On June 18th, 2019, Facebook announced its vision for Libra, a cryptocurrency slated for launch by mid-2020. According to the white paper issued by Facebook, 1.7 billion adults globally remain outside the financial system with no access to a traditional bank. This is despite the fact that one billion of them have a mobile phone and nearly half a billion have internet access. Facebook seems to be pinning its hopes in solving this problem on the Libra coin as it is going to ensure that digital banking services reach the unbanked parts of the world; as well as power first world digital first products and services such as WhatsApp transfers, gaming purchases and marketplace business transactions.
What is Libra?
The main aim for the introduction of Libra is to come up with a global unit of value that is
widely accepted and as easy to use, thereby improving confidence and convenience in
billions of people’s everyday lives.
One of the main characteristics of Libra is the potential for its 2.7 billion users to send instant cross-border payments through its platform. Users can send money all over the world with lower fees than if they were to engage a traditional player like Western Union. As it stands, cross-border payments for individuals and financial institutions alike are costly, time-consuming procedures.
Libra consists of three components that will work together to create a more inclusive financial system.
There are 3 key differences between Libra and the more well known cryptocurrency - bitcoin, which is summarized in the table below and explored in further detail later in this piece:
Libra: Supply issued by network partners only, backed by currency basket, underwritten with standards of care related to processing power
Bitcoin: Anyone, anywhere, can increase supply as a function of time & cost of power
Libra: Stablecoin backed by the world’s major reserve fiat currencies
Bitcoin: Price is function of scarcity to further mine (currently effective price of electricity), value derived by perceived safety
Libra: Network partners verify blockchain
Bitcoin: Fully decentralized
1. Built on a Secure, Scalable, and Reliable Blockchain
Like cryptocurrencies that have come before it, such as bitcoin, Libra is based off of Facebook’s own decentralized database called Libra Blockchain. However, there has been some debate on whether Libra is a true cryptocurrency.
Relative to the US dollar, the euro, or the yen, it’s decidedly a cryptocurrency because there’s no central bank and no public ledger. However, traditional cryptocurrencies, like bitcoin, is a permission-less system where anyone can participate. Libra, by contrast, is permissioned, meaning only a few trusted entities can keep track of the ledger. Libra is therefore more vulnerable to attacks and censorship because it’s not truly decentralized; that makes it more like a digital currency rather than a cryptocurrency.
Additionally, Libra currency is assigned to “wallets”, also owned by Facebook under a subsidiary called Calibra, and transfers are done through public key operations, giving it another characteristic of cryptocurrency. With all these considerations, Libra is more appropriately labeled a permissioned blockchain digital currency.
The downside of a traditional blockchain system is that the computation slows down the transaction significantly, and transacting using bitcoin is not feasible on a day-to-day use case. The Libra permissioned model means less computing power is needed, and makes the transactions nearly as fast as traditional payment processors (Libra – 1,000 transactions per second, Visa – 3,000). These are both much faster than bitcoin’s 7 transactions per second or ethereum’s 15, giving Libra the potential to be used in daily commercial transactions with a bigger potential user base than the combined populations of China, the U.S., and the EU
2. Backed by a Reserve of Assets Designed to Give it Intrinsic Value
Libra is a so-called “stablecoin”, meaning its value will be anchored to the hard currencies that back it. Any cryptocurrency pegged to either a fiat currency or some kind of government-backed security counts as a stablecoin. The idea is that it has more stability and less volatility than something like bitcoin, which isn’t pegged to anything and once dropped from nearly $20,000 to $6,000 in four months.
As planned, the US dollar will represent 50 percent of the backing for Libra. However, the framework calls for Libra to be most heavily weighted by the highest yielding currency in the basket. The remaining support will come from the euro (18 percent), Japanese yen (14 percent), British pound (11 percent) and Singapore dollar (7 percent). The absence of China’s yuan could appease American politicians scrutinizing the currency by assuaging their fears of Chinese influence.
Libra will also be backed by a reserve of the fiat currencies above, which will initially come from Facebook and its partners. As Libra develops, any exchange of cash for Libra will become part of that reserve. That reserve is then “invested in low-risk assets that will yield interest over time”.
Under traditional circumstances like with a bank deposit, the user would get to keep the interest. However, with Libra, the revenue from this interest will first go to support the operating expenses of the association. Once that is covered, part of the remaining returns will go to pay dividends to early investors in Libra for their initial contributions. This is similar to the Venmo and PayPal business model – any cash that’s held in those systems is cash that they get to keep the interest on.
If Libra gains widespread acceptance, its lack of one-to-one correspondence to any single currency will give it a tendency to displace existing national currencies. The user would only convert Libras into local currency when they need to spend physical money. The goal is for Libra to be more useful than any single national currency, accepted in more places, and with fewer complications.
