Rumors that Facebook is developing a blockchain and its own cryptocurrency Libra began in 2018, but only in mid-June 2019 there was the official presentation of the project. It was about the launch of “global currency and financial infrastructure” for 1.7 billion people in those countries where banking services are not sufficiently represented.
From the very beginning, the attitude towards the company’s plans was ambiguous. For example, governments, banks and regulators have expressed fears that Libra will negatively affect the traditional financial system. Conversely, some crypto enthusiasts thought that the new digital asset would stimulate the development of the crypto segment and have a positive impact on the economy.
However, let’s take it in order: first, let’s look at the most important aspects of the Libra project; and then — why and how Facebook’s plans have changed.
What is Libra?
Libra is an ambitious project of Facebook, Inc. on the basis of blockchain technology to create a digital analogue of the payment system mainly in those countries where people have difficulties with banking services.
According to the plan, about 2 billion users will become active clients of the online transfer platform. At the same time, the company’s mobile networks, such as WhatsApp, Messenger and Instagram, will provide convenient access to domestic and transnational transactions around the world. In the official document, Libra is presented as a “global currency and financial infrastructure that empowers billions of people”.
The project originally had six main components:
- Safe, scalable and reliable blockchain;
- Stablecoin, backed up by a reserve of assets;
- Calibra wallet;
- Independent Libra Association;
- LibraBFT Consensus Algorithm;
- New programming language Move for execution of transactions and smart-contracts.
Later, Facebook made adjustments to the project due to pressure from regulators and authorities. In other words, Libra is no longer considered a single currency for all global transactions, but only one of the digital payment methods, in addition to which will also include, for example, the U.S. dollar and the euro.
The history of Libra
Facebook is one of the three corporations that dominate the US online economy. Thus, $2 out of $3 spent on digital advertising in the country goes to Facebook and two other IT giants — Google and Amazon.
For a corporation aimed at profit, it is natural to look for ways to further its growth. And it is the project of the global analogue of payments well solves this problem. In any case, analysts predict that Libra’s cryptocurrency may become a huge source of income for the social network.
Tom Lee, an analyst at Fundstrat Global Advisors:
“One thing to keep in mind is that Facebook’s annual revenue per user is about $50, but maybe a little more. The average bank generates about $1000 per user, so Facebook has 20 times the growth potential compared to banks in case the company starts providing banking services. That’s why I understand why banks are not really excited about this (project).”
Facebook’s “own crypto” was first talked about in May 2018, when the company began to show a keen interest in blockchain technology. It confirmed the information and the active hiring of blockchain specialists. However, at that time it was only about payments within the network. And finally, on May 17, 2019, Reuters published an announcement about the registration in Switzerland of Libra Networks, a financial company “specializing in blockchain, payments, data analysis and investment”. A month later, on June 18, Facebook officially presented Project Libra.
On his page that day, Mark Zuckerberg wrote that the company and 27 organizations have teamed up to create a new Libra cryptocurrency, which is scheduled for release in 2020. The idea is that Libra will provide an alternative to cash, credit cards and bank transfers. Interestingly, Zuckerberg has never once called Libra a cryptocurrency in his rather lengthy report.
The head of Project Libra is David Marcus, former president of electronic payment system PayPal. According to him, Project Libra will ensure competition in financial services.
Technical features of Libra blockchain
Libra cryptocurrency is built on the Libra blockchain, which provides “security, scalability and reliability” of operations. The Blockchain uses the Byzantine Fault Tolerant (BFT) consensus algorithm based on the VMware HotStuff platform. Although BFT is characterized by high performance and resistance to network failures, it should be noted that this is a fairly new protocol, which is not yet widespread and has not yet earned credibility.
Every Libra encryption transaction is recorded in a blockchain in a cryptographic authenticated database that acts as a publicly accessible online book. The platform handles 1000 transactions per second. For comparison, the Bitcoin network handles 7 transactions per second and the Ethereum Blockchain handles 15 transactions per second. A prerequisite for this speed is a 16 Tb SSD hard drive and a connection with a bandwidth of at least 40 Mbps.
During a transaction, each node performs a register-based calculation of all transactions. The Byzantine Fault Tolerance System (BFT) allows consensus if the legality of the transaction is confirmed by at least two-thirds nodes. Only then the transaction is executed and written in the blockchain.
Fundamental features of Libra cryptocurrency
The purpose of Libra is online payments. Being a stablecoin, the coin eliminates the wild volatility inherent in ordinary cryptocurrencies. According to the plan, the stability of the coin is provided by a basket of bank deposits and government currencies such as dollar (USD), euro (EUR), pound (GBP) and yen (JPY).
However, in February 2020, it became known that the Libra Association is exploring the possibility of changing the model of collateral by the dollar. In this way, the consortium hopes to dispel the negative attitude of authorities and regulators to Libra as a potential threat to the dollar.
Each time someone cashes Libra, the equivalent value of coins is minted and issued. If the money is withdrawn from the siege, the equivalent value in Libra is burned. This means that the coin value is always 100% secured by real reserve assets.
In the future, Libra will allow:
- To cash out an electronic amount of coins in the currency of the country where the user lives;
- Pay in coins for certain goods;
- Spend the cryptocurrency on online services, etc.
Also Project Libra plans to release Libra Investment Token for financing development programs and covering expenses. But here they will be available only for accredited investors. Previously, most experts were sure that in case of successful launch, Libra may become the most popular cryptocurrency in the world.
After the release of Libra, users will be able to purchase crypto assets via Calibra virtual wallet. For its development and management Facebook opened a subsidiary Calibra, registering it with the Financial Crimes Enforcement Network (FinCEN) — a network to combat financial crime.
