Arguably the hottest topic in the cryptoasset markets today is Facebook’s planned digital currency Libra. From the day it was launched to the recent Senate hearings, Facebook has been facing nothing but pushback from lawmakers because its cryptocurrency has the potential to compete with the US dollar.
In this article, you will be introduced to Facebook’s planned virtual currency Libra and how it could impact the world’s leading decentralized digital currency bitcoin.
What is Libra?
In June 2019, tech giant Facebook finally substantiated long-standing rumors of an in-house digital currency. Facebook made the revelation through the unveiling of its new blockchain-based cryptocurrency Libra.
The announcement caused reactions from the public that were heavily skewed in both extremes. Cryptocurrency proponents believe that the entrance of a giant like Facebook will likely work to spur the global adoption of digital assets as a whole. Considering the fact that Facebook has access to over 2.38 billion people (over 30 percent of the global population), this belief may be founded on sound statistics. For opponents though, the idea of a digital asset designed for use on the global stage by a company like Facebook holds substantial privacy and security risks, which must be explored beforehand.
According to the whitepaper, Libra is created to function as a stablecoin. However, in contrast to the stablecoins currently in existence, Facebook’s “Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra.”
The Libra Reserve is a basket of assets that the value of Libra Coin will be backed by. The reserve is composed of a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable, reputable central banks.
Facebook envisions the use of Libra in its universe in this way: A user cashes in their local currency, gets Libra, stores them in a wallet, and spends it like fiat currency. Customers can access this service at highly subsidized fees and with a heightened level of privacy through pseudonymous addresses.
Facebook hopes to position Libra Coin as the new cryptocurrency of choice for the online consumer. From acquiring goods and services from physical merchants and online venders, with Libra as a mode of payment, customers will also be able to trade the digital asset to acquire fiat currency through a slew of third-party apps.
While Facebook is clear that the underlying code supporting Libra is open-source, it has launched a separate subsidiary, called Calibra, to focus on financial services. Calibra is headed by David Marcus, formerly of Facebook Messenger and PayPal, and is tasked with creating a robust ecosystem around Libra coin. Calibra is set to launch a wallet for Libra in 2020.
According to the whitepaper, Libra aims to become a payment method for many of the world’s unbanked and promises to become “true internet money.” David Marcus reiterates the promise held in digital assets such as Libra for a more inclusive financial ecosystem, saying: “We’ve seen the internet change the game for everything that could be digitized, except for money. The numbers speak for themselves. There are 1.7 billion people around the world that are unbanked; the same number are underserved by financial services. Now, anyone with a cheap smartphone has access to all the info they want in the world for free with a basic data plan. Why doesn’t money work the same way?”
While details on how Libra will be positioned within Facebook’s ecosystem are scant, what we do know is the digital asset is designed to have a high degree of assurance due to its Reserve. Because there will only be as much Libra as is backed by the reserves, users can rest easy that they can cash out at any time. Marcus explains why he believes that this makes Libra Coin superior, saying: “If you buy $50 of Libra, your $50 makes its way to the Libra Reserve. It’s designed to be stable and confer values on Libra that makes it more like a traditional currency than any of the digital currencies are now. This is the way paper money was created.”
Marcus is alluding to the antiquated approach with which currencies were introduced in history. During the infancy of a new currency, it was generally decreed that a denomination of that currency could be redeemable for real assets. This practice served to lend legitimacy to the currency and spur on further community engagement. Facebook hopes its Libra Association council will help it achieve it.
The Libra Association Council
Libra Coin is a stablecoin that operates on the Libra blockchain. The Libra Blockchain is a permissioned blockchain, with nodes owned and operated by founding members of the Libra Association. Facebook claims the Libra blockchain has the capacity to handle1,000 transactions per second. These speeds would significantly dwarf Bitcoin’s seven transactions per second and Ethereum’s fifteen.
Facebook decided on the permissioned model of blockchain governance as a balanced compromise between the benefits of decentralization and the challenges posed by a lack of control. The Libra Association is Facebook’s answer to the problem of governance.
Founding members of the Libra Association each contributed upwards of $10 million to earn themselves a say in the governance structure of Libra Coin as well as the opportunity to maintain a node in Libra blockchain. It is important to note that the funds contributed by founding members make up a significant portion of the Libra Reserve. Founding members are incentivized to join the association due to the potential of earning dividends from the interest earned on the investments into the Reserve.
The 28 founding members of the association are split across an array of industries. Big names include Mastercard, PayPal, Stripe, Visa, Lyft, eBay, and Uber, among others.
