An interesting fact about Libra Facebook’s native currency which was announced June 18th, it’s inspired from three distinct elements: the Roman weight measurement system, the astrological sign for justice, and the French term for freedom. The culmination of these three elements embodies the essence of Libra, which aims to be a global cryptocurrency for everyone. The focus of Libra is to create a currency that empowers billions of people, allowing them to engage in friction-less financial transactions in a simple, secure, and cost-effective manner.
But Facebook is launching two cryptocurrencies not just Libra.
As part of June 18th big reveal of the social network’s ambitious plan to create a global fiat-backed blockchain currency, (Fiat currency is government-issued currency like the dollar). Facebook said that in addition to Libra, the project will also issue a “Libra investment token.” Unlike Libra – a currency that will be broadly available to the public – the investment token is a security, according to Facebook. As such, the token will be sold to a much more exclusive audience: the founding corporate members of the project’s governing consortium, known as the Libra Association, and accredited investors.
And while Libra will be backed by a basket of fiat currencies and government securities, interest earned on that collateral will go to holders of the investment tokens. Each of the 28 companies that Facebook recruited to run validating nodes as founding members of the consortium invested at least $10 million for the privilege. The investment token is what they received as a financial reward.
“Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size,” Facebook said in one of a series of documents that supplement the long-awaited Libra white paper. Further, the tokens will give holders proportional clout in the early governance of Libra. An investor who buys the tokens doesn’t have to run a node, but unless they do, they don’t get to vote as members.
But every new trend, idea or concept in order to become mainstream must clear three obstacles namely : Technology , Business and Society (Government and Customers)
The same applies to Libra, where, essentially, Facebook wants to make it as easy to move money around the world as it is to send a text message with lower fees, more accessibility and close-to-instantaneous transfers worldwide.
The company released a White Paper to explain the details. It doesn’t see the cryptocurrency as an attempt to replace the current financial system, as is Bitcoin’s aim. Rather, it’s intended to extend a digital payment method to under-served populations that don’t currently have easy access to traditional financial institutions. Worldwide, almost two billion adults “remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access,” reads the paper. Libra aims to fill the gap.
How will Libra work?
Libra will be managed by a Swiss-based nonprofit. It is currently backed by Facebook and more than two dozen Founding Member companies, including Ebay, Uber, Lyft, Spotify, Visa, Mastercard, PayPal, Coinbase and venture capital firm Andreessen Horowitz. Unlike other cryptocurrencies, Libra will be backed by “real” government-backed assets from central banks to give it stability.
Facebook says Libra will be made available to Messenger and WhatsApp users, who can cash in their local currency to buy Libra. The currency will be held in a digital wallet called Calibra and can be spent on products and services at participating merchants, just like any other currency.
To withdraw funds, users will be able to convert their digital currency into legal tender based on an exchange rate. It won’t be so dissimilar to when you exchange U.S. dollars for euros during a European vacation, for example. For those worried about security, Libra payments will not be connected to a user’s Facebook data and won’t be used for ad targeting.
Libra will not be available until the first half of 2020, so you can’t buy the currency today. Once it does become available, there should be several ways consumers can buy the currency, and you won’t necessarily need to go through Facebook.
Transaction fees will likely be lower than those currently charged by traditional finance companies, which will primarily benefit merchants, but also people who, for example, routinely send money to family members abroad and are forced to rely on expensive wire transfer services.
How is this Different from a Credit Card?
One of the purposes of Libra is to serve people who do not currently have access to traditional banking and financial tools. Currently cryptocurrencies can be used like a credit card to buy goods online. But Libra will theoretically go beyond that. Consumers will be able to purchase the currency and use it at participating merchants.
“You have a balance of, say, $100, you go to a merchant, you scan your smartphone for a $10 purchase, the Libras are taken out of your account and held by the merchant,”. Transaction fees will also be lower than they are for traditional forms of payment. Calibra is similar, then, to a payment network like PayPal, but uses the cryptocurrency Libra rather than a fiat currency, like the U.S. dollar for transactions.
Libra will be a stable digital currency, which will be fully backed by real assets stored in the Libra reserve. Stablecoins are cryptocurrency that are stable in value, usually pegged from a real-world currency (such as US$) or a commodity (such as gold) that are stable in nature.
The Libra reserve is created through funds originating from both investors in the separate Investment Token, and users of Libra. This means that you can invest in the project through an Investment Token that could potentially pay out dividends in the future or if you are keen on getting your hands-on Libra coin itself, you have to convert your local currency into Libra.
