In association with leading international publications, East-West Digital News presents a series of expert analysis and thought leadership pieces to shed light on global e-commerce and e-payment trends and prospects. This article by ThePaypers offers an analysis of Facebook’s Libra project, its business goals, technical background and implications for users and the payment industry.
On June 18, Facebook unveiled its ambitious and hotly anticipated plan to create an alternative financial system built on a cryptocurrency named Libra that will roll out in 2020. The new currency aims to reach 1.7 billion people around the world who do not have access to a bank account in order to allow them to make financial transactions online.
1. What is Libra?
The newly created digital currency will function as a stablecoin, a cryptocurrency pegged to existing assets, to make it less subject to volatility. Libra’s value is tied to a basket of bank deposits and short-term government securities for a slew of historically stable international currencies, including the dollar, pound, euro, Swiss franc and yen.
To facilitate transactions, Facebook also created Calibra, a subsidiary that handles Libra cryptocurrency transactions and protects users’ privacy by never mixing Libra payments with users Facebook data. At least this is what Facebook stated. Calibra will be ready for use once the cryptocurrency launches and will be available in Messenger, WhatsApp, and as a standalone app. When users first sign up, they will be taken through a Know Your Customer anti-fraud process where they will have to provide a government-issued photo ID and other verification info, according to TechCrunch. Moreover, Facebook promised to conduct due diligence on customers and report suspicious activity to the authorities.
The currency will be serviced by a group of companies called the Libra Association. So far, 28 business partners, including Mastercard, PayPal, eBay, Lyft, and Uber, have joined the social networking company to form the Association, a Geneva-based entity governing the new digital coin. No banks are yet part of the group. Nevertheless, Facebook hopes to have 100 members by Libra’s launch. Companies must invest at least USD 10 million to join the project and each Libra Association member gets one vote on substantial decisions.
The Libra Association serves two main functions: one is to validate transactions on the Libra blockchain and the other to maintain the basket of assets to which the coin is pegged. For the latter function, the group can change the balance of its composition if necessary to offset major price fluctuations in any foreign currency so that the value of a Libra stays consistent.
2. The Libra blockchain
The announcement of Libra was also accompanied by a white paper where Facebook explainsthe digital coin and its blockchain system. Every Libra payment is permanently written into a cryptographically authenticated database called the Libra blockchain. This acts as a public online ledger designed to handle 1,000 transactions per second, which is much faster, compared with Bitcoin’s 7 transactions per second or Ethereum’s 15. The blockchain is operated and constantly verified by founding members of the Libra Association, which operate as validator nodes. In case an attack compromises over one-third of the validator nodes, the Libra Association will temporarily stop transactions, figure out the extent of the damage and recommend software updates to resolve the change in the blockchain protocol. Therefore, transactions on Libra cannot be reversed.
Currently, the Libra Blockchain is a permissioned one, where only entities that fulfil certain requirements are admitted to a special in-group that defines consensus and controls governance of the blockchain. This structure is more vulnerable to attacks and censorship because it’s not truly decentralised. However, the association aims to move to a permissionless system, which has a lower entry barrier, encouraging competition and, because is based on proof-of-stake, offers better protection against attacks by distributing control.
3. Privacy concerns
Facebook’s recent announcement has immediately raised privacy concerns among regulators, lawmakers and government officials around the globe. For instance, in the US, representatives of the country’s House Financial Services Committee called for Facebook executives to testify before Congress and asked the company to halt development of Libra until lawmakers and regulators have reviewed the project. In Europe, not only has France’s finance minister asked central bank heads from G7 countries to write a report on the project by mid-July 2019, but also the governor of the Bank of England added that the UK’s central bank would scrutinise Facebook’s crypto payments plan “very closely”. Still, the governor keeps an “open mind” on the utility of Facebook’s Libra cryptocurrency, admitting that worldwide payments systems are largely unequal at the moment.
In fact, some Libra backers acknowledged that regulatory resistance or issues related to consumer privacy could hinder their goals, and detailed some steps they are taking to prevent them. For instance, Calibra plans to conduct compliance checks on customers who want to sign up, using verification and anti-fraud processes that are common among banks.
Moreover, Calibra will only share customer (and transactions) data with Facebook or external parties only based on users’ consent. There might also be some “limited cases” where, for hunting down fraudsters or due to a request from law enforcement, Facebook’s subsidiary could share user data, without their consent.
