Demystifying Facebook Libra
Libra is a blockchain-powered, digital currency proposed by the social media giant, Facebook. The company first announced plans for Libra in June 2019. Since then, experts, influencers, financial advisors, consumers, and even the government have been discussing what Libra is, how it would work, what its value proposition is, and its possible implications.
Facebook will launch Libra in 2020, so we expect lots of chatter about it over the coming months. Evolving news about Libra and the cryptocurrency market overall demands a better and deeper understanding of the definitions, processes, and implications of this “new kid on the block.” To demystify the seemingly complex “What is Libra?” conversations, we’re breaking it down. Here, we introduce Libra, explain (in simple terms) what it is, describe the value it provides, and detail how it will operate.
What is Libra?
Facebook’s Libra white paper – its technical manifesto – defines Libra as ‘a new decentralized blockchain, a low-volatility cryptocurrency’. But there is still disagreement about what Libra actually is. Some say it is a digital currency, others say it is a cryptocurrency, commodity or payment tool, and still others argue it’s a new asset class.
Although Libra will be operating on blockchain, it is different than other cryptocurrencies. By definition, cryptocurrencies operate on decentralized networks where the transactions are processed and validated by multiple “nodes” (ie computers) rather than by a single body (eg a referee) or a central institution (eg the Federal Reserve). The blockchain ethos is grounded in this collective effort and diffused verification process.
“Blockchains are described as either permissioned or permissionless in relation to the ability to participate as a validator node. In a ‘permissioned blockchain,’ access is granted to run a validator node. In a ‘permissionless blockchain’ anyone who meets the technical requirements can run a validator node. In that sense, Libra will start as a permissioned blockchain.” (Libra White Paper)
Libra will be governed by the Libra Association that is composed of venture capital firms, credit card companies, and other tech companies — including Uber, PayPal, Mastercard, Visa, and Spotify — that will operate as the nodes on the Libra blockchain “to verify and keep records of the transactions.” Facebook cites speed and scalability as two benefits of this “permissioned” blockchain format, compared to fully centralized “permissionless” blockchain models which are slower in processing transactions (a lower number of transactions per second) and more vulnerable to hacks and unexpected shutdowns. The white paper states that, in five years, Libra will shift to a fully centralized system.
What is Libra’s value proposition?
“Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.” (Libra White Paper)
The Libra white paper begins with this mission statement. Facebook wants Libra to democratize access to financial services the way the internet and mobile broadband have facilitated access to information and lower cost communication. According to research from the World Bank (2017), approximately 1.7 billion people around the world are unbanked and two-thirds of the unbanked have a mobile phone. Facebook’s quest is to provide easy and equal access to financial services globally to those who need it the most, regardless of location, credentials, or wealth. With 2.4 billion Facebook users (almost 25% of the global population), Facebook’s Libra is a global-scale project that would not need the social network effect. Libra facilitates the building of “a system of value exchange without government control and fast and secure online mobile payments that circumvent the traditional financial system.”
How will Libra operate?
Initially, consumers will be able to buy, hold, sell, and send Libra within Facebook-related apps like Messenger and Whatsapp as an intermediary for converting and transferring traditional currencies. Libra coins will be created as users buy them with real money. Facebook has also created Calibra, a Libra digital wallet app, in which consumers can store, exchange, and transfer Libra “freely, securely and affordably” over mobile phones. Consumers will exchange their local currencies into Libra and then deposit the Libra amount in their Calibra wallet. Calibra will support peer-to-peer payments, as well as QR codes to accept payments at small businesses. Eventually, Facebook plans for Libra to be commonly accepted as a form of payment and expects other financial suites to be developed on its blockchain.
“Libra has a burden of proof to carry.” – Federal Reserve Chairman Jerome Powell
There are still many unknowns and uncertainties about Libra that might impact its future life cycle and even its vitality.
Lack of trust
Facebook has a trust issue; specifically, governments, regulatory agencies, cryptocurrency communities, and end-consumers don’t trust it. Facebook is a repeat offender of privacy transgressions and monopolistic behavior, making the tech giant’s move to a global-scale financial platform more susceptible to scrutiny.
Libra has drawn significant scrutiny from US government and regulatory agencies in multiple jurisdictions. In early July, US congresswoman Maxine Waters, a Democrat from California, called for a moratorium on Libra’s development. In mid-July, Facebook had to defend Libra in Congressional hearings in front of the Senate Banking Committee as the committee cited Facebook’s privacy transgression incidences like Cambridge Analytica, “fake news,” the 2016 US Presidential Election, and Myanmar. Libra is expected to meet the highest regulatory standards and supervisory expectations. But concerns about the social media giant assuming such a powerful role in the global financial system is not easing anytime soon.
Demands of scaling
Given the regulatory barriers and possible technological bottlenecks, Libra might not launch in 2020. Facebook’s plan to be one of the first scaling blockchain networks to reach billions of users brings unprecedented technological and regulatory challenges.
“What if” scenarios
Several details are still to be decided or even explored. What will the exchange currency of Libra be? Will it trade for $1/Libra coin? What are some of the privacy protection measures for Libra and Calibra accounts? The list goes on.
The possible ill-use of Libra, including terrorist financing, drug trade, and money laundering, prevent Libra from fulfilling its potential and vision as boundary-less, digital cash that is accessible across the globe without much bureaucratic documentation. Libra might need to integrate background checks for its users. Calibra wallets will need to comply with local and national laws and regulations to operate in certain countries. That could shrink the vision further.
Amid the hype of Facebook’s Libra digital/crypto project, world-leading technology companies and global nations have also started revealing their digital currency plans. Apple has hinted that it is watching the crypto market and might launch its cryptocurrency next year. Similarly, China claims that its national digital yuan has features not offered by Facebook Libra. WeChat and Telegram already have their own cryptocurrency systems of “Pay” and “Gram,” respectively. After Facebook’s global footprint, they will probably try to scale their digital currencies to the rest of the world.
Despite the regulatory and consumer-trust barriers Libra is facing at the moment, it is changing the dynamics of competition, cross-border business formats, and payment systems. We will be watching and discussing Libra, as well as other cryptocurrencies, and their broader strategic implications more in 2020 and beyond. Watch this space.