Facebook’s much anticipated “cryptocurrency”, called Libra coin (just as I suspected in my prior posts here and here) was unveiled this week, with some of the details released. These details are enlightening, but they do leave us with more questions to be answered.
There are so many aspects of Facebook’s Libra Coin to cover, from the technicals to the simple facts of who is involved and how it can be used, to the social impact, trust issues and power struggle of the world of finance.
Facebook’s Libra is not just a cryptocurrency, but an entire “decentralized” financial ecosystem. There is a new programming language within this ecosystem called “Move”.
How does Libra help Facebook? It does not provide a high amount of direct revenue, but it theoretically will solidify/deepen users integration with Facebook and associated platforms (Messenger, WhatsApp, Instagram) and may increase user base due to the user interface and integration with finance.
- What is Libra and The Libra Association?
- What is Calibra?
- Adoption & Benefits of Libra
- Facebook as a Private Central Bank
- Trusting Facebook, vs. Not Trusting Bitcoin
- Barriers to Facebook’s Libra Coin Adoption
- Markshire Crypto Conclusion on Facebook’s Libra Coin
What Is Libra and The Libra Association?
I will start off with a confusing piece of information. There are three main components to Libra. There is a “two-coin” structure and the Libra Association
(1) Libra Coin
(2) Libra Association
(3) Libra Investment Token
Libra coin (or simply “Libra“) is a collection of stable, developed world fiat currencies (i.e. USD, EUR, Yen, GBP, CHF [Swiss Franc]) as well as other low-risk assets/investments such as government bonds, and corporate bonds. This mix of national fiat currencies and low-risk bond type investments is amalgamated into a weighted average unit known as the Libra (or Libra Coin).
These fiat currencies and investments are held in the Libra Reserve in order to back/support the issued Libra tokens. The Libra Token is “fully backed by the Libra Reserve” (from Calibra.com) which indicates that every Libra Token has the equivalent of fiat and investments stored/locked up to support its claim to value.
The purpose of Libra is to create a global, stable, mobile, fast, secure currency that can be used by anyone, anywhere in the world with an internet connection. This gives potentially everyone in the world access to the same banking and finance privileges that most people in the developed Western World enjoy.
How do you access the Libra coin? Initially, through a cryptocurrency wallet called as “Calibra”, which is a fully owned subsidiary of Facebook (more on this below). Apparently, since the code is open source, any third party will be able to develop applications for use with the Libra coin/token.
The idea of Libra came from Facebook, but such as currency is too big of a responsibility for one large company, especially one like Facebook that has a history of anti-trust issues. In comes the Libra Association.
What is the Libra Association?
The Libra Association is an independent (from Facebook), not-for-profit membership organization, headquartered in Geneva Switzerland. The Libra Association is responsible for developing the Libra network/blockchain and maintain the Libra Reserve of fiat and low-risk investments.
The Libra Association also liaisons with the global community, governments, policy makers and regulatory authorities to help expand the Libra mission.
One of the main responsibilities of the Libra Association is to run the Libra network, which is a blockchain. However, this is a private blockchain. It is not open or permissionless because not just anyone can join it. Each member runs a validator node that verifies and monitors every transaction.
Currently, there are about 28 members in the Libra Association (including Facebook as one of the members). The goal is to reach 100 members by 2020 prior to the release of Libra Tokens.
While the Libra Association is a permissioned blockchain today, they say on their website that they are working towards becoming a permissionless blockchain in the future. But that is a vague statement with no timeline.
There has been much criticism and alarm of the Libra Coin, blockchain and Libra Association, some of which are listed below:
- Not a (true) cryptocurrency because it is not open/permissionless and there will be a lot of AML/KYC restrictions and therefore not censorship resistant. Read about what makes a true cryptocurrency.
- Regulatory concerns over international money transfers/remittance/payments.
- Is this a new currency or an ETF-like product that contains currencies and low-risk investment products?
