Libra Demystified

Facebook is launching its cryptocurrency – the Libra. And China has announced elections. Sounds incongruous? When a corporation known as the embodiment of control and secrecy adopts a platform whose raison d’être is decentralisation and anonymity, well, that is the very definition of incongruous.

The world is excited and agog with speculation because Facebook  (along with its other platforms WhatsApp and Instagram) has over 2.3 billion internet users and over 1.6 billion daily logins, more than all daily logins into all bank accounts worldwide. If suddenly these users get access to digital wallets to use the Libra for peer to peer and merchant payments, cryptocurrency adoption rates would go through the roof and a decade’s wait for critical mass would suddenly be over.

Facebook would get access to the massive payments market (which is the largest segment among all financials services), and can couple it with its users’ credit profiles derived from their social data. The possibility is enough to scare the daylights out of banks and several big fintech players in the world.

So the trillion-dollar question is that will Libra be the game-changer everyone is anticipating? I think not, and for more than one reason.

A Whitepaper that Skims the Surface

Like most other crypto whitepapers, the Libra whitepaper has a lot of data copied from different avatars without having all its aspects worked out in detail. A lot of stuff in it is generic blockchain wisdom from Bitcoin, Ethereum, and the likes of several other previously published whitepapers. On the right side, it’s not just a pure retail ICO fundraising plan, though it does ask its members to buy $10m worth of Libras and bear $250,000 per member per year in expenses. But there are several loopholes.

  • The historical data, which can become enormous, may be neglected for validation of subsequent transactions, which defeats the purpose of a true blockchain.
  • There are no details of how regulatory challenges will be addressed, and while there is lip-service towards decentralization, there is no concrete plan to decentralize it away from its large paying members.
  • The whitepaper hints that proof-of-stake is the right validation mechanism, but doesn’t spell out how.
  • And the governance model is massively short on details.

An Antithesis of the Idea of Bitcoin and Blockchain

Bitcoin was invented as an alternative to the existing financial system after its catastrophic meltdown in 2008. It is truly decentralized, and one of the best things Satoshi that did was to remain anonymous. There is no central point of failure in Bitcoin, no dependence on any one person, any one node, any one company, any one CEO, any one nation, any one leader or any one consortium.

Libra fails to measure up to these requirements. It is permissioned, which means Facebook and other firms will be validating all the transactions. Then why call it a crypto-currency at all? Conceptually, there is not much difference between the Libra and airline frequent flyer miles, or other loyalty points programs of hotels, etc. that are accepted within and between consortiums of merchants. As a stable coin, it is just a layer of a payment coin on top of existing fiat currencies. It does not get away from fiat currencies, as was intended by Bitcoin.

The Financial Inclusion Objective

Opening bank accounts for the unbanked population is noble but unprofitable, and very often impractical due to lack of infrastructure in rural and remote areas, and can never be an online-only operation, especially in emerging countries. Libra does not have an equivalent physical mode for operations, so it will fail this test. As far as making financial payments as easy as sending a text message, this objective has already been achieved in the vast majority of developing and developed countries, and anybody reading this blog is likely to be aware of them.

Regulatory Challenges

It is true that with the penetration of the internet, Facebook is likely to have more users than any other country, or all the banks in the world combined.

But financial services is a highly regulated business — from KYC to regular reporting, to avoidance of money laundering — every financial institution has to undergo ever-increasing local compliances. So does Libra intend circumventing regulations in each country?

As a recent example, Facebook has been unable to launch its payments within WhatsApp in India, due to the local regulatory requirement of localising data within India.

In any case, regulators and governments will not want to lose control of their power and authority, and they would not allow Facebook and its consortium to circumvent regulation, make financial services as deregulated as internet, and be unable to run surveillance for money laundering, tax avoidance, etc. US, Europe, India and many other countries will come strongly against this initiative.

And, without China in the mix, Libra maybe adopted in Switzerland and Malta only.

In a best-case scenario, it may genuinely work in Africa. Governments can, in any case, create their own fiat digital tokens as legal tender for payment of taxes and along with Bitcoins, we may well have the BitDollars, BitPounds, BitEuros, BitYens and BitYuans.

