Facebook, the social media goliath that has been in hot water recently over their privacy and data sharing practices, is planning on unveiling their own cryptocurrency, Libra, in the next few months. However, this announcement has been met with criticism, suspicion and all manner of speculation from the crypto industry. Before we take a closer look at Facebook’s cryptocurrency Libra, let’s take a look back at the idealistic vision that has made cryptocurrency the worldwide phenomenon it is today.
The Current Crypto Market
Way back in 2008 the pseudonymous creator of Bitcoin, Satoshi Nakamoto, released his whitepaper outlining the first cryptocurrency and how it would function. His dream of a truly peer-to-peer, online cash system was innovative, and it sparked the fire that has become the crypto revolution. While the technical aspects of his work were of the utmost importance—the idea of a distributed ledger that allows for a trustless payment system—there is a philosophical aspect to his work that was just as groundbreaking.
Satoshi argued that a truly trustless interaction was possible between two parties only through a cryptographic means and that this cryptographic method could remove the need for a trusted third party altogether. His dream was a system of payment completely free from the control and restrictions imposed by third parties—in this case, large scale financial institutions like banks and credit card companies. Eventually, however, the goal was a currency completely free from the need of governments and means of outside oversight beyond the technical, cryptographic methods of creation and control.
The technology behind this idea is the blockchain. The blockchain is a growing list of records, with each record, or “block”, containing the cryptographic hash of the previous block, a timestamp, and the transaction data. This chain is distributed across a vast network of computers that work together to create an immutable ledger, eliminating the need for any third party to validate transactions.
This idea of a means of monetary transaction free from the imposition of arbitrary rules, borders, and taxation is what started the crypto revolution, and now that it has gained popularity it seems that all of the leaders in tech are jumping on board. However, it is yet to be seen if they share the same idealistic standpoint that Satoshi held so dear, or if they are just trying to cash in, throwing the philosophy to the wayside in order to capitalize on new technology.
What is Libra?
Libra is a crypto token by Facebook that aims to provide unbanked individuals—according to Libra, migrant workers and others in developing nations without access to traditional banks—a means of interacting with online economies and achieve a purchasing power that has previously been outside their grasp. This is an interesting concept considering the fact that while large populations of people in developing nations don’t have bank accounts, practically everyone has a smartphone: one estimate states there are 2.14 billion active Facebook users.
While Libra bills itself as a cryptocurrency it strays from the path of other crypto tokens in some significant ways. Libra has been designed as a stable coin in order to curb the volatility that plagues traditional cryptocurrencies, however, it is not tied to a single fiat currency like some other stable coins that have been developed. Instead, Libra will be pegged to a basket of different currencies and assets including USD, EUR as well as a number of government bonds. Libra’s developers hope that this will help it to move away from the speculative nature of coins like BTC and function more like a traditional currency useful for everyday transactions.
Libra’s blockchain also differs from other technical arrangements in that it doesn’t have open access for nodes on the network functioning as validators. Instead, permissioned access is required to participate, so currently, only the 28 members of the Libra association would act as validators.
What Makes Libra Unique?
The Libra network sets itself apart from traditional blockchain tech in that there are no “blocks”. Blockchains function using a distributed ledger that clusters data into packets that are then secured across all nodes in the network. The Libra blockchain does not use this data cluster organization, instead opting for a single data structure that records all transactions over time.
This is a distinction that Facebook’s cryptocurrency subtly hints at in its use of language. Regarding their “Blockchain” in comparison to when they reference blockchain technology: ‘b’ is capitalized suggesting it is something specific, unique and proprietary. Some in the crypto community see this as indicative that Libra is aware of its true nature as some kind of new hybrid system: according to SilaMoney CTO Alexander Lipton, “Libra is NOT a blockchain in the traditional sense, since it is lacking most, if not all necessary attributes; it has to be open, public, censorship-resistant, immutable, neutral etc. which Libra is not, based on the whitepaper.”
Other Important Features
Despite these technical differences, Libra has a lot going for it. It will utilize a byzantine fault tolerance (BFT) consensus method to expedite transactions, leading to faster transaction times thanks to lower verification thresholds. It is estimated that the transaction rates will be close to 1000TPS, much faster than any other coin on the market but still nowhere near the speed of credit card transactions. This model also helps secure the network, making attacks by bad-faith actors more difficult to execute and strengthening the system as a whole.
The creation of a subset of Libra, called Calibra, will function as a wallet for Libra tokens, but there will also be interoperability across several other wallets. The creation of this distinct wallet is an attempt at assuring users that their Libra data will not be used by Facebook for any kind of marketing. It is also worth noting that eventually smart contract capabilities will be integrated into Libra, allowing for more complex options like escrow and other more advanced payment operations.
Why Did Facebook Call It Libra?
Libra is Facebook founder Mark Zuckerberg’s foray into the world of cryptocurrency and it has gained the attention of everyone from crypto insiders and business professionals to top officials in the US and European governments. Even U.S. President Trump has put his two cents in on this hot topic.
But why is it called “Libra”?
This is an interesting question that seems to refer to some of the sordid history of Zuckerberg and goes back to the creation of Facebook. Back in 2004, the Winklevoss twins sued Zuckerberg claiming he stole the idea for Facebook from them; they eventually settled for $65 million and went on to invest $11 million into Bitcoin.
