Earlier in June, Facebook announced its ambitious cryptocurrency called Libra. Libra being termed as a cryptocurrency works on the same underlying technology as other cryptocurrencies, the blockchain. Despite being a cryptocurrency, it is to be noted that Libra has a lot of distinct features that are not seen on other cryptocurrencies.
Libra is a permissioned blockchain, where transactions are validated by a consortium of giant corporate companies lead by Facebook, called the Libra Association. Each member runs a node in the network.
Unlike cryptocurrencies like Bitcoin and Ethereum, Libra is backed by financial assets such as a basket of central currencies and highly liquid government securities. Facebook believes that this backing could make Libra an almost stable cryptocurrency, which is intended to be used for transactional purposes than being used as an investment tool.
The centralised nature of Libra along with strong dependence on fiat currencies makes it distinct to other cryptocurrencies which are decentralised without any dependability on government or a third party. In short, Libra can be considered as a hybrid or digital version of fiat currencies, drawing a lot of inspiration from other cryptographic technologies.
The Libra Association
Libra Association led by Facebook is a consortium of 28 giant corporate companies from various sectors like e-commerce, payments, technology and telecommunications. It is a non-profit organisation registered in Geneva, Switzerland.
Facebook has already announced that Libra even though created by Facebook, will not be managed by the social media agent. The Libra blockchain is engineered to be controlled by the Libra Association where Facebook has equal rights as other members. Facebook thus claims that Libra is created by Facebook but not managed by it.
The enormous nature of the members and the B2B interplay among the association is expected to help in the mainstream adoption of Libra. Even though registered as a non-profit association, the members are provided with interest from the investments made using the Libra reserve for their contributions.
Facebook is hoping to launch its project in the first quarter of 2020, with nearly 100 companies forming part of the Libra Association. It is rumoured to be seeking 1B$ for the project.
The Libra Association defines success as enabling any person or business globally, to have fair, affordable and instant access to money. It has said people will use Libra for transactional purposes than for an appreciation in value. The main motive of Libra is financial inclusion or the efforts to bank the unbanked.
There are over 1.7 billion adults who don’t have access to financial services, bank account despite having a smartphone. The introduction of Libra will help these people to use various financial services. It can help in the development of the developing countries along with creating a global marketplace.
Similarly, there are countries like Zimbabwe, Venezuela and Argentina suffering from a high rate of inflation. People in these countries have already lost faith in their sovereign currencies. Libra can ensure these people easy access to a global currency backed by strong money like the Dollar, Euro and Yen. It helps them to preserve the value of their hard-earned money against hyperinflation.
The announcement of Libra resulted in a drop in the stocks of the remittance giant ‘Western Union’. The average remittance charge for a cross border payment of 200$ is said to be 7-9%, which itself takes days to complete the transaction. Libra aims to provide cross border payments at a very low rate instantaneously. Libra can be purchased in exchange of fiat currencies from an authorized exchange. Facebook assures libra to be highly liquid, stable and one can use it for making peer to peer transactions and payments in various ecosystem powered by the association.
Calibra is the wallet developed by Facebook to store and make financial transactions using Libra. Libra’s blockchain is not controlled by Facebook alone.
The question of Facebook’s monetary interest in the project can be answered through their wallet, Calibra. David Marcus, Head of Calibra had confirmed that everyone, even a non-member of the Libra Association can build their service on the libra blockchain and offer competition to Facebook.
Facebook has already planned to integrate Calibra to its Facebook Messenger and WhatsApp. After its launch, people can make transactions from various products of Facebook. Facebook hopes that Calibra can bring 90 million small businesses on the Facebook platform, under an umbrella.
As a result, it creates more growth and revenue for Facebook’s ad models. Facebook is spending big to make its wallet more feature-rich and dominant. One has to remember that 2.7 billion people are using Facebook services. It is never difficult for a giant like Facebook to use its monopoly to gain an advantage in a new sector/product regardless of the competition.
Ever since its announcement, Libra has faced a significant amount of concern and criticism from Central banks, Governments and Financial Institutions. David Marcus, Head of Calibra, appeared before the US Senate to answer questions regarding the ambitious project of the social media giant.
Marcus testified that Libra is not introduced as a rival/ substitute for sovereign currencies. He also assured that the project will ensure that, all sorts of regulatory compliances are satisfied before its launch. The Senate interrogated the reason for which the people should trust Facebook and its corporate friends with their money.
Facebook was also blamed for its recent track record on privacy and data protection and the implications when Facebook gets the financial data of its users. David Marcus assured that Calibra is registered as a separate corporation which keeps its data separate from the social data owned by Facebook. Facebook’s reputation for data protection, privacy and its recent practices of breaking promises does not give the users enough reasons to trust Facebook’s assurances.
Facebook, at the time of acquisition of WhatsApp, promised that it won’t share data between the two platforms. Facebook has also announced that it would transform the Libra blockchain into a permission-less blockchain to ensure further decentralisation. As a result, more nodes and participants can increase the coverage and lifespan of the network.
History has always proven that Facebook can break its promises and change its policies for monetary gains. It is even believed that the Libra Foundation is registered in Switzerland to avoid certain obligations and to ensure maximum legal flexibility, where the association is not even required to be registered in the commercial registry.
An in-depth analysis of the project can create a lot of questions regarding Facebook’s behind the door intentions. Facebook wants to create a global currency itself and lead the blockchain and cryptocurrency buzz which is seen as a disruption to the current financial system. By integration of platforms, Facebook might also be aiming to create an all in all platform which can cater to all sorts of user needs.
Meanwhile, the very substandard approach of Facebook in privacy and data protection will surely give Libra a hard time before and after its launch. There is no doubt that it will be subjected to the most stringent and rigid regulations across the globe before coming to light.
What is your opinion on Libra? Let us know in the comments below.
About the Author: Aanchal Thakur is Managing partner of DayOrg Consulting Group, providing strategic, financial and Legal consulting to organisations in disruptive technologies. She is also, ambassador for couple of international Blockchain projects in India and mentoring a startup in Mental health space. She is a Chartered Accountant, Information System Auditor, Agile Coach and certified Blockchain consultant. Aanchal regularly speaks and contributes on various forums on Blockchain technology, use cases and the regulatory environment around the same.