Still, the design smacks a bit of Facebook trying to slip into the financial services business through the back door without being licensed by dressing Libra up in the buzzy trappings of blockchain and crypto.

European financial regulators, in fact, already think they smell a rat and are calling for quick action to review Facebook’s plans.

So what’s Spotify’s angle?

In a blog post Tuesday, Spotify’s chief premium business officer Alex Norström framed it as a way for the streaming service to reach audiences that lack ready access to traditional banking and financial services.

One challenge for Spotify and its users around the world has been the lack of easily accessible payment systems – especially for those in financially underserved markets. This creates an enormous barrier to the bonds we work to foster between creators and their fans. In joining the Libra Association, there is an opportunity to better reach Spotify’s total addressable market, eliminate friction and enable payments in mass scale.

That is no doubt true. But it’s also probably not the whole story.

For all its crypto-compromises, Libra still offers elements of a peer-to-peer payment system, albeit within a walled garden. Any Facebook user can sign up for a Calibra wallet and start making and receiving payments directly.

The open-source Move programming language Libra is written in also supports smart contracts, which means users will be able to create their own applications and tokens.

It’s not hard to imagine a future integration in which artists are able to upload their music directly to Spotify, tie it to a smart contract, and receive payments for streams immediately via Libra. Married to the potential reach of Facebook, that could make for an attractive alternative to the traditional record business for artists.

Spotify, in fact, has already been learning and experimenting with how to marry a creator ecosystem with its distribution platform on the podcasts side since its acquisitions of Anchor and Gimlet Media.

Artists and songwriters could also expect to see a bigger piece of the per-stream pie than they get under the current system, especially if Spotify is successful in its effort to rollback the Copyright Royalty Board’s recent rate-setting.

Further, for a publicly traded company like Spotify, Libra’s connection to the traditional financial system is a feature, not a bug. Exposing part of its revenue to the extreme volatility of Bitcoin and other decentralized cryptocurrencies would be an accounting and reporting nightmare, and a serious risk to its valuation.

Finally, Spotify is likely to have Libra to itself among the major music streaming services, at least for a while. It’s hard to imagine Amazon, Apple or Google being in a hurry to integrate their services with a Facebook payment system. So, if Spotify were to make a serious play at luring artists away from the traditional label system, it would be unlikely to face much competition from its largest current rivals.