Facebook hopes to have grown the number to 100 members before the launch of Libra Coin. It is possible for any corporation that meets the requirements to apply to join the Libra Association, including Facebook’s competitors like Twitter.
The Libra Association will be headquartered in Geneva, Switzerland. Meetings will be held bi-annually. The association is already working to bring about a successful launch in the first half of 2020. Organizing bug bounties, upgrading Libra blockchain’s MOVE language as well as creating incentive programs for businesses and merchants to utilize Libra Coin, are initiatives already underways under the association.
Finally, it is important to note that Facebook reveals an important clue regarding its greater plans regarding a global identity management system, by divulging that an “additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.” Thus, we might see Libra coin combined with a global identity system.
Facebook vs. the US Government
A few weeks after Facebook announced its Libra Project; the U.S. Congress asked the company to cease activity related to the project pending further research. In a letter to Mark Zuckerberg, Sheryl Sandberg, and David Marcus, Maxine Waters the Democratic Head of the House Committee on Financial Services, told the executives to stop any plans for further implementation.
Citing the influence held by Facebook on a local and global scale, past privacy breaches, and a shallow whitepaper, Waters and the committee held that Libra a threat saying: “The scant information provided about the intent, roles, potential use, and security of the Libra and Calibra exposes the massive scale of the risks and the lack of clear regulatory protections. If products and services like these are left improperly regulated and without sufficient oversight, they could pose systemic risks that endanger the U.S. and global financial stability.”
Libra May Lead to Tighter Crypto Regulations
Criticism for Facebook’s Libra Project is spread across the political spectrum, with both Democrats and Republicans expressing concern over the multinational’s plans. Waters is far from the first official to express skepticism.
On July 11, President Donald Trump expressed his misgivings and disapproval of Facebook’s plans, adding that Bitcoin and other cryptocurrencies are generally used to facilitate unlawful behavior.
The Chairman of the Federal Reserve, Jerome Powell, has also been recorded stating that he has serious concerns on the Libra Coin project, casting aspersions as to whether the project would launch on time.
The latest pushback comes from Treasury Secretary Steve Mnuchin. Speaking from The White House, Mnuchin drew parallels to the volatile nature of cryptocurrencies and investor risk saying: “Bitcoin is highly volatile and based on thin air. We are concerned about the speculative nature of Bitcoin and will make sure that the U.S. financial system is protected from fraud.” He concluded by saying Treasury’s Financial Crimes Enforcement Network “will hold any entity that transacts in Bitcoin, Libra, or any other cryptocurrency to its highest standards.”
Lawmakers Know They Can’t Stop Bitcoin
During testimony on July 17, U.S. Congressman Patrick McHenry, representing North Carolina’s 10th District, expressed the belief that attempts to stop the blockchain-based technological innovation were futile. McHenry reiterated: “The world that Satoshi Nakamoto, author of the Bitcoin whitepaper envisioned, and others are building, is an unstoppable force. We should not attempt to deter this innovation; governments cannot stop this innovation, and those that have tried have already failed.”
This is likely a nod to the futility involved in trying to adequately legislate for a platform whose users are spread across different legal jurisdictions globally. Decentralization is one of Bitcoin’s most powerful weapons against censorship, and as it stands now, it may also be helping Bitcoin keep itself somewhat steady in the face of unfriendly legislation.
Libra May Boost Bitcoin Adoption to New Highs
Embattled Libra may eventually end up benefiting Bitcoin adoption. As referenced earlier, Facebook has access to a significant portion of the world’s population. If, through their reach, focus on user experience and education campaigns they can onboard some of their customers to the Libra coin project; there may be a ripple effect for the greater digital asset sector.
It would serve best in this metaphor to consider Libra coin as the ‘gateway drug’ into the rest of the crypto market. Users may become curious and begin to use other more prominent digital currencies, such as bitcoin. For those whose needs will be met by Libra, the engagement with the Facebook-created digital asset may serve to bolster public faith in other digital assets.
Lastly, Facebook has been riddled with privacy breaches in the recent past. These revelations continue to haunt the multinational, and more and more people no longer trust the social media giant. Despite promises that the company will separate Calibra from Facebook to promote privacy and security, some people believe that Libra will just be another part of Facebook’s “surveillance capitalism” machine, which, in turn, could push more people to bitcoin if they conclude that they want borderless, digital payments but without a central authority controlling (and potentially selling) all your transactional data.