- Will Facebook have access to all my private financial information?
Libra Investment Token
Libra investors (presumably the members of the Libra Association) receive Libra Investment Tokens, which entitles them to dividends paid out by the Libra Reserve. The interest is supposedly made from the income yield of low risk investment vehicles in the Libra Reserve. Owing to the anticipated large sums of money heading toward the Libra Reserve, even small percent returns will yield hundreds of millions or even billions in income.
The dividends are only paid out after accounting for operating expenses, technological and social investments in the ecosystem, engineering research grants to nonprofits and other organizations, etc.
What is Calibra?
Calibra is a subsidiary of Facebook. Calibra is a wallet application for the Libra coin that will be a separate standalone application but also integrated with Facebook Messenger and WhatsApp. Yes, can use Calibra without having Facebook/WhatsApp or a Messenger account.
Calibra Twitter Account can be found here.
Currently Calibra in intended for peer-to-peer/consumer (peer-to-business) operation and not for business to business. Over time Calibra plans to expand to offer point-of-sale system integration and other in-store payment options.
To sign up/get started with the Calibra Wallet Application you will need a government issued ID, which likely indicates that Calibra will be following AML/KYC laws. The website also stated that Calibra will use “Facebook and WhatsApp account information” to help verify identity and prevent fraud.
Calibra has emphasized their commitment to protecting user’s data, likely hoping to ameliorate users fears over Facebook’s antitrust issues. David Markus (former PayPal president), who is running Calibra for Facebook, stated that the digital wallet will be secure and separate from the rest of Facebook. The financial data will be separate from Facebook’s data collecting platform(s). You can find details in the file below:
The Calibra official website claims that you can use Calibra to send libra to anyone, anywhere in the world (providing they also have Calibra?) or use it to pay for everyday items such as coffee, groceries, public transit, gas, etc. The website also seems to state pretty clearly that you will only be able to use Libra and not your local fiat currency within the Calibra app, but that you can withdraw into your local fiat anytime you like.
Their site does say that transaction fees will be low-cost and transparent, especially for international transfers, which is counter to ideas/notions that it would be entirely free to use.
Adoption & Benefits of Libra
“Facebook’s cryptocurrency will be a powerful force for good in developing countries which is where Facebook intends to market the product.”Caitlin Long, “What Facebook’s Cryptocurrency Means”, Forbes
The integration of Libra coin will spell disaster for remittance companies such as Western Union as over 2 billion people will be able to send money globally, instantly, anytime, at no cost. However, this will be wonderful for the people of the developing world. Not just for remittances, but also by putting pressure on these governments not to devalue their national fiat currency, because their citizens now have alternatives (Libra, and possibly Bitcoin).
Most people worldwide are familiar with comparing exchange rates. The USD is the world reserve currency, therefore, in America, where everything is priced in USD, there is no need to reference exchange rates. However, that is only the case for 328 million people out of the world’s 7.53 billion. Particularly in the UK where the people use the GBP and frequently reference exchange rates with the EUR. Additionally, and in greater quantity, the people in developing nations are constantly referencing exchange rates as their local currencies fluctuate with the USD and occasionally enter hyperinflation. Using the Libra coin which will be largely stable against a basket of relatively “stable” fiat currency will not be a problem for the majority of the world where Libra coin is most likely to be used.
There are towns and villages in the world with very limited infrastructure and business, meaning that most people do not have (i) adequate access to banking services, or (ii) no access to banking services. Libra puts the bank in their pocket with integration with WhatsApp (over 1 billion users worldwide, highly popular outside of North America), Facebook Messenger, and Instagram. Yes, the exact same is possible with Bitcoin, Ethereum, XRP and other cryptocurrencies. The difference with Libra is that it integrates with applications that many people already use.
