Facebook’s Libra: What is all the Fuss About?

1. Introduction

On May 24, 2019, Facebook announced that it was going to launch a new cryptocurrency called “Libra” that is powered by the “Libra Blockchain.”[1] Instead of direct sponsorship, Facebook took a cue from the open source community and created a separate foundation, called the Libra Association.[2] In conjunction with the announcement, Facebook (through the foundation) published the obligatory white paper[3] as well as a developer’s guide[4] and a “testnet”[5] that can be used to test code using a for-purpose language called “Move.”[6]

The news spread throughout the world, generating wildly differing opinions, from the pessimistic[7] to the euphoric.[8] Some wonder if Libra might be a competitor to fundamental governmental functions.[9] Others thought Libra might be akin to a multi-headed Hydra striking fear in governments, who promptly conducted hearings,[10] made calls for regulation,[11] and filed bills[12] that caused the Libra Association to backtrack on its ambitions (somewhat) and giving rise to some rather plausible conspiracy theories.[13] Another group of critics, citing Facebook’s recent privacy scandals,[14] decried the privacy abuses made possible by the standardized identity required by Libra and what surveillance tools Libra would provide to corporations and totalitarian regimes.[15] The mainstream media, always in tune with government, claimed that terrorists might use Libra for nefarious purposes.[16] The technical community, on the other hand, was overjoyed with all the new (free and not-so-free) goodies bestowed upon them.[17]

Speculation went on for weeks. I deliberately let time pass before finishing this article (much to the consternation of my editors). So in the intervening period, have we found ourselves closer to a consensus? Not necessarily. Libra has been bent somewhat, but not broken. The mainstream media has moved on, which either means that the serious work of development has begun, or that the serious work of development will never begin. Time will tell.

2. What is Libra?

According to the Libra Foundation: 

“The Libra Blockchain is a decentralized, programmable database designed to support a low-volatility cryptocurrency that will have the ability to serve as an efficient medium of exchange for billions of people around the world. We present a proposal for the Libra protocol, which implements the Libra Blockchain and aims to create a financial infrastructure that can foster innovation, lower barriers to entry, and improve access to financial services. To validate the design of the Libra protocol, we have built an open-source prototype implementation — Libra Core — in anticipation of a global collaborative effort to advance this new ecosystem.”[18] ( emphasis supplied.) 

The Libra Association is made up of a set of corporations called partners.[19]

Figure 1: Some of the Libra Association Partners. Image from the Libra Association website.

The partners provide the financial and technical backing for the Libra Blockchain and its attendant infrastructure. In short, Libra is a cryptocurrency and smart contract platform that allows someone to buy or sell things with nearly zero transaction fees – worldwide, by leveraging the user-base of Facebook[20] and its subsidiaries such as WhatsApp.[21]  This puts Libra squarely in competition with credit card companies such as Visa and MasterCard -- which charge hefty usage fees on each transaction -- as well as with banks dealing predominantly with national currencies. Interestingly, some of those very same organizations are partners in the Libra Association. Facebook’s financial and technical backing has catapulted the Libra Blockchain to the forefront of programmable blockchains such as front-runner Ethereum.[22]

3. Why the Fuss?

Because of the size of Facebook’s international user-base (estimated at 2.4 billion[23]) and, because Facebook intends for Libra to be based on a variety of hard assets, users should feel confident in the integrity of this cryptocurrency. However, according to the Libra Association documents, the “money in the reserve will come from two sources: commitments by members and users of Libra.”[24] Moreover,

“The association will pay out incentives in Libra coin to Founding Members to encourage adoption by users, merchants, and developers. On the user side, for new Libra coins to be created, there must be an equivalent purchase of Libra for fiat and transfer of that fiat to the reserve. Hence, the reserve will grow as users’ demand for Libra increases. In short, on both the investor and user side, there is only one way to create more Libra — by purchasing more Libra for fiat and growing the reserve.”[25]

In other words, Libra is not going to be backed by hard assets. Rather, it will be backed by a basket of fiat currencies, and thus itself is an example of a derivative fiat currency.

Finances aside, another major issue with the Libra Blockchain is its design. The design of a blockchain belies indelibly the intent of its creators. Blockchains implement a “trust paradigm.”[26] Bitcoin[27] is an example of a publicly-available, decentralized, permission-less blockchain based on open source software.[28] In other words, anyone who has access to the Internet can download the software and run it on their own hardware (thereby becoming a “node” in that parlance) – without seeking someone’s permission. In addition, the Bitcoin protocol does not require knowing the identity of the individuals conducting transactions in Bitcoin.