Essentially, Libra is only created when there is more fiat with which it is either exchanged or backed up. The Libra reserve will then be invested in low-risk assets that will yield interest over time, which will then be used to cover operational costs, support low transaction fees, and pay dividends to Investment Token investors who helped jump-start the ecosystem. The stability of Libra will therefore be supported by a global basket of fiat currencies and low-risk assets; likewise, you can convert your Libra at any time according to the prevailing exchange rate to your local currency.
Facebook will relinquish control over Libra, instead conferring control to Libra Association, a Geneva-based non-profit organization with a long list of prominent founding members, including Paypal, Mastercard, Stripe, Visa, eBay, Lyft, Spotify, Uber, and Coinbase. Currently, there are 28 members, each of whom are required to invest $10 million into the development of Libra.The Libra foundation aims to accumulate a total of 100 partners with a reserve fund of $1 billion, which is going to be used to manage Libra’s price stability. All members will also be granted a single vote for the governance of Libra, with each entity serving as nodes in the Libra network.
The association will also spearhead Libra’s native open-source technology, by promoting its developer platform, which is fueled by its own programming language. Given the wide reach of the cumulative networks of all members in the association, it is not hard to imagine that there will be a colossal base of ready users for Libra, something which would have been incomprehensible with any other past cryptocurrency projects, particularly on this scale.
Libra will be built on the Libra blockchain, a natively developed open-sourced blockchain that uses a Byzantine Fault Tolerant (BFT) consensus approach called LibraBFT Consensus Protocol (voting based protocol used in hyperledger networks). However, the Libra blockchain will initially be a permissioned (closed) blockchain. This means that access to the network is limited to a handful of selected and pre-approved entities who will become nodes in the system.
Libra will gradually transit into a permissionless network (similar to Bitcoin and Ethereum networks) within five years of the public launch of Libra blockchain and ecosystem. The rationale behind this is that a permissionless network has limitations in terms of speed and scalability, and in order to deliver a scalable, secure, and stable solution globally across billions of people and transactions, it needs to be a permissioned system at first. That said, Libra blockchain will be open in the sense that anyone can use the network and even build applications on top of the blockchain.
The Libra Blockchain
With 5KB transactions, 1000 verifications per second verifications on commodity CPUs, and up to 4 billion accounts, the Libra Blockchain should be able to operate at 1000 tps (transactions per second) if nodes used at least 40Mbps connections and 16TB SSD hard drives. Transactions on Libra cannot be reversed. If an attack compromises over one-thirdof the validator nodes causing a fork in the Blockchain, the Libra Association says it will temporarily halt transactions, figure out the extent of the damage, and recommend software updates to resolve the fork.
Libra blockchain will facilitate smart contract functionality, using a relatively new language called ‘Move’. Smart contracts are pre-programmed contracts that are self-executable, thereby allowing for the automation of contracts without the need of any third parties or intermediaries. Move is a simple but powerful language, and is relatively suitable as a “first programming language”. More importantly, Move is designed with a key focus on security and safety, since leveraging a simpler language facilitates easier code writing and execution, and reduces the risk of unintended bugs or security flaws.
The first application to be built to support a cryptocurrency must be a wallet. This is exactly the case with Libra, in which Calibra, a cryptocurrency wallet, will facilitate the storage and exchange of Libra coins. Calibra will be the first application to be built on the Libra blockchain.
Calibra is also the name of the company which will develop the wallet, and is in fact a subsidiary of Facebook, built to ensure separation between financial and social data, and to build and operate services on its behalf on top of the Libra blockchain.
Calibra will be available as a mobile application and will also be integrated with Facebook’s Messenger application and WhatsApp, allowing users to convert fiat currency into Libra in their wallets and thereafter send, receive, and pay for stuff using Libra.
According to Facebook, almost half of adults in the world don’t have an active bank account, with the figures worse in developing countries and even worse for women. Approximately 70% of small businesses in developing countries lack access to credit, and $25 billion is lost by migrants annually through remittance fees.
Facebook has more than 1.5 billion users on both WhatsApp and Messenger yet makes almost no money from the messaging services. When Facebook revealed its Libra plans, the company also said it would soon put new digital wallets inside these apps so users can easily use the cryptocurrency to send money to friends and businesses anywhere in the world. If the plan works, WhatsApp and Messenger will become new payments and commerce hubs that take small-but-profitable cuts from billions of transactions.
Facebook has a checkered record in payments. But China’s WeChat and QQ show what’s possible when messaging apps cleverly fold payments and other services into the mix. WeChat and QQ make money by facilitating payments between users and merchants, distributing mobile games, and selling digital goods, such as stickers and avatars. The services have turned owner Tencent Holdings Ltd. into the most valuable publicly traded company in China.
