A guy walks into a bar, keeps the door wide open and screams: ‘If you’ll forget my previous mistakes, I will buy you the next round!’, turns to bar’s regulars: ‘you’ll get some too if you let me in’, and finally adds with conviction: ‘my intentions are good!’. The guy is called Mark Zuckerberg, free beer is cryptocurrency Libra and the regulars are Bitcoin, Ethereum, Litecoin, and friends. The mistake is obviously the most recent privacy leak and intentions are to stabilize the currency in developing countries. Should Zuckerberg be allowed to get in?
When Mark Zuckerberg announced that Facebook is going forward with its very own cryptocurrency, Bitcoin surged above $11,000, highest since March 2018. This could be clearly ‘a cryptocurrency Libra effect’ since cryptocurrencies seemed to have burned the hype-fuel and ran only on past media glory. The Facebook announcement generated new hype and sparked the FinTech engine yet again. How long will it last? But more importantly, is Libra even needed on an already saturated market? What will it take to set aside from the competition and create fresh demand? Well, we still have time until its lunch planned in 2020, so… food for thought?
Let’s talk about the term itself, it comes partially from ancient Greece. The root of the ‘crypto’ part comes from ‘kryptos’, meaning ‘secret’ or ‘concealed’. In the world of cyber money, the specific description would probably be closer to ‘a digital currency that uses cryptographical techniques to assure secure transactions’.
A cryptocurrency is, in fact, a system of dispersed information, storing data about the amount. The amount is bound to system nodes (wallets) in a way allowing access only to a wallet’s owner. A few ground rules amongst which spending twice the same coin is not possible and the characteristic to maintain the integrity by design makes an interesting data structure and potentially a practical financial instrument. As it stands now, most countries do not accept cryptocurrencies as a legal form of products and services exchanges, therefore they do not allow them to be legal currency – mostly because it is really difficult to regulate – we are just uncertain how to do it yet.
A new programming language, called Move, was developed to handle Libra, ‘handled’ being the right word. According to Ben Maurer, a tech lead for the Libra-focused Facebook subsidiary Calibra, Move had to be created. In an interview with CoinDesk he claimed that none of the existing programming languages was up to the task:
The reason why we built our own language is that we want to really focus on the flexibility of the blockchain over time.
One of the key ways to do that is by having programmability inside of the blockchain. If you want to take advantage of new functionality or new techniques, you don’t have to wait for the entire network to upgrade.
In existing blockchains, there are a lot of issues with writing code securely. The Move language is built with safety being a key principle of the design.
It doesn’t seem that creating a completely new language was absolutely necessary, but the ability to upgrade and adapt would definitely help to bring new users onboard and maintain ‘technological currency’ when the platform evolves.
Formally, Libra will be governed by The Libra Association group of 26 founding members, including Visa, Mastercard, PayPal, Uber, Lyft, Coinbase, and many others. Calibra will develop financial services and products around the Libra network, which will eventually be fully governed by the independent Libra Association. Calibra intends to start with a digital wallet for the Libra coin, which will let users transfer funds to each other, as well as store their tokens locally.
Now, down the rabbit hole… because it gets really interesting. The fundamental question: is Libra even a cryptocurrency, therefore a true ‘FinTech product’? The question is valid, but the answer is tricky. Libra is a cryptocurrency in a way that it uses cryptocurrency technology. It’s more restricted compared to other blockchain-based projects but that is not really something new. The first major difference is in the way that we would access the system. Bitcoin, for example, does not impose restrictions. If you solve a puzzle, you are adding a link to the chain – that is it. Anyone can play. With Libra, it is different, at least for now. Only a few players keep track of the ledger, making Libra more of a digital currency than an actual cryptocurrency. But since Libra is put into the pseudonymous wallets, with transfers performed through public key operations, it can be called a cryptocurrency. Either we need a more precise definition of a cryptocurrency or something is not right and skeptics hit the mark about the whole thing. Which we will discuss a bit later.
Is Libra powered by blockchain? Blockchain… when was the last time you heard that buzzing word? What is interesting – and it floats through the media like Bitcoin’s value peak since March – is that Facebook made Libra Blockchain a thing. In the official white paper it’s said:
In order to securely store transactions, data on the Libra Blockchain is protected by Merkle trees, a data structure used by other blockchains that enables the detection of any changes to existing data. 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. This implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.
On one hand, Facebook is saying ‘unlike previous blockchains’, on the other – ‘Libra Blockchain’. At this point, we can’t be sure how much ‘blockchain’ is put into Libra. Even better, there are speculations if it even works - according to Bloomberg it does not!