Fast forward 10 years and the Winklevoss twins have started their own crypto project called Gemini. Now Zuckerberg has created his own crypto-based project and has called it Libra, another Zodiac sign. Coincidence? Not likely. In fact, some make the argument—and it is a reasonable one—that Zuckerberg is trolling the twins with the hopes of out-doing them again.
But what is there in a name…right?
Companies Backing The Project
Facebook will not be alone in this intriguing new endeavor. Libra will be controlled by the independent, Switzerland-based Libra Association. This group is made up of some of the biggest names in both the financial world as well as powerhouses in the tech industry. In order to gain membership, a one-time donation of $10 million USD is required from each participant. These funds are put towards the reserve backing the currency, continuing to develop the technology as well as setting up the nodes on the network to facilitate the launch of Libra.
So far Libra has assembled quite the team of backers: Uber, PayPal, Vodafone, and eBay have all joined the team and contributed their shares, while on the financial side Visa and Mastercard have also joined, bringing two giants of cashless transactions into the mix. Along with these powerhouses, the venture capital firm Andreesen Horowitz has thrown their hat in the ring and joined the Libra Association. According to Libra, this group of members will eventually grow to 100.
It seems that this large, diverse group of actors serves several purposes. Beyond raising capital it has been suggested that spreading the trust across many different entities will lessen the likelihood of a consolidation of power: something that has been a real concern considering Facebook’s sketchy track record regarding the privacy and information rights of its’ users.
Libra’s Regulation Problems
While all of this is very interesting there are a number of issues that need to be addressed. One issue with Libra that some in the crypto industry have pointed out is that it seems that it is not truly decentralized. The system runs on a “permissioned” format, meaning that only a small group of actors function as validators. Only members of the Libra Association are involved in the process of coin creation, creating a landscape that doesn’t look very decentralized at all.
While there is discussion of expanding this group in the future the requirements to join are substantial: to qualify a group must have more than $1 billion USD in market value and reach more than 20 million people per year multi-nationally. These thresholds essentially price out any kind of small business or private citizens besides the super-rich industry elite.
There are also issues with regulation and privacy that must be addressed. There are questions on whether all transactions that take place using Libra will be considered private information, or if in fact, it will function like Twitter, where all users can view the transactions of all other users. This would be similar to Venmo, which has become a topic of conversation in financial privacy circles.
This differs from the privacy protocols that traditional banks use. Transaction records are not made public, providing a layer of customer privacy. However, on another level, these banks sacrifice privacy for the sake of combating financial crime. Through Know Your Customer and Anti-Money Laundering laws banks must provide government agencies with certain financial information in order to assess the likelihood that some customers are committing crimes. These laws differ vastly from country to country, and considering the international intentions of Libra, these regulations would presumably be of major importance. We will have to wait to see how they intend to navigate this complicated issue.
Facebook’s Cryptocurrency And Taxes
There are also some that are concerned with the role of the IRS when dealing with Libra. If Libra is a cryptocurrency, then it would be classified as a commodity like gold or silver. This can have tax implications, especially regarding volatility. While Libra is supposed to limit volatility it cannot completely eliminate it and this can cause problems. If I am paid in Libra and the value goes up while my money is being transferred and I end up making an extra $50 this money would be taxable. This could limit the appeal of Libra for everyday transactions.
Another issue that Libra will have to address, in the United States at least, is the legal necessity to keep banks and commerce separate. Matt Stoller from the Open Markets Institute summarizes the problem succinctly:
“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. As one travel agent told Congress in 1970 when opposing the right of banks to enter his business, “Any time I deposited checks from my customers,” he said, “I was providing the banks with the names of my best clients.”
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.”
Given Facebook’s sketchy history regarding user privacy and data violations, this type of backroom dealing is a real concern. We shouldn’t forget Zuckerburg’s less than favorable opinion of his loyal customers.
These concerns have caught the attention of legislators and they are not amused. Representative Maxine Waters, Chairwoman of the House Finance Committee, has called for Facebook to halt the development of Libra until Congress can fully examine the details of the project. During the first Congressional hearing there was a strong feeling of distrust of the social media giant: “I have serious concerns with Facebook's plans,” said Waters, adding that “if Facebook's plans come to fruition, the company and its partners will wield immense economic power that could destabilize currencies and governments.”
There also has been a bill proposed in the US House of Representatives that would fine Libra $1 million per day. This is an interesting development and a sign that the US government is serious in its dealings with Libra. However, given the amount of money consolidated in the Libra Association and the potential profits to be made in the implementation of the network, Libra may fly in the face of authority and simply pay the fine and continue with business as usual.
Will Libra Succeed?
The development of Libra is nothing if not interesting. It seemed only a matter of time before the biggest names in technology and finance climbed on board the crypto-train and now the time is here. Not only with Facebook and Libra, but now it seems Amazon may be developing its own blockchain-based token.
Despite an announced delay of Libra’s launch until 2021, it seems Libra has also forced the US and other governments to more thoroughly examine cryptocurrencies and their role in the future of global finance and politics. No longer can policymakers sweep crypto to the side as some kind of nerdy past time; it is now painfully clear to lawmakers that crypto is here to stay, and some sort of rules and guidelines must be developed to deal with these technologies in order to curb some of the less noble traits of humans. While this sort of regulation may not align with the altruistic origins of the crypto, it may be necessary to prevent a technological dystopia. So, will Libra succeed? That depends if it ever comes to fruition. The recent launch of the Libra bug bounty program is a good sign, however.
Stay up-to-date with the crypto market
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