Facebook’s crypto push could facilitate similar offerings in payments, shopping, apps and gaming, while tapping into the company’s huge user base in Asia, where it has nearly four times as many monthly active users as it does in North America, according to RBC Capital Markets.
For now, Facebook and its new subsidiary Calibra, which is building the digital wallets, are framing the new currency as a way for individuals to send money to each other across borders. David Marcus, who is leading Facebook’s Libra efforts, said that the company doesn’t plan to take a fee when people send money to friends, and will likely charge “tiny transaction fees” for payments to businesses.
Libra (Source: Calibra)
If people do start stuffing their new digital wallets with Libra, it might not take years for Facebook to turn that activity into revenue. Marcus believes the new wallets could have a more immediate financial impact on a business line Facebook knows well: Targeted advertising. If users have Libra on hand as they scroll through Facebook’s News Feed, when they click on an ad it will be easier to buy something. That would make Facebook ads more appealing to marketers.
“If there is more commerce happening on the platform, then small businesses will end up spending more and advertising will be more effective for them,” Marcus said.
To generate higher levels of adoption among users, Libra has developed an incentive program to encourage more developers to create applications on Libra blockchain, and more merchants to accept Libra as a payment currency. Node operators, who represent the founding members of the Libra association, will be rewarded with Libra coins for getting users to sign up and use Libra. Businesses that attract users towards Calibra will also be rewarded with incentives which they can pass on, in part or in their entirety, to users in the form of discounts or free Libra tokens for their purchases. Merchants in the network are also incentivized by receiving a percentage of the transaction value back for each transaction that is processed on the platform.
The incentive programs are targeted towards the entire Libra network, ensuring that a holistic approach is undertaken to foster adoption in the usage of Libra.
The company’s crypto plans are already under fire from regulators in Washington and Europe who don’t like the idea of Facebook dipping its toe in yet another aspect of people’s personal lives. And gaining consumer trust after years of privacy mishaps may be harder than Facebook expects. A letter from US House Representatives Committee on Financial Services to Facebook sent on July 2, Facebook to officially put the project on hold.
Today, cryptocurrencies are backed solely by the willingness of users to accept them, not because they have any intrinsic value or are backed by any government. This makes such currencies unstable. Libra, however, will be backed by reserves: If a user buys a dollar of Libra, that dollar will presumably be held in reserve somewhere, ready to be honored when someone sells that Libra. Moreover, while most cryptocurrencies are hard to use, Libra promises to be user-friendly and embedded into Facebook and WhatsApp.
There are four core problems with Facebook’s new currency.
The first, and perhaps the simplest, is that organizing a payments system is a complicated and difficult task, one that requires enormous investment in compliance systems. Banks pay attention to details, complying with regulations to prevent money-laundering, terrorist financing, tax avoidance and counterfeiting. Recreating such a complex system is not a project that an institution with the level of privacy and technical problems like Facebook should be leading.
The second problem is that, since the Civil War, the United States has had a general prohibition on the intersection between banking and commerce. Such a barrier has been reinforced many times, such as in 1956 with the Bank Holding Company Act and in 1970 with an amendment to that law during the conglomerate craze. Both times, Congress blocked banks from going into nonbanking businesses through holding companies, because Americans historically didn’t want banks competing with their own customers. Banking and payments is a special business, where a bank gets access to intimate business secrets of its customers.
Imagine Facebook’s subsidiary Calibra knowing your account balance and your spending, and offering to sell a retailer an algorithm that will maximize the price for what you can afford to pay for a product. Imagine this cartel having this kind of financial visibility into not only many consumers, but into businesses across the economy. Such conflicts of interest are why payments and banking are separated from the rest of the economy in the United States.
It’s also possible that insiders belonging to the Libra cartel could exploit their access to information, business relationships or technology to give themselves advantages. There are many ways a new currency system could advantage large businesses over everyone else, especially when the large ones are sitting on the board of governors for the payments system. For instance, one of the incentives is to get people to use the currency is discounts on Uber rides; if this happens, Facebook would be giving an advantage to Uber instead of other ride-sharing businesses.
The third problem is that the Libra system introduces systemic risk into our economy. The Libra currency is backed, presumably, by bonds and financial assets held in reserve at the Libra Reserve. But what happens if there is a theft or penetration of the system? What happens if all users want to sell their Libra currency at once, causing the Libra Reserve to hold a fire sale of assets? If the Libra system becomes intertwined in our global economy in the way Facebook hopes, we would need to consider a public bailout of a privately managed system. We should not be setting up a private international payments network that would need to be backed by taxpayers because it’s too big to fail.