Easy to use. Facebook owns WhatsApp and Instagram. We all know that they are no strangers to excellent UX (user experience). They design quality platforms. There are millions of businesses that have operations on Facebook and Instagram. Imagine making purchases directly off of Facebook or Instagram instead of having to leave the platform to a company’s website or Amazon? Yes, Calibra will be able to operate independently but it will certainly be integrated into these platforms.
Facebook as a Private Central Bank
Technically Calibra is a separate company, but it is a subsidiary of Facebook, meaning that Facebook owns it. Libra will be taking a basket of stable international currencies and investing a portion into low-risk bonds, keeping in all in reserve while issuing out its Libra coin.
Forget money manager. Libra (Calibra/Facebook) will be the worlds largest, private, central bank. Let that sink in a moment. Facebook is issuing a non-national currency to billions of users in 2020.
As far as we know, there will be ~100 validators in the Libra association to verify and validate the private Libra ledger. However, it is still private, putting much trust behind Libra, and by extension, Facebook, the organizer and powerhouse behind the operation.
Current bank practices involve fractional reserve banking, meaning not all the fiat in reserve are actually there. The banks loan out more than they hold, virtually creating new money out of thin air. This leads to inflation of fiat currencies that contributes to the devaluation of a nation’s money. What happens if Libra is tempted to practice fractional reserve banking?
What happens when a pseudo-cryptocurrency based on a basket of inflated, depreciating fiat participates in the same fractional reserve banking? Disaster. Let’s hope that Libra is not tempted to do this.
Trusting Facebook vs Not Trusting Bitcoin
How Facebook is handling their trust issues? Facebook has 1% weight in decisions/consensus algorithm. Moreover, Facebook’s involvement is actually at arms length through their wholely owned subsidiary Calibra.
Additionally, there was no public keynote by Mark Zukerberg, who seems to have distanced himself from the project as he is often associated with anti-trust/Facebook’s bad record. Most of the media interviews regarding Facebook, Calibra and Libra have involved David Markus, the lead on Calibra.
We realize people don’t want their social data and financial data commingled. The reality is we’ll have plenty of wallets that will compete with us and many will not be in social, and if we want to successfully win people’s trust, we have to make sure the data will be separated.David Markus, Head of Calibra
Moreover, Mark Zukerberg weighed in explaining that the pholosophy behind Libra is that it is to be decentralized, run by many different organizations to make the system overall more fair. Anyone with an internet connection can access Libra with low costs/fees. The system is secured by cryptography which works to help keep your money safe.
Apparently, by default, Facebook will not import your contacts or any of your profile information into Calibra, unless you explicitly give it permission to do so. Neither will it share your transaction data back to Facebook, so it will not target you with ads, rank your News Feed, or otherwise earn Facebook money directly. In fact, you do not even need a Facebook or WhatsApp account to use Calibra or Libra.
However, the fact remains that we are still worried about our privacy. The Libra Reserve and/or the Calibra wallet would be a “trusted third party” – whereas Bitcoin has no trusted third party, there doesn’t need to be one. It is direct exchange on an open, readable blockchain ledger.
Barriers to Facebook’s Libra Coin Adoption
- Anti-Trust Issues
- Regulatory Issues
- Conflict Issues from Central Banks
- Government, Regulators and Other Organizations Call On Facebook To Stop Project Libra
There are the anti-trust issues that Facebook has been combating for the past few years now. Despite these trust issues, Facebook (Libra Association and Calibra) have been charging ahead and starting the project anyway, appearing to sort out problems as they arise.
There is a good chance that Libra will be banned in a number of countries. It’s no secret that Facebook and its platforms have been banned in a number of countries for years (i.e. China). Insert a (pseudo) non-national currency into the mix and Libra, Calibra will also be banned alongside Facebook, as threatening a country’s monetary system is a huge threat to a government’s power.
Below is a quote from David Markus attempting to alleviate fears of antitrust that the community rightfully has.
