The world, as we know, revolves around the notion of physical or digital currencies used for millions of daily transactions across the globe. The world’s dominating currency, Dollar, might be seeing rivals in the wake of cryptocurrencies.
Similar to the petrodollar, the oil dominating industries are witnessing the exhaustion of oil fields while tech companies are jumping on the cryptocurrency bandwagon. Facebook’s Libra is not new to the crypto world but promises stability and global acceptance.
What is Libra?
Libra is a virtual currency or a cryptocurrency. In Facebook’s vision, Libra should become a global currency for billions of people, especially those in developing countries who have no access to banks or financial services. The idea is that Libra would be like digital money, which you can transfer to other people or simply use to buy goods online.
Who will Govern Libra?
Libra will be governed by the Libra Association, a Swiss group that initially included 28 members, with the prominent members being Facebook subsidiary Calibra, Uber, PayPal, MasterCard, Visa, and Spotify, to name a few.
just before the first Libra meeting on October 14, 2019, MasterCard, Booking Holdings, eBay, Stripe, PayPal, and Visa along with a few others have left the group.
How will Libra Work?
Libra’s white paper – a sort of technical manifesto – says that it will run on a ‘blockchain.’ Again, this is a controversial definition in some quarters. So, a quick, rough explainer: a blockchain is an infrastructure on which cryptocurrency payments take place. It is a digital, unchangeable record of all the payments ever made in a given cryptocurrency.
Here’s a crucial thing: a blockchain is decentralized. The transactions are processed and verified by a swamp of independent computers rather than by a single referee or central bank. Those independent computers are called nodes.
That decentralized 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, however, is, of course, the one underpinning Bitcoin, the original cryptocurrency. But, the Libra blockchain has not decentralized the way Bitcoin is. On the Bitcoin blockchain, anyone can theoretically run a node, even if it’s expensive.
How Libra Works on a Blockchain
In contrast, Libra’s nodes will be run only from the servers of Libra Association’s members – that is Facebook, Uber, and others. Now, none of these companies will individually have much of a say in how payments are processed and verified. It will be a collective effort – which is good, according to the blockchain ethos.
Still, the most libertarian cryptocurrency fans resent that a club of mega-corporations will control Libra. They also fear that the Libra Association could buckle under pressure if, for instance, a government orders it to block a transaction.
Facebook’s official reason for this make-up is that a decentralized model would not be powerful or fast enough to deliver the ‘global financial infrastructure’ Libra aspires to become. The issue of this scale is one of the main challenges confronting decentralized cryptocurrencies.
Is Decentralization the Future?
Decentralization makes the system less vulnerable to hacks or shutdowns. Still, it takes time: the Bitcoin blockchain, for instance, can only process about seven payments per second. By comparison, the centralized Visa payment method 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 a ‘permissioned’ blockchain – to a totally decentralized – or ‘permissionless’ blockchain. Of course, there is no guarantee that will ever happen.
Here is another issue Facebook says it is tackling. One big problem with cryptocurrencies is that their value can be quite fickle. Over the course of 2017, the price of Bitcoin swung between $900 and $20,000. That is spectacular news if you’re a speculator, but it’s not ideal if you want to launch a global payment network of Facebook’s 2.4 billion users.
Governments And Central Banks Race To Create A Public Stablecoin https://t.co/VOFQeZNkYQ #crypto #cryptocurrency #regulation #regulatory #cryptoregulation #RegTech #FinTech
Facebook’s upcoming stablecoin named Libra has been making headlines for the past year, after it was… pic.twitter.com/uqPX1jpXWW
— RegInnovate (@reginnovate) November 4, 2019
This is precisely why Libra has been designed as a so-called ‘stable coin.’ What this means is that 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, or 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, the cash would be added to the Libra Association’s reserves. Calibra would launch a Libra wallet allowing users to exchange Libra through Messenger, WhatsApp, or any other app for that matter.
Will Libra be accepted?
While it is unclear which businesses will accept Libra yet, it is anticipated that the cryptocurrency will take its time just like the beginning days of Bitcoin. Libra does not launch until 2020, but that does not mean that people are not already fretting about the whole affair.
Facebook has promised that it will not use payment data in order to target adverts – but people do not trust Facebook, for notorious reasons. Regulators are already frowning upon the move. France has underlined that only governments can mint money, and has warned against Libra’s potentially nefarious uses.
Recently, Libra released by Facebook was boycotted by five EU countries. Previously, VISA and MasterCard also withdrawn from it. In Internet era, competition and concerns about traditional currencies and digital currencies are increasing. #arin2610https://t.co/TuvnOv9KDh
— Tangkai Yang (@12Citizens) November 3, 2019
The Bank of England said that Libra would have to meet very high financial standards to be allowed in the United Kingdom. Lawmakers in the U.S. and the EU are concerned about Facebook’s expansion to the financial domain. It seems that Libra will have to get around tough firewalls before it is launched.
For a company that is increasingly depicted as on oversized, unaccountable, arrogant monopoly, maybe launching a cryptocurrency is the best way to avoid scrutiny? The question arises, can the social media giant be trusted with this great power given its track record of mischievousness?
Facebook Libra is a series of blogs that will focus on what is Libra, how will Libra’s launch affect the crypto market, can the social media giant be trusted, Cambridge Analytica fiasco, involvement in the U.S. Elections, Pre and Post GDPR era and much more.
References: Wired, The Guardian, and TechCrunch.