The fourth problem is that of national security and sovereignty. Enabling an open flow of money across all borders is a political choice best made by governments. And openness isn’t always good. For instance, most nations, especially the United States, use economic sanctions to bar individuals, countries or companies from using our financial system in ways that harm our interests. Sanctions enforcement flows through the banking system — if you can’t bank in dollars, you can’t use dollars. With the success of a private parallel currency, government sanctions could lose their bite. A permissionless currency system based on a consensus of large private actors across open protocols sounds nice, but it’s not democracy. Today, American bank regulators and central bankers are hired and fired by publicly elected leaders. Libra payments regulators would be hired and fired by a self-selected council of corporations. There are ways to characterize such a system, but democratic is not one of them.
Facebook is trying to convince U.S. regulators that it is ready to fight efforts by foreigners to interfere with the 2020 Presidential Election while at the same time promoting its Libra cryptocurrency that may make it easier to do just that. The social media giant says it will accept the cryptocurrency anywhere where it takes payments and at least for now won't rule out allowing it to be used to buy political ads
Eight U.S. House candidates raised $550,000 in bitcoin contributions from 20 states between 2014 and 2018, according to the Center for Public Integrity.
States have varying views on cryptocurrency political contributions. Some such as Colorado, Kansas, and the District of Columbia permit it while others such as California outlaw the practice out of concerns over potential foreign meddling.
The Libra Association, a not-for-profit organization based in Switzerland, will have several layers of governance, the most powerful of which is a council, on which each member organization will have a representative.
“The council delegates many of its executive powers to the association’s management but retains authority to override delegated decisions and keep key decisions to itself, with the most important ones requiring a greater than two-thirds supermajority,” according to another supplementary document released by Facebook. As mentioned, to become a member, the initial investors must put in at least $10 million. In addition, a business must meet at least one of several elite criteria, such as being on a list like the Fortune 500.
For every $10 million invested, a member gets one vote, subject to a cap of 1 percent of total votes, in order to prevent the concentration of power in any single entity. However, the financial reward remains proportional to the amount invested no matter how much.
The council will be responsible for standard governance matters, such as appointing an executive team for the association, led by a managing director, and a board of directors to oversee them; setting the top executive’s compensation; and managing the currency’s underlying reserves.
But the body will also have final say over technical questions, such as activating new features to the protocol and resolving situations “where compromised validator nodes have resulted in many signed versions of the Libra Blockchain,” according to the document.
While Facebook’s newly created Calibra subsidiary will be a consortium member with a council seat, the social network stressed it won’t be in charge for long. “Once the Libra network launches, Facebook, and its affiliates, will have the same commitments, privileges, and financial obligations as any other Founding Member,” the company said. “As one member among many, Facebook’s role in governance of the association will be equal to that of its peers.”
The exact components of the basket of assets securing Libra are to be determined. But broadly, it will be “structured with capital preservation and liquidity in mind,” according to the social media giant. Importantly, while the coin has been described in early press coverage as a stablecoin, Facebook noted that “from the point of view of any specific currency, there will be fluctuations in the value of Libra.”
“The makeup of the reserve is designed to mitigate the likelihood and severity of these fluctuations, particularly in the negative direction (i.e., even in economic crises).” In this way, Libra will function more like a currency board such as Hong Kong’s rather than a central bank. The collateral will consist of “bank deposits and government securities in currencies from stable and reputable central banks,” according to Facebook. The latter will be limited to “debt from stable governments that are unlikely to experience high inflation.”
To make sure it can easily raise cash by selling this paper, it will all be “short-dated securities issued by these governments that are all traded in liquid markets.” While the composition of the basket may change over time, Facebook said, the currency will always be fully backed, discouraging “runs on the bank” that can happen with fractional reserve institutions.
To comply with anti-money-laundering regulations that require traceability of funds, transactions on the Libra blockchain will be unencrypted, “like many other blockchains, so it is possible for third parties to do analysis to detect and penalize fraud,” Facebook said. In other words, it appears that there will be no use of cryptographic mechanisms such as zero-knowledge proofs, used to obscure transaction details in privacy-focused coins such as zcash.
If that raises privacy concerns (particularly given Facebook’s own reputation with user data), the company is offering similar assurances to those Satoshi Nakamoto gave in the 2008 bitcoin white paper.
It’s important to realize that Facebook is actually launching two cryptocurrencies: the one everyone’s talking about (Libra) and the one available only to Facebook and its corporate partners (the Libra investment token).
The former will be backed by a basket of fiat currencies and cash equivalents, which means that for every dollar of Libra in existence, there will be (in theory) a “dollar” worth of real-world assets which that token may be exchanged for under certain conditions.
