As we had assumed in our post last week, BigTech Facebook has now officially unveiled its plans to enter the FinTech space with the launch of their own cryptocurrency – Libra. Below is a summary derived from the Libra White Paper – this covers all the main aspects so you can get up to speed.
Main Points & Definitions
- “Calibra” – Facebook’s “regulated subsidiary” created to ensure the separation of social and financial data, furthermore, it allows for distance between Facebook and Libra
- “Libra Association” – an association of equal members who will govern the Libra Network & Reserve
- “Libra Reserve” – a bank reserve of low-volatility assets, the Libra will be backed by this reserve, thus it will be a low-volatility currency
- Libra’s Governance – Facebook will have a leadership role over Libra throughout 2019, then once Libra is launched in early 2020, they will have equal governance with the rest of the Libra Association members
- Libra’s Goal – “a stable currency built on a secure and stable open-source blockchain, backed by a reserve of real assets, and governed by an independent association”
- ‘Social Empowerment’ – further aims are for financial inclusion by banking the unbanked & developing a standardised and decentralised digital identity via the Libra blockchain
- Decentralisation – the Libra Association will work towards decentralising the Libra 5 years after launch
- Doubts – the main hurdles are with regulations, governmental acceptance, data misuse and financial crime
Facebook has created a “regulated subsidiary” called Calibra. Calibra’s intention is to “ensure separation between social and financial data”. Furthermore, it will create a separation between Facebook and its influence over the Libra Network and Reserve. Once Libra is launched, the only sway that Facebook will have over the governance of Libra, will be via Calibra, which will have the same voting rights as the rest of the Libra Association members. It seems that with the creation of Calibra, Facebook wants to be as separated as possible from Libra. This distance could be to avoid potential problems around: liability, data misuse, trust and abuse of power.
Upon launch, power over the governance of Libra will be equally shared by Calibra and the rest of the Libra Association, meaning Facebook will not have a monopolistic control over Libra. Trust into the ecosystem will be passed to the blockchain technology with its immutable ledger, the Libra Association as they are the ones in control of decision making for Libra, and Calibri as they will be ensuring the separation of social and financial data in order to help Facebook avoid misusing data. As for liability, it seems that the plan is to push this to the Libra Association, then eventually even further with its decentralisation plans…
The above paragraph is how it should technically work. However, it will be a challenge for Facebook to really distance itself from Libra. Additionally, we will have to truly trust that Facebook doesn’t abuse this sensitive data, regardless of Calibra’s intervention.
Facebook has also created the Libra Association, it is “an independent, not-for-profit membership organization headquartered in Geneva, Switzerland. The association’s purpose is to coordinate and provide a framework for governance for the network and reserve and lead social impact grant-making in support of financial inclusion.”
So far the Libra Association has 28 members. Facebook hopes to have 100 members before Libra’s launch in the first half of 2020. Each firm must invest at least $10 million to join. “All decisions are brought to the [Libra Association] council, Each member gets one vote. Major policy or technical decisions require the consent of two-thirds of the votes.”…“Once the Libra network launches, Facebook, and its affiliates, will have the same commitments, privileges, and financial obligations as any other Founding Member. As one member among many, Facebook’s role in governance of the association will be equal to that of its peers.”
The 28 members of the Libra Association vary, they are entities involved in: Payments, ride-sharing, e-commerce, music, travel, telecommunications, blockchain, venture capital, academics, not-for-profit, and multilateral organisations. The members are displayed below.
“Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve. The reserve will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”
“Libra is not a “peg” to a single currency. Rather, as the value of the underlying assets moves, the value of one Libra in any local currency may fluctuate. However, the reserve assets are being chosen to minimize volatility, so holders of Libra can trust the currency’s ability to preserve value over time.”
“Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jumpstart the ecosystem and support further growth and adoption. The rules for allocating interest on the reserve will be set in advance and will be overseen by the Libra Association.” They will not pay interest to the account holders deposits.
What are the Actual Assets That Will be Backing Each Libra Coin?
“The actual assets will be a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks. The makeup of the reserve is designed to mitigate the likelihood and severity of fluctuations, particularly in the negative direction (i.e., even in economic crises). To that end, the above basket has been structured with capital preservation and liquidity in mind. On the capital preservation point, the association will only invest in debt from stable governments with low default probability that are unlikely to experience high inflation. In addition, the reserve has been diversified by selecting multiple governments, rather than just one, to further reduce the potential impact of such events. In terms of liquidity, the association plans to rely on short-dated securities issued by these governments, that are all traded in liquid markets.”
This is where things get a bit complicated… (via a permission based system, each Libra Association member will act as a validator node).
However, “an important objective of the Libra Association is to move toward increasing decentralization over time. This decentralization ensures that there are low barriers to entry for both building on and using the network. The association will develop a path toward permissionless governance and consensus on the Libra network. We believe that for the Libra network to achieve its full potential, it needs to be permissionless. [The transition] will begin within five years of the public launch of the Libra Blockchain and ecosystem.”