In contrast to the Bitcoin example, “[t]he Libra protocol allows a set of replicas — referred to as validators — from different authorities to jointly maintain a database of programmable resources.”[29] The software underlying the Libra Blockchain may be free, but the implementation of that software requires permission from an authority, namely a Partner with the Libra Foundation. Furthermore, the identity of the individual using Libra will be absent from the transaction ledger, but will be ascertainable via the user’s account information with the respective Partner.[30] By restricting the number and location of the replicas (nodes), the Libra Association regulates the infrastructure underlying the Libra Blockchain, and thus regulates access to the Libra Blockchain only to individuals known via their accounts associated with the respective Libra Association Partners.

4. Conclusion

Libra is not a cryptocurrency in the way that most individuals would consider. Unlike Bitcoin, Libra will be centralized among a pre-selected set of Partners. Libra will not provide its users with anonymity, and the Libra Association has made it clear that it will cooperate with law enforcement agencies should the need arise to track the enablers of a transaction. “In simple terms, Libra is just a new brand for old products: Digital gift cards and pre-paid debit cards”[31] – with less anonymity, and the value of which will fluctuate differently from that of any particular national (fiat) currency. Perhaps the greatest compliment bestowed upon Libra, however, came from the current Governor of the Bank of England, Mr. Mark Carney, who suggested that a Libra-like currency (but not Libra itself) should be used to eliminate the dominance of the U.S. dollar as the world reserve currency.[32]

[1] Chan, S. (2019). Facebook plans to launch crypto-currency. [online] BBC News. Available at: https://www.bbc.com/news/business-48383460 [Accessed 13 Aug. 2019].

[2] See, https://libra.org/en-US/

[3] Libra White Paper: Blockchain, Association, Reserve, The Libra Association (2019), https://libra.org/en-US/white-paper/ (last visited Aug 15, 2019). See also, An Introduction to Libra. (2019). [ebook] Libra Association. Available at: https://libra.org/en-US/white-paper/ [Accessed 13 Aug. 2019].

[4] See, https://libra.org/en-US/open-source-developers/

[5] Id.

[6] Move: A Language With Programmable Resources, The Libra Association, https://developers.libra.org/docs/move-paper (last visited Aug 15, 2019).

[7] Timothy B. Lee, There's a big problem with Facebook's Libra cryptocurrency, Ars Technica (2019), https://arstechnica.com/tech-policy/2019/07/facebooks-half-baked-cryptocurrency-libra-explained/ (last visited Aug 15, 2019); Binoy Kampmark, Facebook, Funny Money and Libra, Counter Punch (2019), https://www.counterpunch.org/2019/07/04/facebook-funny-money-and-libra/ (last visited Aug 15, 2019); Adam Levitin, Libra and Financial Inclusion Credit Slips (2019), https://www.creditslips.org/creditslips/2019/07/libra-and-financial-inclusion.html (last visited Aug 15, 2019) (“Libra is a payment system and that is why it will likely fail.”)

[8] Huw van Steenis, To succeed, Libra must prove itself in the Indian market, Financial Times (2019), https://www.ft.com/content/5c77d442-ad40-11e9-b3e2-4fdf846f48f5?segmentid=acee4131-99c2-09d3-a635-873e61754ec6 (last visited Aug 15, 2019).

[9] See, e.g., Charles Hugh Smith, Could a Cryptocurrency Become a Global Reserve Currency?, Of Two Minds Blog (2019), http://charleshughsmith.blogspot.com/2019/06/could-cryptocurrency-become-global.html (last visited Aug 15, 2019); See also, Tyler Durden, "Game Changer" - Is Libra The Trojan Horse For An SDR-Backed Redesign Of The Global Financial System?, Zero Hedge (2019), https://www.zerohedge.com/news/2019-06-27/game-changer-libra-trojan-horse-sdr-backed-redesign-global-financial-system (last visited Aug 15, 2019).

[10] Slashdot, Facebook Backpedals From Its Original Ambitious Vision for Libra (2019), Slashdot, https://tech.slashdot.org/story/19/07/19/2349224/facebook-backpedals-from-its-original-ambitious-vision-for-libra?utm_source=rss1.0mainlinkanon&utm_medium=feed (last visited Aug 15, 2019); and Watch Live: Senate Grills Facebook Crypto Head About "Libra" Digital Currency, Weather Internal (2019), https://weatherinternal.com/watch-live-senate-grills-facebook-crypto-head-about-libra-digital-currency/ (last visited Aug 15, 2019).

