On 18 June 2019, Facebook formally announced its plans to launch a global digital currency, called ‘Libra’. The Libra White Paper outlines Facebook’s ambitious vision to shape the future of money by establishing a new decentralised blockchain, a low-volatility cryptocurrency and a smart contract platform.
On the same day, Facebook also open-sourced the code for the Libra Blockchain and launched Libra’s initial testnet, allowing developers to experiment with and build upon from an early stage.
Facebook aims to officially launch Libra in the first half of 2020.
Under the mission statement, the goal is to create a simple global currency and to establish the necessary infrastructure that will “empower billions of people.” The White Paper highlights that 1.7 billion adults globally are currently unbanked, although one billion have a mobile phone and nearly half a billion have internet access. According to Facebook, Libra will seek to promote financial inclusion and access to financial services, aiming to create “a new opportunity for responsible financial services innovation.”
At the same time, Libra is an opportunity for Facebook to leverage its extensive ecosystem and expand into financial services. Libra will allow users to instantly send money using the popular Facebook applications, like Facebook Messenger and WhatsApp. The idea is that “just as people can use their phones to message friends anywhere in the world today, with Libra, the same can be done with money — instantly, securely, and at low cost.”
On the flip side, many are concerned about giving the technology giant further insights into people’s lives through access to their financial data. Therefore, “to ensure separation between social and financial data,” the Libra network will be built and its services will be operated by ‘Calibra’, a regulated subsidiary of Facebook.
What is Libra?
Libra seeks to bring together the advantages of certain traditional currencies, such as stability, low inflation, wide global acceptance, and fungibility as well as the positive features of blockchain technology.
Libra’s key features, according to the White Paper, are:
- Built on a secure, scalable, and reliable blockchain – At the beginning, Libra’s Blockchain will operate as a so-called ‘permissioned’ blockchain, which means that access must be granted to run a validator node. However, Facebook aims to move to a ‘permissionless’ model in the future. Given the global nature of the venture, the underlying software will be open-source so that any developer or organisation can build on it. The Libra Blockchain will enable smart contracts using the programming language ‘Move’. It will be pseudonymous, allowing users “to hold one or more addresses that are not linked to their real-world identity.” Even though Facebook maintains that this approach is familiar to many regulators, we note that it could be problematic given the scrutiny cryptocurrencies have received globally from regulators, such as the Financial Action Task Force, in terms of compliance with the Know-Your-Customer and Anti-Money Laundering requirements.
- ‘Backed’ by real assets – To build “trust in its intrinsic value,” Libra will be ‘backed’ by the Libra Reserve, a reserve of low-volatility assets, including bank deposits and short-term government securities in currencies from stable and reputable central banks. The idea is that users will be able to convert Libras into local fiat currency based on the applicable exchange rate. However, importantly, Libra will not be ‘pegged’ to a single currency, which means that it will not always be possible to convert one Libra into the same amount of a given local currency. As a result, Libra’s value in any local currency may fluctuate, as the value of the underlying assets moves. This risk will be mitigated, to some extent, by choosing low-volatility assets for the Libra Reserve. In addition, assets will be held by investment-grade rated custodians that will be geographically distributed to increase security and decentralisation of assets.
- Governed by an independent association – The Libra Blockchain and the Libra Reserve will be governed by the Libra Association, which will be an independent, not-for-profit membership organisation, headquartered in Geneva, Switzerland. The Libra Association will be governed by the Libra Association Council, which will include one representative per validator node. The Libra Association will create (‘mint’) and destroy (‘burn’) Libras, by selling them to “authorised resellers” for fiat currencies or buying them back from them in exchange for the underlying assets, respectively. The Libra Reserve will act as a “buyer of last resort” for these authorised resellers who will always be able to sell Libra coins to the reserve at a price equal to the value of the basket.
- Membership – Libra Association’s membership will comprise of businesses, nonprofit and multilateral organizations, and academic institutions. Its ‘Founding Members’ represent various industries and include major players, such as Mastercard, PayPal, Stripe, Visa, Booking Holdings, eBay, Spotify AB, Uber Technologies, Inc., Vodafone Group and Coinbase, Inc. The aim is to reach 100 members by its launch in 2020. Facebook will maintain a leadership role during 2019, but once the Libra network formally launches, Facebook’s position will be the same as any other Founding Member’s.
Libra, unsurprisingly, has made a big media impact in the short term, but immediately ran into objections from a number of European regulators with calls for tighter regulation of the social-media giant following hot on the heels of the Libra announcement. There is a regularly referenced trust problem – after a number of Facebook scandals involving user data and security, not everyone is convinced of their standing to launch and run financial services products. In discussing the launch on the Today Programme, Mark Carney said “it has to be safe or it is not going to happen… if this is going to work, the major central banks of the world would [need to] have direct regulatory oversight… we don’t want criminals and terrorists to be using this, we want to make sure that people’s data is protected and their privacy rights are hugely important.”
On the other hand, there is a conviction that the introduction of Libra (and possibly other Libra-like products and services) could produce significant changes in the digital payments landscape which may be of benefit to business and consumers generally, including the unbanked population referenced in the white paper.
It is going to be interesting to see how Libra evolves in terms of supporters and users, competitors, use cases and governance, amongst other things including whether the platform can satisfactorily navigate the complex regulatory and political environment in which it is proposing to operate.