Shared Beneficial Ownership

The Bitcoin Blockchain is owned by the public, striving to build a decentralized financial system where trust is built in a democratic fashion. While Bitcoin was initiated by smart hackers, it was scaled by the tech community and eventually became mainstream, because it seemed to help the whole world and everyone had an equal opportunity to build their businesses around it (like all miners, bitcoin exchanges, etc.). Wikipedia, Linux and several other open and crowd-sourced platforms have scaled similarly. The Libra is far from a decentralised, democratic, community-driven coin defeating its crypto purpose.

Consortium Challenges

Several banks and other firms have attempted blockchain consortium initiatives before. For example, R3 was a similar initiative by several firms signing up for a combined blockchain network, only to realise a few years down the line that they need not do it on blockchain at all since they had no use for its decentralisation benefits. Libra may have obtained some big names as members, but they are likely to be just observers who will distance themselves in case the project fails to live up to its promises in light of the challenges highlighted here and those yet unforeseen. To been seen as independent, Facebook has also not used their branding anywhere in Libra until now. It will help them distance themselves quietly later. Some consortium members have already tried using blockchain (example Masterchain by Mastercard) and not succeeded.

Independent Mining Achieves Trust

Blockchain does not create trust inherently. Several nodes independently validating all transactions for an incentive help build trust in a blockchain. If the Blockchain application did not have enough independent miners, the Bitcoin transactions would not have been trustworthy. Libra will face an uphill task in this area to attract independent miners. Facebook has already had several trust and privacy issues that it had not responded to seriously. Remember it denied swaying voters in US election in 2016, only to admit it later once the Cambridge Analytica whistle-blower scandal erupted in 2018. But for that Facebook’s role would never have become public and more elections would have been unknowingly “swayed”. A single person controls 60% of its votes. Besides, backed by research and facebook’s team admissions – its usage leads to dopamine release, making it addictive, and not constructive for the society.

 

What I have stated above is explained succinctly in my recent book Squaring the Blockchain Circle wherein I have — in the chapter entitled “Maslow’s Hammer” — highlighted how the blockchain hype has led to a large number of (mis)use cases across industries including Fintech. While explaining the origin, strengths and weaknesses of this path-breaking technology, I have also discussed the ways in which blockchain will have a significant impact on our lives.

Unfortunately, Facebook with its Libra coin won’t be one of them.

 

 

FAQs

 But the existing blockchain systems have yet to reach mainstream adoption. Can Libra change that?

  • Practically not. Cryptos adoption has not happened at mass scale because their valuation was way higher than their value in 2017. Now the re-alignment is happening and it will take a few years for cryptos to possibly come to platform where they can target mass adoption.

Why does Libra have Smart contracts?

  • After Bitcoin, the only real possible value creator has been Ethereum. Its smart contract angle and developer community is too relevant for Libra to ignore. Hence its attempt to incorporate a smart contract story and possibly copy Ethereum model.

Whats wrong with Libra’s statements around Faster payment networks? “We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world”

  • Nothing wrong with it. But Bitcoin already achieves that. Its volatility and mining energy issues can and should be addressed in its subsequent version, not by a centralised internet company that nobody ought to trust.

What is the challenge with Libra statement “We believe that we all have a responsibility to help advance financial inclusion, support ethical actors, and continuously uphold the integrity of the ecosystem”

  • Good to hear about responsibility from Libra / FB. So is this really a pre-committed non facebook monopoly system only to help financial inclusion? Can facebook confirm they will not derive any data, any networks effect, direct or indirect platform addiction, and revenues from this?

The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.”

  • BTC achieved that since 2009. What’s new here in 2019?

That means anyone with Libra has a high degree of assurance they can convert their digital currency into local fiat currency based on an exchange rate, just like exchanging one currency for another when traveling.

  • Not good enough. High degree of assurance to use my own money???

If Facebook disrupts payments, why will MasterCard and Paypal support it?

  • Most likely they wont. They are in it to learn and adapt as needed, not to make Facebook the payments unicorn.

The association is the only party able to create (mint) and destroy (burn) Libra?

  • So not decentralized? FB maybe able to arm twist anyone to anything, if this platform works.

 

 

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