On June 18, 2019, Facebook announced Libra.
It is a virtual currency, or cryptocurrency – even if some people don’t agree with
that definition.
In Facebook’s vision, Libra should become a global currency for billions of people, especially
those in developing countries who have no access to banks or financial services.
The idea is that Libra would be like digital money, which you can transfer to other people
or simply use to buy stuff.
Facebook CEO Mark Zuckerberg is not doing this alone – a bunch of Silicon Valley hotshots
are also onboard with the plan.
Libra will be governed by the Libra Association, a Swiss group including 28 members
– among which Facebook subsidiary Calibra, Uber, PayPal, Mastercard, Visa, Spotify and
many other household names in technology and finance.
So, how will this work?
Libra’s white paper – a sort of technical manifesto – says that it will run on a “blockchain”.
Again, that is a controversial definition in some quarters.
So, a quick, rough explainer: a blockchain is the infrastructure on which cryptocurrency
payments take place. It is a digital, unchangeable record of all the payments ever made in
a given cryptocurrency.
Here’s a crucial thing: a blockchain is decentralised. The transactions are processed
and verified by a swarm of independent computers rather than by a single referee or central
bank.
Those independent computers are called nodes.
That decentralised structure is intended to enhance security – as there is no single
entity to be hacked – and also, to guarantee that governments can’t block transactions
simply by browbeating a central authority.
It is a pretty libertarian, anti-state, anti-bank tool. The first blockchain ever is, of course,
the one underpinning Bitcoin, the original cryptocurrency.
But, the Libra blockchain is not decentralised the way Bitcoin is. On the Bitcoin blockchain,
anyone can theoretically run a node, even if that’s expensive.
In contrast, Libra’s nodes will be run only from the servers of the Libra Association’s
members – that is, Facebook, Uber, Paypal and the others.
Now, none of these companies will individually have much of a say in how payments are
processed and verified. It will be a collective effort – which is good, according to the
blockchain ethos.
Still, the more libertarian cryptocurrency fans resent that Libra will be controlled
by a club of megacorporations. They also fear that the Libra Association could buckle under
pressure if, for instance, a government ordered it to block a transaction.
Facebook’s official reason for this make-up is that a fully decentralised model would
not be powerful or fast enough to deliver the “global financial infrastructure”
Libra aspires to become.
The issue of scale is one of the main challenges confronting decentralised cryptocurrencies.
Decentralisation makes the system less vulnerable to hacks or shutdows, but takes time: the
Bitcoin blockchain, for instance, can only process about seven payments per second. By
comparison, the centralised Visa payment network can support up to 24,000 payments per second.
Initially, Libra should be able to handle about 1,000 transactions per second.
The white paper says that, over the next five years, Libra will shift from the current proposed
model – also called a “permissioned” blockchain – to a totally decentralised – or “permissionless”
blockchain. Of course, there is no guarantee that will ever happen.
Here is another issue Facebook says it is tackling.
One big problem with cryptocurrencies is that their value can be quite fickle. Over the
course of 2017, the price of Bitcoin swung between 900 and
20,000 dollars.
That is great news if you are a speculator, but it’s not ideal if you want to launch
a global payment network for Facebook’s 2.4 billion users.
That’s why Libra has been designed as a so-called “stablecoin”.
That means the value of Libra will be tied to the value of real-world assets. Essentially,
the Libra Association will store a basket of currencies (like dollars, euros, or pounds)
and low-risk government securities. The value of this basket will determine the value of
all the Libra units in circulation.
Every time a user trades cash for Libra through an exchange, that cash will be added to the
Libra Association’s reserves.
At this stage, there is not much else we know about Libra. We do know that Facebook Calibra
will launch a Libra wallet allowing users to exchange Libra through Messenger, WhatsApp
or a standalone app.
We don’t know which businesses will accept Libra yet – I suppose that both Uber and
Ebay will, because they are both members of the Libra Association.
Libra doesn’t launch until 2020 but that doesn’t mean that people aren’t already
fretting about the whole affair. Facebook has promised that it won’t use
payment data in order to target adverts – but people don’t trust Facebook, for notorious
reasons.
And regulators are also frowning upon the move . France has underlined that only
governments can mint money, and has warned against Libra’s potentially nefarious uses.
The Bank of England said that Libra will have to meet very high financial standards to be
allowed in the UK.
Lawmakers in both the US and the EU are concerned about Facebook’s expansion to the financial
domain.
For a company which is increasingly depicted as an oversized, unaccountable, arrogant monopoly
is launching a currency really the best way to avoid scrutiny?
We’ll find out in 2020.