The cryptosphere has experienced a mixture of excitement, trepidation and uncertainty since Facebook unveiled its Libra cryptocurrency and associated blockchain. Poised to send disruptive shockwaves through the traditional financial sector- does Libra signify an evolution of the cryptocurrency space or simply the rise of ‘fiat 2.0’?
With the long-awaited whitepaper finally released, alongside a plethora of supporting documents, let us explore this question with greater clarity. The opening of the main whitepaper positions Libra as:
‘A new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.’
The fiat-collateralized Libra stablecoin will be housed on top of Libra’s permissioned but public blockchain. Facebook’s new subsidiary, Calibra, is building a wallet of the same name to allow users to ‘save, send and spend Libra’ as the first step in their rolling out of a suite of financial services built atop the Libra blockchain.
Due to its data structure and governance mechanism, Libra is not technically a blockchain and is far from decentralized in its upcoming form. The proposed low-volatility ‘cryptocurrency’ and smart contract platform do, however, offer an exciting potential solution in the way of creating ‘a new opportunity for responsible financial services innovation’, at least in reference to the traditional financial services sector.
Libra aims to grant access to financial services for approximately 1.7 billion unbanked individuals worldwide. It’s the poorest people who are hit the hardest with financial service costs and fees; the inherent properties of cryptocurrencies address these issues, in addition to greater accessibility and institutional transparency.
Libra’s mission statement mirrors the existing narrative of financial inclusion surrounding Bitcoin and countless other cryptocurrencies that have materialized over the last decade. Nothing new there.
The Libra whitepaper argues that cryptocurrencies in their current form are inadequate in enabling global financial freedom; the current space is hindered by price volatility and lack of scalability. Existing cryptocurrencies, according to Libra, make for ‘poor stores of value and mediums of exchange’. The biggest criticism from Libra is also the most telling sign of the direction of the project:
‘Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts’.
Calibra’s mission is at odds with the fundamental principles of the traditional cryptocurrency space: disrupting the existing financial system and bypassing regulatory and institutional intermediaries. If regulators exercise their hand in determining participation in the network, then it is not inclusive.
Libra’s mission statement includes many vague references to financial inclusion. Aside from the difficulties in achieving inclusivity through regulatory compliance, Facebook seemingly fails to consider that an estimated 1 billion people globally do not possess proof of identity- many of whom are the unbanked that Libra is supposedly designed primarily to assist.
Whilst anyone is free to use the Bitcoin network with a mobile phone, such individuals would be excluded from the Libra financial ecosystem, which requires KYC on the application level to participate.
Inclusive? Undoubtedly a lot more so than a traditional bank, but certainly less so than conventional cryptocurrencies.
Facebook’s subsidiary company, Calibra, will compete with existing solutions to achieve its goal of widespread global adoption. Previously dubbed “GlobalCoin,” Libra will run on a high-performance permissioned yet public ‘blockchain’ which leverages a new programming language and an interesting dual-token model.
According to the whitepaper, Libra will be capable of 1000 transactions-per-second upon launch and achieve a 10-second finality time, closely matching some of the best-performing current blockchains. However, Libra clearly differentiates itself from a traditional blockchain altogether:
‘Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time.’
With its single data structure, Libra is clearly not a conventional ‘blockchain’. It is, however, a high-performance programmable database, equipped with the native security-focused ‘Move’ programming language. Move is designed specifically to overcome the pitfalls of existing blockchain languages such as Solidity through carefully considered security measures which make it harder for critical bugs to surface.
Though there are numerous references to enabling developers to build on the open-source platform, don’t expect open accessibility anytime soon. According to the whitepaper, Libra ‘anticipates that the ability for developers to create contracts will be opened up over time’. Any contributions to the ‘open-source’ project will be vetted and assessed for suitability by the blockchain’s governing body, the Libra Association.
The primary currency utilized within the ecosystem is the Libra coin, which is fully collateralized by a basket of cash deposits (corresponding to several fiat currencies) and low-volatility assets such as ‘government securities in currencies from stable and reputable banks’, residing in the Libra Reserve. Libra coins are created when a user deposits fiat and burned when fiat is withdrawn.
Libra presents an interesting take on the stablecoin model but will, of course, be only as ‘low-volatility’ as the fiat-based assets which underpin the coin.