We believe that a public utility such as an internet of value shouldn’t be controlled by any company and I think you’d be hard pressed in modern business history to see a company that starts an initiative like this do so much to remove its influence over the very thing it just created.David Markus, Head of Calibra
The Libra Association/Libra Reserve would need regulations to develop this new pseudo-fiat-cryptocurrency stable coin, which would theoretically contend with the fiat in its holdings.
Additionally, Calibra, the wallet application, would need to be approved for AML/KYC protocols to prevent money laundering and fraud. They do claim to be instituting appropriate AML/KYC with users needing to give government-issued ID before being allowed to use Calibra.
The Libra Reserve and Calibra wallet would need to monitor and comply with regulation laws in about 200 countries to truly be worldwide. This is a huge barrier to overcome.
Conflict Issues from Central Banks
There may be conflict with big central banks that issue the fiat that will be held in the Libra Reserve, such as the Federal Reserve or European Central Bank. Since the Libra Association would be “bastardizing” their currencies into a basket weighted average mix. Whether or not this truly causes conflict is yet to be seen.
However, there will almost certainly be conflict between the Libra Reserve/Libra Association and smaller national central banks of fiat currencies not in the Libra Reserve basket. For example, it is unlikely that an Argentinian or Venezuelan or Madagascar national fiat will be incorporated into the Libra since they are highly unstable and frequently undergo hyperinflation. Their citizens would be able to leave their national fiat into Libra coin online, and not have to use their national fiat.
This would put immense pressure on developing nations to use more conservative and safer monetary policy and encourage them not to devalue their national fiat. However, if enough citizens depart the national fiat into Libra, that itself may be enough to degrade their national fiat. Hence, there may certainly be a conflict between developing nations central banks and the Libra Reserve.
Government, Regulators and Other Organizations Call On Facebook To Stop Project Libra
Regulators have called on Facebook to stop developing Libra. They have concerns for Facebook’s size, influence/power.
Facebook is continuing its unchecked expansion and extending its reach into the lives of its users.Maxine Waters, US House Financial Services Chair
Many European nations, as well as the United States, have stated concerns over Libra coin, Libra Association/Reserve and Calibra. They are calling for a halt to the cryptocurrency development and a halt to the launch in 2020. These include, but are not limited to, India, the USA, England, Australia, Russia, and many European nations.
World leaders and regulators want to inspect the Libra cryptocurrency, Calibra and Libra Association more closely before allowing such a powerful tool to be released, unchecked. In particular, they want to ensure appropriate regulatory checks are in place to avoid money laundering, fraud and terrorist financing.
Questions About Facebook’s Libra Coin
When will Libra officially launch? We are told in early 2020. With all the regulatory concerns that may be delayed.
Will Libra coin eventually become a true, open, permissionless, censorship-resistant cryptocurrency? Will it incorporate Bitcoin and other large true cryptocurrencies (Ethereum, XRP, Litecoin) into its Reserve basket?
Will there be some co-operation between Facebook and governments that absolves them of their antitrust issues? Facebook has a lot (and I mean a lot) of data on us already. With Facebook (Calibra) ultimately having overwatch of our finances, will the government want some of that data? Will Facebook use our data to bail them out?
Did Facebook speak under the table, unofficially, with governments and get some sort of pre-approval before venturing into this international global digital hybrid-fiat pseudo-cryptocurrency? No one really knows, but this is a huge undertaking to initiate with serious repercussions should they fail. With that reality, I would make a small bet that there was some kind of unofficial pre-approval by big governments under the table.
Resources For This Post
- What Facebook’s Cryptocurrency Means: 6 Predictions, Caitlin Long, Forbes June 2019
- Official Libra Website
- Official Calibra Website
- Tech Crunch Article on Facebook’s Libra Cryptocurrency
- Facebook’s Libra Crypto Coin: 5 Things We Know, and 5 We Don’t, Bloomberg new 22 June 2019.
- Halt Libra? US Lawmakers Call for Hearings on Facebook’s Crypto, Coindesk, 18 June 2019.