In the simplest terms posible, Blockchain is a very decentralised technology. However, there are aspects that can be centralised. Initially some of these aspects in the Libra Blockchain will be centralised. This means that the Libra Association will initially have control over who can use the Libra, have access to the blockchain network and have access to the ledger database.
Facebook states in the white paper that “an important objective of the Libra Association is to move toward increasing decentralization over time.” Meaning that they want to make the above aspects less dependant on the governance of the Libra Association, so it can become decentralised. (Bitcoin, for example, isn’t governed by any type of organisation, in a sense, the technology governs itself with the use of computers). Facebook says that the transition to decentralisation “will begin within five years of the public launch of the Libra Blockchain and ecosystem.”
Many minds will need to be changed and many deals will have to be made. There will be a lot of hurdles that will stand against the launch of Libra, it will not be an easy process… Regulations, governmental acceptance, data misuse and financial crime are amongst the main complications.
Cryptocurrencies are a very lightly-regulated area, of course this will have to change. It is unknown which agencies will oversee the unfolding of the Libra, it first needs to be appropriately identified. Furthermore, Libra will have to adhere to many regulations from differing countries. Regulations in the internet sector are a drop in the ocean when it comes to financial regulations.
TransferWise, a FinTech in remittances, described how it was a lengthy process to set up a network to move money around the world. They even had to get acceptance in every single US state. A government could simply ban Libra from being launched in their country.
Of course, privacy scandals. The adoption of Libra will create a substantial amount of sensitive data, data which could prove very valuable for a range of purposes. In fact, did you know that last year Google made a behind-the-scenes deal and bought transactional data from Mastercard? Check out the Bloomberg report about it. Apparently it’s in the small print somewhere that this is allowed…
Therefore, the integrity of Facebook and Calibra are in question. Will they stick to their word of separating social and financial data? Facebook/Calibra will need to gain the trust of the people, governments and businesses in order for its adoption. However, actions speak louder than words – at the time of writing, if you go on the Calibra website and click ‘learn more’ about the cookies usage, the link doesn’t even work…
KYC (Know Your Client), money laundering and financing for terrorism – these are the main grey areas for Libra when it comes to financial crime. In the white paper it is stated that “the Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity.”. This sounds like the perfect proposition for criminals, and a nightmare for regulators. Facebook will undoubtedly need to adhere to KYC and countless other financial crime regulations in order for its launch to be allowed.
It should be reminded that payments via Libra will be traceable, it won’t provide for advanced anonymity, like Monero for example.
There is also another concern which people have been overlooking – the amount of cash in the Libra Reserve… When multiplied by the billions, user deposits will add to a substantial amount – but what about the millions of businesses which use Facebook, what if they start accepting Libra? By creating a globally accepted currency with instant international transfers, drastic savings in remittance fees, blockchain security and mere ease of use – why wouldn’t an international company want to accept Libra?
Facebook has recently announced that Instagram will accept in-app payments to third party sites. (e.g. if an influencer advertises a Zara top on an Instagram post, then you could buy that Zara top without leaving the app). This could also turn into a swift transition for businesses to use Libra. Then soon enough businesses may start to accept Libra outside of the Facebook ecosystem.
If Facebook manages to gain widespread adoption for this cryptocurrency, specially for businesses, then with time, the Libra Reserve has the potential to become one of the biggest in the world. Furthermore, who will govern and get dividends from the Libra Reserve upon launch? The Libra Association – which will be comprised of Earth’s largest group of monopolies…
Facebook is taking a ‘social empowerment’ edge with its plans to launch their cryptocurrency. They claim that Libra can help bank the unbanked, save millions of dollars via remittance fee reductions so that migrants can send more money to their families back home, catalyse business operations in the poorest areas and give a standardised digital identity to permit social/financial inclusion. This could all be possible. However, whether this is all a marketing ploy to try and cover up a dodgy capitalist move, a legitimate motivation for social good, or a mix of both, is down to opinion. While Facebook will clearly benefit from this launch, so could those in need. They could simply be staying true to their mission statement from 10 years ago…
“Facebook’s mission is to give people the power to share and make the world more open and connected” – 2009
With all fairness, the intentions of launching the Libra seems relatively acceptable. Facebook, it seems, is merely leveraging their 2.4bn customer base, so that the world can benefit from a globally accessible, efficient, cost-effective and decentralised currency. However, Facebook will undoubtedly benefit from Libra – an increased use of the Facebook ecosystem, dividends from the reserve and most probably several other benefits which will come about its adoption. Alternatively, those in the poorest situations will also benefit greatly…
Either way, they will have to work relentlessly in order to instil trust, change people’s mindsets, work with governments, and get the world onboard with Libra for this launch to be a success. Only then will we see how it all unfolds…