Alongside the Libra coin, another much more exclusive currency also exists within the ecosystem. The Libra Investment token is the mechanism which grants governance rights over the ‘decentralized’ network, awarded to a group of select global corporations who form the Libra Association.
Satoshi Nakomoto’s decentralized vision is clearly unfolding before our very eyes… or perhaps not.
The Libra documentation is riddled with inconsistencies and contradictory statements when it comes to the aspect of decentralization. Claiming that its ‘blockchain’ is decentralized throughout, the Libra Reserve, and its governing body of network validators, the Libra Association, outline a more centralized decision-making process.
The Libra Association is an ‘independent, not-for-profit membership organization based in Geneva, Switzerland, whose role is to ‘coordinate the agreement among its stakeholders – the network’s validator nodes – in their pursuit to promote, develop and expand the network, and to manage the reserve.’
The Libra Association will thus govern the network and manage the Libra Reserve as they see fit for the advancement of the ecosystem. The reserve itself will be ‘held by a geographically distributed network of custodians’, representing many central points of failure; if and when the government of any of the custodian territories decides they have the right to do so, reserve assets can be seized.
Association members represent global organizations from an array of industries, each of which vetted for suitability upon application and paying a minimum of $10 million each for the privilege of a node. Though the Libra Association is a ‘not-for-profit’ organization, its members will each benefit from the interest generated by the Libra Reserve alongside with network transaction fees earned from running a validator node. Libra aim to have 100 association members (network validators) upon the public platform launch, with the 28 current members listed below as seen in the whitepaper:
Despite a governance mechanism involving a central organization of network operators, Libra still persists on referring to itself as “decentralized.” The main issue stems from the conflation of the terms ‘decentralization’ and ‘distributed governance’; the two are not interchangeable. Whatever your stance on the compatibility of decentralization and governance, oversight and ultimate network control by a collective of global corporations is certainly at odds with any traditional notion of a decentralized blockchain.
Facebook opts for a BFT-style consensus mechanism, named LibraBFT. But it doesn’t add any weight to its decentralization narrative, and seems redundant. Given that validators in the permissioned network are all carefully vetted global corporations, there will be no adversaries which may decide to attack the network. LibraBFT simply provides a mechanism by which network validators to easily collude to block any unwanted network transactions, whilst still allowing for the use of the somewhat loosely applied ‘decentralized’ buzzword in the Libra narrative.
Facebook’s blockchain technical lead, Ben Maurer, told CoinDesk that only founding members can run a validator node. But Facebook is hoping that eventually node participation will be open to everyone, which would make the network more decentralized:
“In the initial version of the system, only founding members will be able to be a node that participates in the consensus algorithm… Over time, it’s designed to transition the node membership from these founding members who have a stake in the creation of the ecosystem to people who hold Libra and have a stake in the ecosystem as a whole.”
The whitepaper echoes this sentiment, stating that work with the community to commence research into Libra’s transition to a permissionless network ‘will begin within five years of the public launch of the Libra Blockchain and ecosystem’.
Five years is a lifetime in the crypto space. Switching to a permissionless blockchain will not be a simple task when the network is already being used and relied upon in its current form by potentially billions of users, especially when an all-powerful association with mutual financial vested interests has been successfully running the permissioned network for so long.
Facebook as an entity has voiced its intention to distance itself from Calibra and the Libra ecosystem moving forward. Despite being the creators of the network – having recruited a plethora of blockchain and financial experts to work on the project, led by ex-PayPal President David Marcus – the whitepaper makes clear that the social media titan will not occupy a privileged position within the network:
‘Facebook, and its affiliates, will have the same commitments, privileges and financial obligations as any other Founding Member. Facebook’s role in governance of the association will be equal to that of its peers.’
Whether the creators of the Libra blockchain will, in practice, exert as much influence as that of the Mercy Corps, for example, is yet to be seen. As the creator of the Calibra Wallet, Facebook’s Calibra subsidiary is likely to be the de facto corporate face for the Libra blockchain at least from a network user perspective.
The Calibra Wallet will be issued as a standalone app as well as integrated into Facebook Inc.’s array of social platforms, including Facebook Messenger, Instagram and WhatsApp; billions of social media users will thereby be presented with the opportunity to seamlessly ‘save, send and spend Libra’ from directly within a plethora of applications.