As a normal user, you’d get $100 worth of Libra by spending $100. Your Libra can (again, in theory) be used across a variety of platforms or sent to an approved friend.
The Libra Association (a Swiss not-for-profit) puts your $100 into a variety f low-risk, short-term investments like U.S. Treasury bills. Those funds are controlled and spent by the Libra Association. According to the white paper, funds are used first to fund the operation of the network with the remainder being divided among the Libra Investment Token holders according to their holdings, with policies determined by the association.
The association itself is made up of holders of the Libra investment token who invested a minimum of $10 million, as well as “special impact groups” selected by the association to have a vote but who don’t have to buy the investment token.
From the white paper:
“How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions. Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size.”
Early investors are primarily large technology and VC companies, for whom $10 million isn’t actually a huge investment. The big numbers come into play when you look at what success, big or small, would look like for the investors, at which point suddenly the project makes sense.
Consumers, who will decide ultimately whether or not Libra is a flop, there was only a slightly underwhelming hint of what it might actually be used for: A picture of someone sending money to someone else via a smartphone.
Even setting aside the various risks thrown up by the Libra white paper (financial stability, user privacy, and whether it could cope with hundreds of millions of daily transactions), you have to ask why it might be a compelling product. The service described by Facebook, namely sending money “as you might send a text message,” is already offered by plenty of other companies such as Alphabet Inc.’s Google, Apple Cash, PayPal Holdings Inc.’s Venmo and Circle, a peer-to-peer payments provider that lets you transfer traditional fiat currencies.
Indeed, Facebook itself lets you send cash through its Messaging app. The company even had its own virtual currency before, called Credits, for the purchasing of content from within apps. It didn’t take off.
Sweden, for example, is on the road to becoming cashless as soon as 2023. The local mobile payments service Swish was used by about 60 percent of Swedes in 2018, according to a Riksbank survey. It has more than 6.7 million users in the country.
Facebook plans to lead the Libra consortium for the rest of 2019, and it will be at least five years before the blockchain technology that supports the tokens is completely decentralized. The ultimate dream of any crypto project worth its salt is that the digital currency doesn’t rely on a single point of control. And what about Facebook’s targeting of the “unbanked,” or those in the developing world struggling with volatile currencies? Bitcoin and its ilk promised to address the same problems, and have failed completely to help anyone other than speculators and criminals.
Facebook’s own patchy record on international payments should give pause too. WhatsApp Pay has struggled to gain regulatory acceptance in India, the world’s top remittance market, because its data storage practices didn’t meet national standards. Libra will have to answer a lot of similar questions about its financial structure and treatment of customer information.
Facebook has been on a mission over the past year to recapture the trust of its users. Libra certainly demands a lot of faith.
Another big question surrounding Libra is what kinds of consumer protections — if any — Facebook and its partners will build into the system. With bitcoin and other cryptocurrencies, there are often few protections.
Stories abound of people losing thousands or millions of dollars or more because they can't remember the passcode to their cryptocurrency wallet, or a hacker broke into their wallet or into the cryptocurrency exchange where it was stored. And typically, any transactions conducted using such digital currency are final once they happen. They can't be reversed because one party made a mistake or a customer didn't get what he or she ordered. Customers using the traditional banking system have many more protections. In the US, federal banking insurance covers deposits. Consumers generally have the right to contest charges or have transactions reversed if they didn't get what they've ordered or were defrauded. And they generally won't be held responsible if someone steals their credit card and uses it to make a bunch of purchases.
It's unclear what model Facebook and its partners will follow with Libra. But it's likely that many customers and, perhaps, regulators are going to expect the company to offer similar protections that banks and credit card issuers offer.
Libra is still in the early stages of development with lots of things left to do, with a targeted launch in early 2020. However, Libra is perhaps the most ambitious and hyped cryptocurrency in existence, drawing on the stature of Facebook as a unicorn, as well as the partnerships that have been developed by the Libra association. With plans to create a fully-functioning blockchain that is open-source, and facilitates smart contract technology using a native programming language, Libra seems to be moving in fundamentally the right direction.
More importantly, the adoption of cryptocurrency and blockchain technology by a giant technology firm has set the tone for mainstream adoption of this nascent technology, and the fact that a prominent list of institutions, all of which were previously openly reluctant to embrace cryptocurrencies, serve as members of the Libra association, is a huge testament to the changing tides of acceptance towards distributed ledger technologies. Saying that this is a huge deal is perhaps an understatement, but it is definitely a well-deserved victory for the industry and technology.