- Is Facebook’s Libra the Dollar’s Killer App? American Institute for Economic Research, Jeffrey Tucker, 15 June 2019.
Peter McCormack and Caitlin Long Discuss The Nature of Facebook Libra Coin and Why Libra is Good for Bitcoin
Ivan on Tech Discusses Facebook Libra Coin Technology
Bloomberg Discusses Facebook’s New Cryptocurrency, Libra, With David Markus
Facebook’s Digital Wallet Project (Calibra) Head (David Markus) Speaks with CNBC
Markshire Crypto Conclusion on Facebook’s Libra Coin
Acknowledging that Facebook is not in control of the Libra Cryptocurrency, we do know that they were central in creating it and that their Calibra app and easy integration into their platform will be a massive power boost to Facebook. Facebook (and its platforms) has well over 2 billion monthly active users, none of which are in China. If/When the Libra cryptocurrency launches it will instantly make the Libra Association the largest central bank, and Calibra the largest worldwide bank.
Conservatives fear big government, progressives and liberals fear big business, and freedom loving people fear what happens when big government and big business collude.Terry (unknown), re-quoted by Caitlin Long, Why Facebook’s Libra Coin is Good for Bitcoin.
We feared the big banks… now we have big business colluding with big banks.
If the topline question about Facebook and antitrust is about whether to break it up and spin-off the likes of WhatsApp and Instagram, while this global coin is the most invasive and dangerous form of surveillance they could have devised thus far, this will easily become the most dangerous antitrust case in history.
If it is launched and adopted worldwide, we’re bound to see Facebook as the top 10 biggest companies for the next 100 years and have complete ownership of the customer.Phil Chen, Decentralization Chief Officer, from HTC
David Markus replied to the above quote in an interview with CNBC inviting Phil Chen to read the documentation that was released from Libra and points out that Facebook/Calibra painstakingly took efforts to not be in control of Libra coin.
In the end, Libra is not a truly open cryptocurrency, not an open blockchain, not permissionless, not censorship-resistant. To be honest, it is more like an ETF of a basket of fiat currencies. While the Libra Reserve does claim that they will work towards becoming a truly open, permissionless and censorship-resistant cryptocurrency.
I think that overall, should Libra and Calibra successfully launch, it will be a very good thing for the developing world and banking the unbanked to bring billions of people living in poverty access to the world economy. It also gives our Western World Big Banks something to compete with to improve the speed, transparency and cost of banking.
By calling themselves a “cryptocurrency” the Calibra app and Libra coin will engage user interest in cryptocurrency. People will start using Libra coin. They will acclimatize to exchange rates. They will discover how easy and convenient Libra coin is, and how revolutionary it is for people in developing countries. The people will also become accustomed to non-national currencies.
Then two things will happen:
(1) The populous will start asking themselves “cryptocurrencies don’t seem that bad… what other cryptocurrencies are out there?” Then they will invariably encounter Bitcoin. Some will dismiss it, but some will learn the value proposition of Bitcoin and invest in Bitcoin.
(2) Over time, people will see Libra coin devalue against Bitcoin, and migrate towards it as a better store of value.
We witnessed something very similar in Venezuela. The Venezuelan national fiat currency was (and still is) undergoing hyperinflation. So their totalitarian government issued a national cryptocurrency, the “Petro”. Once Venezuelans started using the Petro, they became accustomed to cryptocurrency, liked it, learned more about cryptocurrency, and adopted Bitcoin as the better option.
Overall, I like the idea of the Libra coin, Libra Association/Reserve and Calibra. Facebook is obviously trying to do something good here and I think they deserve a chance at it. That is likely a very unpopular opinion, but there it is. At the very least, it should increase awareness of Bitcoin and other truly decentralized, open, permissionless, censorship-resistant and public blockchains.
Please feel free to drop a comment, question, or note for me. I love hearing from my readers