Facebook, Libra and the Future of Payments

Libra is Facebook’s first venture into cryptocurrency. In a nutshell, this will allow people to transfer money and buy stuff without being charged significant fees. Libra users won’t need a bank account. They will be able to buy Libra online or for cash at local shops and spend it using their personal Calibra wallet as a standalone app or as incorporated in WhatsApp and Messenger.

Although it might sound a little like Bitcoin and similar cryptocurrencies, the reality is very different. As Libra will be pegged to a mix of fiat currencies, its value will be far less volatile.  It will also be available to the 2 billion people who don’t have access to standard banking. It sounds great, but is there a catch? Let’s dive in and find out more.

Is Libra Facebook’s Bitcoin Beater?

The announcement of Libra has undoubtedly sparked debate. Critics have branded it a cynical attempt by Facebook to grab control of the cryptocurrency market, while protagonists are hailing it as legitimising cryptocurrencies for ordinary folk while liberating the large sector of the global population who are currently unbanked. We will return to the ethics of Libra later on, but first, we look more closely at its nuts and bolts.

 

https://www.businessinsider.com/facebook-move-programming-language-libra-blockchain-2019-6?r=US&IR=T

What has been going on?

Why has Facebook taken this massive step into the cryptocurrency market? Perhaps it is in response to the troubled waters the company has been surfing over the last few years.

There have been a series of crises. There was the Cambridge Analytica scandal that broke in 2018 where 50 million people had their data accessed, supposedly the worst data breach in history. The data was used to micro-target political ads, allegedly affecting the Brexit referendum and the US presidential election. There have been other privacy issues, again affecting tens of millions of users and Mark Zuckerberg’s appearances in congressional hearings and European parliaments have done little to quell concerns.

The immediate effect was a 20% drop in share prices wiping $120 billion of the company’s value.

It was in the midst of these crises when Libra first emerged. David Marcus, the creator of Facebook Messenger,  was to head a blockchain division following Zuckerberg earlier announcing his intention to explore cryptocurrencies.

In December 2018, Facebook announced its decision to build a cryptocurrency to make it easier to transfer money on WhatsApp. The focus would be on India with its 400 million WhatsApp users. To avoid the volatility and speculation associated with Bitcoin and similar cryptocurrencies, the new cryptocurrency would be pegged against the dollar and other assets.

Then, in June 2019 Facebook released its White Paper announcing Libra with an anticipated launch during 2020.

 

The Libra White Paper

The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.”

Libra White Paper

 

The white paper sets out the case for Libra, indicating that the primary motivation is to financially empower much of the world’s population that remains unbanked, pointing out that existing cryptocurrencies have failed to achieve mainstream adoption.

The three components of Libra that, by working together, will achieve this are:

  • A reliable blockchain that is scalable and secure
  • The Libra coin is backed by a reserve creating intrinsic value
  • Libra is governed by the independent Libra Association

We consider all of these below.

Libra’s Nuts and Bolts

While it is beyond the scope of this article to examine the fine detail of Libra, we will take a closer look at how it is intended to work, and what makes it different from Bitcoin, Ethereum, and similar cryptocurrencies.

For instance, a fundamental difference is that Libra will have an intrinsic value. This does not apply to bitcoin etc. where it is often argued that its value is entirely sentimental. Just like diamonds, bitcoins are worth what people are willing to pay for them. However, this is a highly complex subject that has some of the world’s greatest financial minds scratching their heads.

Other Stablecoins

Neither is Libra the first attempt to launch a cryptocurrency with an intrinsic value. Termed “Stablecoins”, they may be pegged to fiat money or exchange-traded commodities such as gold and platinum. Some Stablecoin ICOs (Initial Coin Offerings) have fallen flat due to regulations preventing them pegging the value to the dollar. An example is the stablecoin Basis which shut down after raising $100 million.

Another example is NuBits, initially pegged at dollar parity, it lost its peg and is unlikely to recover its value. Probably the most controversial of all is tether. It too was designed to be dollar equivalent, but the company has refused to honour this promise – the coin is now worth considerably less.

Will Libra succeed where others before it have failed? Come back in a few years, and we will provide an answer.

