A Brief Analysis of Libra – Vision, Criticisms and The Future

Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people. – Libra Whitepaper

In June 2019, when Facebook announced plans to launch a digital currency, it added a full-blown revolution in global finance to its typically vaulting Silicon Valley mission statement: To create a digital currency alongside its efforts to bring the world closer together through networks.

Libra is a permissioned blockchain digital currency proposed by the American social media giant, Facebook. The currency and network do not yet exist, and only a rudimentary experimental code has been released. The initial launch was projected for 2020; however, its future is uncertain. To understand the project in a deeper way, let us dive into the intricacies.

The Libra Vision

The Motivation

Libra is a direct attempt to undercut existing payment services by re-inventing and improving the remittance sector from scratch. If successful, the project aims to make Libra move value from one wallet to another within seconds for almost negligible fees. One of the most important reasons Facebook plans to fulfill the Libra project is to curb remittances. Citing several sources, the corporation claims that everyday remittances are one of the biggest areas where high fees and barriers to entry keep most of the world’s population unbanked and in the dark. Immigrants who work in distant countries cannot successfully send their earnings due to these reasons.

According to the Libra whitepaper, “All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 to borrow $100.4. When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.”

The Structure of the Project

In essence, Libra is a stablecoin, which will be created only when users “buy” coins, i.e., convert fiat to the Libra token. A stable currency is a currency, which successfully performs its functions as a means of exchange, a unit of account, and a store of value because its purchasing power is stable. For example, the US dollar is a stable currency, and the Federal Reserve backs it. These inflows will form The Libra Reserve that will back the token.

A basket of currencies will back the Reserve from around the world. As mentioned in the whitepaper, the basket may include the US Dollar, Japanese Yen, Euro, and a host of other assets. In a recent interview, it was stated that the basket might also include a few pegged Stablecoins as well, to maintain the volatility.

The whitepaper proudly claims that there will always be 100% of the Libra’s value in circulation, collateralized with real-world assets in the Libra Reserve, thus discouraging the controversial fractional reserve circulation. And unlike “pegged” stable coins that are tied to a single currency like the USD and a basket of other currencies, Libra plans to maintain its own value.

Facebook won’t fully control Libra but instead get just a single vote in its governance like other founding members of the Libra Association, including Visa, Uber, and Andreessen Horowitz, which have invested at least $10 million each into the project’s operations. The association will promote the open-sourced Libra Blockchain and developer platform with its own Move programming language, sign up businesses to accept Libra for payment, and even give customers discounts or rewards.

As the whitepaper states. Libra will be made up of three parts that will work together to create a more inclusive financial system:

  • It is built on a secure, scalable, and reliable blockchain;
  • It is backed by a reserve of assets designed to give it intrinsic value;
  • The independent Libra Association governs it tasked with evolving the ecosystem.

“Moving money around the world should be as easy and cheap as sending a text message. No matter where you live, what you do, or how much you earn.”

Founding Members

Initially, the 28 founding members of the association and their industries, previously reported, include:

  • Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
  • Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
  • Telecommunications: Iliad, Vodafone Group
  • Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
  • Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
  • Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

Instead of carrying it as a solo project, Facebook chose to include as many partners as possible. There are various advantages to this tactic, as it lets Facebook distribute the risk, helps them market with the names of the backers, and can help in the exchange of resources. Incentives for the backers are not small too. Backers have a direct claim to any services provided by Libra, get a share of the interest received from the Libra Reserve, and have a direct say in any of the decisions made.

As of October 2020, there are 27 members. Most of the initial members left the association due to uncertainties and critics surrounding the project.

The association hopes to grow to 100 members with an equal vote, while Facebook expects to “maintain a leadership role through 2019”.

Criticisms Against Libra

US Senators Against Libra’s Vision

“Facebook appears to want the benefits of engaging in financial activities without the responsibility of being regulated as a financial services company,” claimed letters sent by two US senators to Mastercard, Visa and other members of the association. “If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related activities, but on all payment activities.” The letters came just days after PayPal’s withdrawal from the Libra Association. The company did not give a specific reason, but many have speculated that it was a response to heightened pressure from regulators.

