Libra: A New Open Access and Connected Financial System

30 June 2019

A quick take on the new global coin by Facebook, the crypto-game has just reached a whole new level.

By Mattias Cerini

Here it is. One single announcement has single-handedly skyrocketed cryptocurrencies from a small and niche market into the next gold rush.

With the publication of the long-awaited Libra whitepaper dated 18th of June 2019, the tech giant Facebook has officially entered the crypto industry. And what an entrance.

Every primary news channel from Bloomberg to CNN has dedicated coverage to the news, and every social network is flooded with comments from users debating on how and if Libra could revolutionise the legacy financial system as well as the impact it could have on the networks already active in the crypto industry.

Facebook’s bid on tackling the money game has caused a ripple effect felt by all participants in the current economic environment, financial institutions fearing total disruption, regulators and central bankers worried about the impact on their monetary policies and power status as well as crypto radicals calling the project an aberration of Satoshi’s vision of a genuinely decentralised world.

The goal set out by the Libra project is as much far-reaching as it is challenging, considering the social, economic and legal implications of the endeavour.

Libra: Vision

Reporting directly from Libra’s whitepaper, “The Libra Blockchain is a decentralised, programmable database designed to support a low-volatility cryptocurrency that will have the ability to serve as an efficient medium of exchange for billions of people around the world.”

The vision proposed by Libra and its parent Facebook is clear, reshaping the payment systems currently in use by leveraging the internet’s accessibility and the security and trust typical of blockchain protocols, to enable the over 1.7 billion “unbanked” people around the world to gain full access to the financial system and all the perks that come with it.

Over 34% of the global population could benefit from this new payment railway, enabling them to exchange value without having to incur in hefty fees typical of cross border money transfers.

Just picture an immigrant worker emigrated abroad to seek fortune, wishing to transfer money to his family in a remote country. As of today, he will have to spend as much as 7% of the total value of the remittance on commissions applied by providers such as MoneyGram or Western Union, to transfer the money.

With Libra, that cost should be brought down to mere cents, and thanks to the scalability of the proposed permissioned blockchain protocol, the timeline of the payments should also be drastically reduced, from several days to a matter of seconds.

Libra’s goal is to make sending money as easy as sending a message on social media.
This would be a game-changer for many people and business around the world, giving them access to possibilities that were secluded entirely to them. Companies in countries where the monetary base is highly inflated like Venezuela could benefit immensely from a secure, global, instantly transferrable currency that can’t be manipulated by greedy officials as well as finally having access to credit.

Libra: Protocol & Governance

The Libra blockchain protocol is defined as decentralised in the whitepaper, but in its broader sense, meaning that no single stakeholder will be able to singlehandedly decide on modifications of the network since all the founding members will have the same voting power, Facebook included.

This is very different from the standard of decentralisation set by Bitcoin, which is an entirely distributed network without any central authority to govern it. Its transactions are validated by miners spread all over the world which solve the complex mathematical equation necessary for transaction validations required for consensus to be reached in what is defined as Proof of Work. Whereas, consensus on the Libra blockchain will be operated through a “permissioned” mechanism where validators are represented by the members of the “Libra Association”, a no-profit organisation headquartered in Ginevra, Switzerland.

The newly defined “Founding Members” will detain voting rights and will be tasked with the promotion of the network and the execution of its mission. They will also host a full node of the Libra blockchain, acting as guarantors of the validity of the transactions occurring on the network.

The entry price to become a member is steep, 10 million dollars is the minimum contribution to the association operations development and initial efforts. To ensure that the project would already have a strong user base and credibility from the get-go, Mark Zuckerberg sought the support of a truly remarkable roster of companies, all heavy hitters in their related industry.

Paypal, Visa and Mastercard own around 80% of the globe payment railways. Spotify, eBay, Uber, Lyft can leverage exponential technologies as well as vast marketplaces. Andreessen Horowitz, Rabbit Capital and USV are prime players in the VC sphere and even Vodafone and Illiad, telecom giants, have joined the group. Not to mention Coinbase, Xapo and Anchorage, prominent names in the blockchain space.

The first 28 organisations are just the first wave to join the non-profit, Facebook has opened the doors to every entity that would meet the stringent threshold and standards set out in the association charter, even direct Facebook competitors are welcome to the club.