Libra Governance

Facebook won’t manage Libra. Instead, it will be handled by a non-profit organisation called the Libra Association. This body will oversee the development of the project, the Libra Reserve Fund, and the blockchain governance. The 28 initial founding members of the Libra Association each paid a minimum  £10 million joining fee which included the option to become a validator, a single vote on the council, and a share in profits generated by the fund.

Facebook is targeting 100 founding members by the time of the cryptocurrency’s launch, but it is a somewhat limited pool to fish in. For instance, businesses must be valued at least £1 billion or hold at least $500 million in customer balances.

By offloading the management of Libra, Facebook is also avoiding much of the scrutiny it might otherwise receive from regulatory bodies and is a smart way of sidestepping the financial regulations that have been the downfall of previous attempts to build stablecoins as described above.

Libra Reserve

The Libra Reserve is the fund that holds the assets that back the value of Libra. Each founding member contributes a minimum of $10 million to the reserve, so at launch, the fund will be worth around $1 billion. The reserve will be invested in various asset classes and so will generate interest and dividends. The founding members will receive the profits thus generated.

If Libra is successful, the reserve will continue to grow. There isn’t a limit on the number of Libra that will be issued, so ultimately the reserve will become huge, generating significant profits for the founding members. It’s not too surprising that so many of them are happy to make the punt.

A huge question is how the Libra Reserve will be subject to banking regulations. Banks have to hold just 3% in reserve for depositors who wish to access their cash. Mark Carney, the Bank of England’s governor has said he will be looking closely at the Libra Reserve.  

What happens when you buy and sell Libra?

Whether you buy Libra online or for cash, the money goes into the Libra Reserve, and the corresponding value of Libra is minted.  When you cash Libra in, you receive the current value of the Libra, and the Libra is burned (destroyed). Thus, the number of Libra coins in circulation should always be equal to the value held in reserve.

The Libra Blockchain

Every Libra authenticated transaction is entered on the blockchain. The blockchain is based on a Byzantine Fault Tolerance system where two-thirds of the nodes must agree on the authenticity of the transaction before it can be entered on the blockchain. The code uses a Merkle Tree structure and is designed to support 1,000 transactions per second (a massive increase on Bitcoin’s 7 per second).

Initially, the blockchain will be permissioned, though Facebook indicates it would hope to move to a “permissionless” system eventually, through this could be several years away. The permissionless system will be a proof-of-stake system based on the Libra holdings of the node operator. Until that happens, only validated nodes owned by founding members will participate in validation.

Move Coding Language

Move is the coding language behind the Libra blockchain. It is called Move as its function is to move Libra between accounts. The language is designed to facilitate the creation of smart contracts without introducing bugs. To quote the Move developers webpage, “Move is an executable bytecode language used to implement custom transactions and smart contracts”. It contains a variety of safety features that prevent it from copying or discarding resources.

A Final Analysis

We said that we would return to the question of Libra ethics, but it’s a complex area.

Unlike all the other cryptocurrency projects and ICOs, Libra has a massive head start. While the others have found it challenging to build up their user base, Libra already has a captive audience of 2.7 million users on the Facebook platform, including WhatsApp, Messenger, and Instagram. Libra will be integrated into the apps they use every day.

While this would appear almost to guarantee Libra’s success, there is a darker side. Facebook has demonstrated that it can’t be trusted with its customers’ personal data, and the company’s business model is designed around exploiting what it knows about us as individuals to target ads. Do we really want to provide it with access to our monetary interactions too?

There are already warnings from government representatives. Some claim that Facebook is already too big and powerful and can’t be trusted with personal data. Others have gone so far as to request Facebook to halt the project until it has been assessed by Congress; to call for an anti-trust investigation, and to demand the breakup of the organisation. Is that an overreaction? Maybe, ironically, many of Facebook’s most vociferous critics still have a Facebook page.

Will Libra, as Facebook claims,  liberate the unbanked or is it just a pipedream or perhaps an attempt to re-establish its brand as a business that puts people before profits?

It has been said that the reason so many people in the world are unbanked, is they don’t have enough money to pay into a bank account. There is no doubt at least some truth in that statement. Providing people with an app to spend and transfer their money will be of little benefit when they don’t have money to transfer and spend.

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