Libra Congress Hearing

On 23rd October 2019, Mark Zuckerberg, the CEO of Facebook, and several Libra team members sat in front of Congress to answer the questions Congress had over Facebook’s ambitions and controversial Libra project. The hearing was held following the perceived threat policy-makers felt over a currency formed and run by a private corporation.

Anticipating the negative outlook, Zuckerberg said that Facebook wouldn’t agree to move forward on the Libra project until all US regulatory bodies involved gave it the green light. But even that was not taken lightly when Congress asked Zuckerberg to list all the regulatory bodies the Libra foundation would seek approval from. Unfortunately, the CEO of Facebook did not prepare for that and could not come up with an answer.

G7’s outlook towards the Project

The G7 summit held in October had a chance to discuss payments projects such as that of the Libra Stable Coin. Apparently, the report outlined nine major threats posed by Libra and also other stablecoins in general. They zoomed in on the suspicion that digital stablecoins could seriously destabilize the global financial order if not nipped in the bud in time.

Withdrawal of Major Backers

The uncertainty and regulatory hostility among regulatory bodies has left the initial buyers in a haze. Some remained to support and push the project, while others felt the heat was cranking up too fast. PayPal left the Libra Association on 4 October 2019. eBay, Mastercard, Stripe, Visa, and Mercado Pago followed on 11 October and Bookings Holdings on 14 October. Out of the initial 28 backers, only 21 remained. However, throughout 2020 many other left while some new companies joined the association.

What the Future Holds

The First Board Meeting

When the Libra Association debuted in June, Facebook touted a roster of 28 major firms. However, Visa, Mastercard, PayPal, Booking Holdings, eBay, Stripe, and Mercado Pago announced their withdrawals from Libra, with some citing concerns over the project’s regulatory backlash.

The five-member board comprises Facebook’s David Marcus, representatives from non-profit Kiva Microfunds, PayU, venture capital firm Andreessen Horowitz and Xapo Holdings Limited. The members also laid out several bylaws describing electing new board members, voting on proposals, and adjudicating disputes.

A Collection of Stable Coins?

Recently, the Libra Association said that it was considering basing its cryptocurrency on a range of fiat currencies instead of a single synthetic one, deviating from their initial plan mentioned in the white paper. Reuters, project lead David Marcus said that they were open to looking at alternative approaches following an avalanche of criticism and the defection of several major partners.

“We could do it differently,” he said, according to the news agency. “Instead of having a synthetic unit, we could have a series of stablecoins, a dollar stablecoin, a euro stablecoin, a sterling pound stablecoin, etc”, said David Marcus to a panel.

Bumpy Road Ahead

Facebook is launching a subsidiary company called Calibra, which will handle its crypto dealings and protect users’ privacy by never mingling your Libra payments with your Facebook data, so it can’t be used for ad targeting. Your real identity won’t be tied to your publicly visible transactions. For this reason, the company has released more than 100 pages of documentation on Libra and Calibra.

Calibra, the holding company of Libra’s projects, will act like a regulated subsidiary that will operate services on top of the Libra network. Calibra’s first product will be a digital wallet for Libra with separation between social and financial data. It is going to be available on Facebook Messenger and WhatsApp and also as a standalone app. Libra Association’s head of policy and communications, Dante Disparte, has said, “implied in this project is that wherever the Visa or Mastercard logo are accepted, Libra would follow suit.”

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For now, the regulatory pressure seems to have submerged all of Libra’s efforts. The negative PR has definitely pushed the initial enthusiasm. But only time will tell what effects this will have on the project. If the association can weather the storm and jump through all the hurdles thrown their way, there will be no way to stop their growth. But no matter the result, the showdown will surely be a lesson to the entire crypto community.

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