As opposed to FinTech, blockchain in RegTech is still considered a myth by most. Although, there are physical attempts to utilize the electronic ledger to ensure the integrity of the KYC records, the most recent one with BENEFIT in Bahrain, that I had the opportunity to assist with conceptual architectural designs.
According to the social media giant, Libra targets developing countries. 1,7 billion adults globally live outside of the financial system with no access to bank services. Interestingly enough, one billion of them have a smartphone and nearly half a billion have internet access. For Facebook, this is a new, unsaturated market. One will not have to have a bank account to use the currency. Facebook hopes it will settle in developing countries. Some of them have unstable currencies, so implementing potentially wide-spread and giant-based means of payment can be an attractive proposal.
Physical terminals are considered; according to Facebook, they will resemble ATMs. With 2,4 billion users, Facebook would have to install millions of these to be effective. You can put millions of cheap, $40 smartphones in the hands of poorly salaried man but you cannot put millions of machines in many countries, on different continents, just like that. It is a complicated logistical operation. Plus, you have to gain trust through a proven track record of tight security and integrity – not the words that would fit this context easily, especially given recent security leaks.
On the second hand, a report by Binance states that the Libra “could be uniquely positioned to gain mass digital adoption”. The report underlines the fact that despite aggregation of $283B market capitalization, the cryptocurrency world “still faces challenges to see further global adoption”. We can read that driven from the architecture itself and potentially increased accessibility will lead to mass adoption. Even “reshaping of the payment industry”. Well… that seems like a big assumption.
Increasing offerings of financial services is pretty much a given since FB has means to roll over competition like a road roller. Un-dollarization of The World also called a new unit of account for global trade is also a misunderstanding. Un-dollarization could happen only if we (and USA first) give up paper for a gold standard. That probably will not happen very soon (if ever). Defining a new unit of global trade is very optimistic. A shift in monetary economics from public entities to private corporations seems more likely with each passing decade and giving up privacy, and control to the private sector. This, however, could be difficult for Facebook.
Looking with a critical eye. Cryptocurrencies should be decentralized by definition - cryptocurrency Libra is not. In fact, new Facebook’s cryptocurrency, if not secured properly, will only expand the problems that we have seen with the social media portal. Let us hope the lesson was learned!
The Facebook currency will have the Libra Reserve – accounts held around the world from which they will be used to buy low-risk government bonds or other cryptocurrencies. Bitcoin and similar FinTech stars do not have reserves. If you want to sell them, someone has to buy them. Now, if the community decides that Bitcoins are worthless, they stay worthless, no one will buy them. If someone decides Libra is worth nothing, he or she can trade it for cash from the reserve. That means that the value could be speculated and leveraged when needed.
The social media giant is worried that a fully decentralized Libra would not be usable. Facebook’s white paper claims that Libra is centralized and decentralized at the same time. Which is it? The Libra Blockchain as a technology is indeed decentralized, but the governance structure around will be kept in a closed circle. The creators will not hold a grip over the currency, that is Libra Association’s job, assuming it will be impartial.
Governing bodies will need to figure out how to tax the new form of exchange. Libra’s worth is being built on a global currency basket, not on the local, national currency. Libra’s users and their physical location will not play a role. In most countries, profits from Libra will be taxed. Users will have to include them in their tax returns. Since exchange rates change over time, they will have to be taken into consideration when calculating the tax. Plus regulate the tax in accordance with profit levels – depending on local law. It really does not seem to simplify the whole process for the developing countries and ‘the unbanked’.
Furthermore, the app ecosystem is not really helping with ‘the mission’. In order to use cryptocurrency Libra, you need Messenger, WhatsApp or dedicated Libra app. That means you need to have Facebook. That means you need to have a smartphone. Smartphones are widely popular and accessible to almost anyone, that’s true, but if you want to buy Libra coins, you’ll have to pay with real money. To summarize – if you don’t have access to a bank, you need an app, a Facebook account, a smartphone, and real money. Currently, retail banks offer much simpler solutions – will Libra be actually better?
The future of Libra is not very clear yet, and we’re talking about it even before the product launched. USA lawmakers are asking (for now) to postpone Facebook’s new project, at least until the regulators can investigate potential issues. According to the New York Times, seven Libra’s close partners signed “non-binding agreements” knowing they could bail and not promote new cryptocurrency if things ‘get too hot’. The NYT reports that these companies are not overzealous to be too closely associated with Libra in the light of its uncertain regulatory status quo.
FinTech products are on the rise, no wonder Facebook wants to establish a foothold on that market. But can it really deliver the promise of simplicity, accessibility, safety, and trust? We will be observing closely as it has the potential to affect a quarter of the World’s population.
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