“Freedom, justice and money is exactly what we’re trying to do here” – David Marcus, co-creator of Libra
4. Cryptocurrency adoption
Generally the cryptocurrency trading remains largely unsupervised, even if it has passed a while since Bitcoin, the most popular cryptocurrency, was created. Some countries have explored ways to regulate the market, however this hasn’t stopped investors from losing hundreds of millions of dollars through price drops and crypto exchange hacks. Also, this hasn’t stopped the market from dealing with money-laundering and terrorist-financing allegations either.
Besides these issues, another weakness of the crypto ecosystem, which surely hinders crypto adoption, is the usability and user experience (UX) which by some is seen quite technical. But the good news is that “there are a lot of startups working on creating a better UX for crypto”, Yoni Assia, co-founder and CEO of eToro says, and the company expects this to evolve quickly as “we move closer to mass adoption”. Therefore, Facebook’s status as a Silicon Valley iconic image touching billions of people around the world could help legitimise what has so far been a niche and volatile market. Also, it is expected “other tech giants to follow suit, helping to realise the potential for blockchain to disrupt traditional financial services.”
5. Banking revolution
What institutions are being challenged by Facebook’s Libra? Over the last couple of years Marten Nelson, CMO of open banking platform provider Token.io, has been telling that “banks must stop worrying about the competition from peer banks, as the real threat is from the large tech companies.”
Since customers want an instant, low-cost, international payments service, they go (or, perhaps, they used to go, as Martin puts it) to their bank. However, nowadays banks do not offer such features to their services anymore and, as a result, there is a gap between supply and demand. “When incumbents don’t fill the gap, someone else does. Always. This is what leads to disruption.” Interestingly, “in most cases, it’s not the technology itself that disrupts, but new business models”, Martin concluded.
In Libra’s case, though there are no major banks among the inaugural members, there have been discussions with them, said Jorn Lambert, executive vice president for digital solutions at Mastercard. Large banks are waiting to see how regulators and consumers respond to the project before deciding whether to join, he said.
6. Financial inclusion
The team behind Libra has big aspirations. Facebook executives and others associated with the project hope it will not only power transactions between established consumers and businesses globally, but will also offer unbanked consumers access to financial services.
The lack of easily accessible payment systems, especially for those in financially underserved markets, makes it challenging for international businesses to expand globally and to offer quality products and services. For instance, explaining why Spotify is backing Facebook’s Libra cryptocurrency, Spotify’s Chief Premium Business Officer Alex Norström acknowledges “there is an opportunity to better reach Spotify’s total addressable market, eliminate friction and enable payments in mass scale”.
However, according to Libra documentation, the new cryptocurrency is more than supporting businesses, it’s about helping people become financially included and connected with/helping their dear ones, even when working abroad. “Success will mean that a person working abroad has a fast and simple way to send money to family back home, and a college student can pay their rent as easily as they can buy a coffee”, Facebook writes in its white paper.
Nevertheless, with 2 billion users, Facebook has the potential to create one of the largest financial platforms in the world.
7. Digital identity
According to TechCrunch, Facebook’s bid to create a global digital currency that promotes financial inclusion for the unbanked actually has more privacy and decentralisation built-in than many expected. Moreover, commenting on the announcement, David Birch, an expert in digital financial services, mentions that “on page nine of the Libra white paper, just at the very end” Facebook mentions that an additional goal of the association is to develop and promote an open identity standard. We believe that a decentralised and portable digital identity is a prerequisite to financial inclusion and competition. “What if a Calibra wallet turns out to be a crucial asset for many of the world’s population not because it contains money but because it contains identity?”
Conclusion
Facebook’s announcement was compared with a “seismic moment for global finance” by crypto enthusiasts, and indeed it is due to its impact and changes it brings to the shape and movement of assets/money. However, in my opinion, the social media company has taken a studied and pragmatic stance – it launches a stablecoin (pegged to known assets), is part of a consortia, and therefore doesn’t dominate the discussions around the project. Basically, each member, including Facebook/Calibra, will only get up to one vote or 1% of the total vote in the Libra Association council. What’s more, it is in permanent talks with financial authorities and regulators.
Today’s money doesn’t work the same for everyone: on the one hand, we have consumers who enjoy economic stability and the ease of making payments with a single tap of their phone, and on the other there are countries hit by hyperinflation, or by the lack of access to a bank account . And let’s not forget the migrant workers living abroad sending money back to the family coping with large money transfers fees. But it not just the unbanked who want money that works for them. Overall, people want universal money that doesn’t have to be exchanged at every border and a digital payment method that doesn’t require users to hand over identifying information each time they use it.
Facebook seems to have understood this situation and it would be interesting to see how it translates these given facts into valuable propositions for consumers and businesses alike.
- This story was initially published in the Voice of the Industry section of The Paypers’ website. Check out this article and more here.