3. Governed by the Independent Libra Association Tasked with Evolving the Ecosystem
The Libra Blockchain and Libra Reserve are governed by The Libra Association, an independent, not-for-profit membership entity that acts as the monetary authority controlling Libra and is comprised of diverse group of members designed to facilitate the operation of the Libra Blockchain. Their role is to coordinate the agreement among its stakeholders, which act as the network’s validator nodes, in their pursuit to promote, develop, and expand the network, and to manage the reserve.
Learning from past experiences involving trust issues and client data handling, Facebook has created Calibra, a regulated subsidiary, to ensure separation between social and financial data, and to build and operate services on its behalf on top of the Libra network. 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 the governance of the association will be equal to that of its peers.
Members of the Libra Association consist of geographically distributed and diverse businesses, nonprofit and multilateral organizations, and academic institutions. The initial group of organizations will work together on finalizing the association’s charter and become “Founding Members” upon its completion.
Threat of Government Regulation
Since their creation a decade ago, cryptocurrencies have been developed with the goal of one day replacing the current financial system. Although cryptocurrencies do not threaten sovereign states by virtue of their own existence, they do represent a financial system in which the state does not have sovereign control over all finances operating within its borders.
If you come from an Eastern European country, such as Ukraine, stablecoins make a lot of sense and would probably be a desirable standard over local currencies. However, if you come from a hegemony that tends to be in charge of things like France or Germany, your position is probably to keep the status quo, and both these countries have recently agreed to block Libra. In a joint statement, the two governments affirmed: “no private entity can claim monetary power, which is inherent to the sovereignty of nations”.
Getting the regulatory aspects of the currency right is key to Libra’s success, particularly in emerging markets like India, which is proposing a new law that would make owning and selling cryptocurrency a crime — and punishable for up to ten years in jail.
Governments Develop their Own Digital Currencies
Beyond regulating Libra, multiple world governments have begun working on their own version of a digital stablecoin. Asia, with its vibrant cross-border trade, might be ground zero in this battle. China views Libra as a direct threat and is developing its own central bank digital currency (CBDC) to meet the challenge posted by Libra, although the structure proposed by the People’s Bank of China (PBoC) suggest more a glorified payments system than a true cryptocurrency.
CBDC is not a stablecoin per se, but rather a fully digital version of the renminbi. With China moving fast, other central banks may reactively follow suit, partly out of fear that a digital renminbi will gain a bigger role in international trade, especially within the 65 countries of the Belt and Road Initiative. The European Central Bank has been quietly working on its own digital currency project.
Hoping to beat Facebook’s Libra to market. China’s big four state-owned commercial banks (Bank of China, China Construction Bank, Agricultural Bank of China, and the Industrial and Commercial Bank of China), as well as fintech giants Alibaba, Tencent, and Unionpay, will be the first batch of organizations to receive the CBDC. It could be launched as soon as November 2019.
Competition From the Private Sector
First revealed in February 2019, JPMogan’s JPM Coin initially runs on top of Quorum, a private version of the ethereum developed by the bank. JPM Coin will function as a stablecoin, with fiat cash being deposited at the bank in exchange for the token, which can then be transferred via a permissioned distributed ledger. The recipient can later redeem the token for cash from JPMorgan. Initially linked to the US dollar, the coin is expected to be extended to other fiat currencies in time.
Another large bank, Wells Fargo, is also developing a U.S. dollar-linked stablecoin that will run on the firm’s first blockchain platform. Dubbed Wells Fargo Digital Cash, the tokenized dollar will be used in a pilot initially for internal settlement across the company’s business. It says its blockchain for internal cross-border money transfers is faster and more efficient than SWIFT, the global wire transfer system used by over 11,000 financial institutions.
Finally, asset management companies such as Franklin Templeton are also entering the space. The firm is currently trying to receive regulatory approval to tokenize a new fund on the Stellar blockchain. While the underlying fund will be primarily comprised of traditional holdings like government securities and cash, investments will entail shares that are issued, transferred, and managed on a blockchain with no cryptocurrencies involved. According to the company:
“[We believe] that blockchain technologies have the possibility to knit traditional asset management products and services closer to transactional payments…with its shares existing as native digital assets on a blockchain and held in a digital wallet, can be an ideal stable digital asset to be used in the new economy. “
The Future of Libra
Despite already attracting a powerful industry consortium of backers in payments, software, eCommerce, telecommunications, and venture capital, 7GC believes the Libra situation to be one of “wait and see”. Several partners are rumored to be wavering in the wake of EU regulatory scrutiny. The venture investors participating are primarily former Facebook and Instagram investors and only required to put in $10M to bootstrap the program from their multi-billion dollar funds.
The threat of government regulation, uncertainty of Libra’s launch and execution, copycat competitors from both the public and private sectors, and ultimately adoption in the broader consumer finance market are all major threats to Libra’s viability. Although Facebook’s unmatched scale of users may provide the best chance for a cryptocurrency to rival a fiat currency, it remains to be seen whether Libra can achieve the company’s grand mission of a global currency and financial infrastructure that empowers billions of people.