Libra’s protocol is going to be open source; community members will have the opportunity to propose modifications to the network and collaborate with core developers and founding members to ensure the best possible outcome for Libra. Moreover, the social juggernaut is planning to slowly move the protocol towards complete decentralisation, by including more and more participants and spread the control of the network shifting from “permissioned” to “Proof of Stake” consensus.

Libra: Basic Mechanics & Value

Users will be able to exchange fiat currencies for Libras at designated vendors; the fiat amount will be transferred to the Libra reserve, which will be managed directly by the association. The basket of different currencies such as USD, EUR, GBP, JPY and CHF will then be utilised to purchase low-risk liquid government securities like T-bills and aggregated in a basket, from which the intrinsic value of Libra will be derived. These investments will yield an interest rate that will be used to finance the non-profit operations, and at a later stage when critical mass has been reached, it will reward investors that have supported the financing of Libra through the purchase of an ad hoc security token.

This means that the new global coin will be a stablecoin pegged to the value of several major currencies, but since it is extracted from a mixture of them, it won’t be influenced by standalone swings in the FX markets and therefore be immune to monetary policies. Whenever a user is looking to exchange back digital currency for fiat, he or she will be able to do so with the same effortlessness as when it was purchased.

The Libra coin has been designed to be a stable mean of exchange, therefore the choice of developers not to let the value fluctuate like other cryptocurrencies such as Bitcoin or Ehtereum. This is an attempt by Facebook to tackle the issue represented by the large price swings experienced by cryptocurrencies and caused by market speculation and manipulation. A clear impediment to the utilisation of the currency to purchase goods or exchange value in daily transactions.

Calibra & Regulation

Facebook has also launched Calibra, another subsidiary tasked with providing financial services to the users and community of Libra. The first product in the pipeline is a digital wallet interface, which will come as an integrable component of WhatsApp and Messenger, as well as a standalone application.

The wallet interface is just the first product to be rolled out by Calibra, at a later stage the organisation is looking to provide many different financial services and products, all based on the new possibilities generated through the exploitation of a global, secure and shared financial ecosystem.

The wallet will display top of the line security features to protect user data, and it will not share information with Facebook databases; KYC and AML procedures will be applied directly by the wallet provider. This is a critical element in Facebook’s attempt to reassure users and regulators that private financial information will be held separately from social identities.

The giant tech company has been charged with several allegations by US and European officials over recent years, regarding the company’s alleged misuse of user sensitive data, including the infamous episode of Cambridge Analytica. This series of presumably illicit activities have put a target on the company’s back, and governments are the ones holding the rifle.

By launching the Libra project, Facebook has worsened its position in the eyes of regulators, who are seeing an attempt by the company to extract even more data from its users, appearing entirely unresponsive for warnings and fines already implemented.

In the US there has already been some turmoil caused by the chair of the House of Financial Services Committee, Maxine Walters, calling for a block on Libra’s further developments until officials could get a handle on its implications as well as warning against it trying to compete against the dollar.

This is just one of the first episodes in the long journey ahead, which is going to be very challenging for both Facebook and Libra. Governments and chiefly central bankers are not going to let the status quo be changed without a fight. By creating a new digital currency and assembling an alliance of such proportions, it appears as if a new financial superpower has been formed, much resembling the structure of a central bank, but with a much broader reach across borders and continents.

Another cause for headaches for incumbent governments and financial institutions is the potential complete disruption of their business models, heavily reliant on margins generated by fees; revenues which will be wholly absorbed by the almost cost-free libra money transfers. And if Calibra starts building financial services on top of this new ecosystem, it’s going to be “transform or die” for most legacy financial institutions.

If Facebook succeeds in its mission, the world we know may be completely transformed into a fully digital world where everything is connected by the internet, from cars to restaurants all will be dematerialised and digitised, fostering speed and efficiency. This, of course, poses an issue for the many that can’t see or can’t keep up with the change, which will be the cause of heated confrontation and problems we may not be able to grasp yet fully.

The crypto industry just got a whole lot bigger; these are definitely exciting times to be living in; we’ll keep you posted.

 

This article was originally published in “Blockchain Compliance Bulletin”, number 7. Cover image: © everythingpossible / Adobe Stock

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