As the company explains, this was done to ensure “a separation between social and financial data”. In other words, financial transactions must remain isolated from social networks. When first registered, the application on iOS or Android will offer the “Know Your Customer” (KYC) identification procedure. During the verification process, you will need to prove your identity with a photo document. Only then will operations with Libra be available. Your wallet will make it much easier to use your coin on Facebook.
With the help of Calibra it will be possible:
- Sending the cryptocurrency;
- Buying on Facebook, Instagram, WhatsApp and Messenger;
- Selecting a transaction recipient, the amount of coins to be sent, and add a description;
- Requesting an accelerated payment method using the QR code.
Numerous scandals related to Facebook’s inability to protect data and user privacy led to the fact that the IT corporation offered the Libra Association, not itself, to manage the project. If the company itself controlled the blockchain, very few would want to “jump” on the platform.
In this way, the social network accomplished several things at once:
- It solved the problem of distrust, which could prevent mass acceptance of Libra currency;
- Relieved itself of the burden of sole responsibility by distributing it among its members;
- Reduced the level of attention from regulators investigating privacy violations and anti-competitive behavior;
- Adopted a decentralised super-centralised type of management instead. However, Facebook refers to its platform as decentralized, implying that it is a priori provided by its members.
The Libra Association is registered in Switzerland. According to the regulations, it has 100 members, each member owns only 1% of the network and has 1 vote. Membership is paid, respectively, all members contribute at least $10 million to the organization’s fund. Despite strict requirements, the list of first members of the Association includes 28 largest companies. Such market leaders as Mastercard, PayPal, Stripe, Visa, Booking Holdings, eBay, Facebook / Calibra, Farfetch, Vodafone Group, Bison Trails, Coinbase, Andreessen Horowitz, Ribbit Capital and others announced their participation.
However, due to growing pressure on the project from the authorities and fear of spoiling relations with financial regulators, a number of companies soon left the consortium. Thus, in October 2019, six largest companies left — PayPal, Visa, Mastercard, Stripe, eBay, travel company Booking Holdings and online payment platform from Argentina Mercado Libre, and in January — payment service Vodafone. However, the companies said they did not rule out the possibility of restoring membership at a later stage.
Also in March this year, one of the unpleasant surprises for Facebook was the decision of a few remaining members to join an alliance with a rival stablecoin project known as Celo. Among them: Coinbase Ventures, Anchorage Mercy Corps, Andreessen Horowitz. Celo plans to use its service token to facilitate cross-border payments with a smartphone.
Regulators and government response
Not surprisingly, Facebook’s plans to launch a blockchain-based payment system have caused strong resentment among governments, banks and financial regulators. Not least is the scandalous reputation of a company that is too loosely managing its customer databases for marketing purposes.
There are known cases of leakage of users’ personal information due to backdoors in the social network security system. But the biggest fear of the authorities is caused by the growing influence of IT giant on the country’s economy.
For example, U.S. Senator Elizabeth Warren believes that today’s major technology monsters have too much power and are preventing a new generation of IT companies from taking their rightful place in the industry. Therefore, government officials have not yet decided to approve the new Facebook project, which will further increase the social and financial influence of the corporation.
And it’s not just the United States. The authorities of Great Britain, Canada, France, Germany, Italy, Japan, harshly criticize the project and make decisions that block the work of the platform on their territory. Thus, according to French Finance Minister Bruno Le Maire, the Libra coin cannot be considered as a replacement for fiat money. The minister offered the central banks of the G7 countries to carefully analyze the project. German MP Marcus Ferber has a similar position, who is sure that Facebook may well become a “shadow bank”.
Most central banks believe that Libra could undermine the sovereignty of their countries. They also suggest using cryptocurrency for money laundering. As for developing countries, which have huge economic difficulties, the Libra is still likely to become the accepted currency there. In that case, the consequences for the national economies of those countries cannot be predicted.
In the US, the attitude towards Libra is even more complicated. Congress and regulators continue to study all potential risks of the project. We can say that the country is tightening its financial policy. All questions about how the functioning of the payment system meets the country’s legislation and what impact it will have on the economy and the stability of the dollar. The authorities are interested and how the corporation is going to maintain confidentiality and protect user rights.
Mark Zuckerberg tries to solve problems: he answers questions from Congress, meets with central bank governors, constantly consults with the Treasury, Securities and Exchange Commission (SEC), Commodity Futures Trading Commission (CFTC). However, the results of the meetings and negotiations were not reported in detail.
One thing is clear — governments want to strictly control the Libra Association for fear of its private influence on monetary policy and the economy as a whole. The goals of the alliance and those of governments may not be the same.
Pressure from regulators and governments on the Libra project has not abated or even increased. Zuckerberg has no intention of backing down, but he understands very well that the plan needs to be adjusted. So, what changes have been made to the project?
In early March 2020 Facebook made an important decision to support other currencies, including those issued by central banks. Now Libra will not be the main payment instrument, but one of the ways to conduct transactions.
In addition, the company postponed to October 2020 the launch of its digital wallet Calibra, which previously was also given a central role in online payments. The wallet will support multiple currencies, not just Libra.
Surely such a decision, as well as accepted restrictions on the availability of the wallet, will slow down the deployment of Calibra. However, the basic storage and transfer functions will remain the same for both Facebook Messenger and WhatsApp.
In general, the project is aimed at the operation of the payment network rather than at the global cryptocurrency. So far, the company has not lost hope to launch a blockchain, but it is important for the company to fit into the framework. Time will show how successfully the regulatory problem is overcome.
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