The Libra whitepaper is keen to state that Calibra ‘will not share account information or financial data with Facebook, Inc. or any third party without customer consent’. Regardless, Calibra will hold a treasure trove of personal financial data on potentially billions of its users, and it is not clear what ‘customer consent’ will entail.
Facebook’s attempt to remain somewhat publicly removed from the Libra project likely stems from concerns over the firm’s public image in light of their controversial past in the way of data management; many may feel wary of allowing their personal financial data to be accessed by Facebook- either via their subsidiary or directly. Regulators will be watching Calibra’s practices with a close eye.
Although Libra may not represent Satoshi Nakamoto’s decentralized vision, the meeting of Big Tech and fintech undoubtedly presents a challenge to traditional banks; Libra represents the first real foray by a big tech company into the realm of traditional financial services. This should be very concerning for the gatekeepers of the traditional financial system. It’s therefore perhaps not surprising that the regulatory hammer is already banging hard on Libra’s door.
The Calibra Wallet represents the first application within the Libra ecosystem which will leverage Libra’s global infrastructure to initiate the transition to the new financial order, initially focusing primarily on remittance payments but soon expanding into conventional daily purchases. Head of Policy and Communications for the Libra Association, Dante Disparte, told CoinDesk:
‘Implied in this project is that wherever the Visa and Mastercard logo are accepted, Libra would follow suit.’
Calibra has already registered as a money service business (MSB) with FinCEN, and is applying for money transmitter licenses in various U.S. states. Services will include money transfers, payments, credit loans; all stand to be revolutionized by Calibra’s global infrastructure. Libra’s reimagined digital fiat ecosystem therefore holds huge potential for positive impact globally, especially in the developing world.
Though Calibra will be following the guidelines of the Financial Action Task Force (FATF) and working closely with global regulators, Libra’s journey towards obtaining their goal of enabling ‘a simple global currency and financial infrastructure that empowers billions of people’ will not be without its hurdles.
Judging by their reaction thus far, politicians and central bankers clearly understand the threat the Libra Project poses to their traditional financial system, surfacing in force to voice their dismay and disapproval almost immediately upon Libra’s official unveiling. French Finance Minister Bruno Le Maire warned against Facebook’s crypto becoming a ‘sovereign currency’ hours after the announcement, while a German politician referred to Facebook as a ‘shadow bank’. A slew of central bankers has also come forward to publicly denounce the social media titan’s venture into financial services.
The Libra Project clearly has the gatekeepers of traditional finance concerned, and for good reason. Libra undoubtedly proposes a solution which is more open and borderless than traditional banking services, but could never be as open or decentralized as Bitcoin by its very nature.
As far as posing a threat to the decentralized movement, Libra doesn’t have the necessary characteristics of a true blockchain or cryptocurrency required to potentially do so. Even in its proposed eventual form which promises to be ‘open’, ‘permissionless’ and ‘decentralized’ blockchain, the Libra ecosystem can never truly be any of those whilst operating within the confines of global regulation and being overseen by a central governing organization.
The Libra coin is a programmable ‘Fiat 2.0’ running on a network which acts as the infrastructure for an evolved financial services experience. The most important aspect of Libra is its potential to onboard vast numbers of users into the world of cryptocurrency. It could catalyze a seismic shift in consumer spending behavior on a global scale by present hundreds of millions of internet users globally with their very first crypto-related experience.
More will inevitably explore the decentralized movement as their preconceived notions of money and finance become increasingly challenged, and cryptocurrencies become more socially-accepted in the mind of the mainstream. Libra may serve as a valuable stepping-stone towards mainstream cryptocurrency adoption.
Wallets built for Libra will also grow to include other cryptocurrencies over time, thus acting as a bridge from the Libra user base to the conventional cryptocurrency space. Multiple currency support would result more transfers and adoption of different cryptocurrency support.
Whatever Libra’s level of success, the project undoubtedly signifies a step forward from the traditional financial system. The blockchain space must continue to refine its operational methods to facilitate the gradual onboarding of mainstream users.
Onwards to our uncertain, yet exciting, decentralized future.
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