What is Libra?
On June 18, 2019, Facebook announced Libra. It is a virtual currency, or cryptocurrency, though some people don’t agree with that definition. We’ll get into why later.
In Facebook’s vision, it should become a global currency for billions of people, especially those in developing countries who have no access to banks or financial services. In other words, 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 on-board 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.
How will Libra 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 here’s a quick and rough explainer.
A blockchain is the infrastructure on which cryptocurrency payments take place. It is a digital, unchangeable record of all the payments ever happened 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.
So Libra is a cryptocurrency?
Yes, but also no. This is where the disagreements start. The Libra blockchain is not decentralised the way the Bitcoin is. With the Bitcoin blockchain, anyone can theoretically run a node, even if that’s expensive. In contrast, Libra’s nodes will be only run 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 on how transactions 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 mega-corporations. 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.
Why does Libra need to be centralised?
Because of scale and speed.
Decentralisation makes the system less vulnerable to hacks or shutdowns, 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 “permissioned” blockchain – to a totally decentralised – or “permissionless” blockchain. Of course, there is no guarantee that will ever happen.
Bitcoin is really volatile, isn’t that a problem?
Absolutely. Over the course of 2017, the price of Bitcoin swung between £920 and $20,000. 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 and 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. But we don’t know which businesses will accept Libra yet, thought it’s probable that both Uber and Ebay will because they are both members of the Libra Association.
What do central banks think about Libra?
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.
And, of course, 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.
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