[11] Bloomberg, Facebook and bitcoin must face banking rules, says Trump, South China Morning Post (2019), https://www.scmp.com/news/world/united-states-canada/article/3018271/donald-trump-blasts-bitcoin-facebooks-libra-demands (last visited Aug 15, 2019).

[12] New US House Bill Would Ban Big Tech From 'Banking', Fine Facebook's Libra $1 Million Per Day, Zero Hedge (2019), https://www.zerohedge.com/news/2019-07-15/new-us-house-bill-would-ban-big-tech-banking-fine-facebooks-libra-1-million-day (last visited Aug 15, 2019). See also, Slashdot, US Lawmakers Consider Ban On Big Tech Companies Launching Cryptocurrencies, Slashdot, https://news.slashdot.org/story/19/07/15/0019215/us-lawmakers-consider-ban-on-big-tech-companies-launching-cryptocurrencies?utm_source=rss1.0mainlinkanon&utm_medium=feed (last visited Aug 15, 2019).

[13] Tyler Duran, Who In The World Is Most Interested In Facebook's Libra (It's Not Who You Think), Zero Hedge (2019), https://www.zerohedge.com/news/2019-07-18/who-world-most-interested-facebooks-libra-its-not-who-you-think (last visited Aug 15, 2019). See also, Edward Playfair, Is Libra the West's response to China's payments empire?, Three Body Capital (2019), https://threebody.capital/blog/2019/6/29/is-libra-the-wests-best-response-to-chinas-payments-empire (last visited Aug 15, 2019).

[14] See, e.g., James Sanders, Facebook data privacy scandal: A cheat sheet, TechRepublic (2019), https://www.techrepublic.com/article/facebook-data-privacy-scandal-a-cheat-sheet/ (last visited            Aug 15, 2019).

[15] See, e.g., Bill Black, Facebook's Libra Currency Monetizes Identity and Threatens Privacy, The Real News Network (2019), https://therealnews.com/stories/facebooks-libra-currency-monetizes-identity-and-threatens-privacy (last visited Aug 15, 2019). See also, Inside the Congressional Staff Meeting About Libra, The American Prospect (2019), https://prospect.org/article/inside-congressional-staff-meeting-about-libra (last visited Aug 15, 2019).

[16] Kate Rooney, Mnuchin: US has 'very serious concerns' that Facebook's Libra could be misused by terrorists, CNBC (2019), https://www.cnbc.com/2019/07/15/treasury-secretary-mnuchin-will-hold-a-news-conference-on-cryptocurrencies-at-2-pm-et.html (last visited Aug 15, 2019).

[17] Binoy Kampmark, Facebook, Funny Money and Libra, Counter Punch (2019), https://www.counterpunch.org/2019/07/04/facebook-funny-money-and-libra/ (last visited Aug 15, 2019) (“Facebook’s Libra cryptocurrency generated more than a smattering of interest last month when its early-access code made its way to GitHub. By the end of the month, it had been “saved” by some 10,000 users, while a 1,000 clones of the codebase were also generated, very much in a playful effort to test its reliability.”)

[18] https://developers.libra.org/docs/the-libra-blockchain-paper

[19] https://libra.org/en-US/partners/

[20] https://www.facebook.com/

[21] https://www.whatsapp.com/

[22] https://www.ethereum.org/

[23] See, e.g., J. Clement, Facebook users worldwide 2019, Statista (2019), https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/ (last visited Aug 15, 2019).

[24] https://libra.org/en-US/about-currency-reserve/#the_reserve

[25] Id.

[26] See, e.g., Kevin Werbach, The blockchain and the new architecture of trust (2018).

[27] https://www.bitcoin.org

[28] The bitcoin software is available at https://github.com/bitcoin/bitcoin

[29] See Compliance & Consumer Protection: Libra, Libra.org, https://libra.org/en-US/compliance-consumer-protection/#overview (last visited Aug 15, 2019).

[30] Id.

[31] Thomas Knapp, Facebook's Libra Isn't a "Cryptocurrency", Counter Punch (2019), https://www.counterpunch.org/2019/06/24/facebooks-libra-isnt-a-cryptocurrency-2/ (last visited Aug 15, 2019).

[32] Brian Swint, Carney urges Libra-like reserve currency to end U.S. dollar dominance, Bloomberg (Aug. 23, 2019), https://www.bnnbloomberg.ca/carney-urges-libra-like-reserve-currency-to-end-dollar-dominance-1.1306107 (last visited Sept 3, 2019).