Barely a minute into the Libra whitepaper, I must admit to feeling a wave of acute dystopia. They open the whitepaper with "We need a global currency". It seemed like an attempt to be a global central bank, using the idea of blockchain to avoid oversight. It also felt like an entity that already has our personal data is now gunning for our financial data. As I went on, though, my stomach settled, somewhat.
There are many, many reports that talk about what Libra is, and how it works, so I will spare you the long-form wiki lesson. Minus the marketing and the jargon, there’s just this:
Calibra is a subsidiary of Facebook, which is a wallet like Venmo or Paytm or PayU; and Libra, is a digital currency you put in Calibra and use to buy things on Facebook and any other platform(s) that accepts Libra.
Facebook’s plan is to keep the value of Libra steady (1 Libra = 1 USD or 1 EUR or 1 INR), by backing it with a ‘basket’ of currencies. You the user would deposit money with the Libra Association, and you get its worth in Libra. The platform is open to anyone (well, those allowed by local regulations) to set up a wallet like Calibra. On the other side, businesses and users will be incentivised with discounts and ‘cash-back’ style offers to transact using Libra.
In the days following the big announcement, there has been a lot of commentary from the worlds of tech, finance and blockchain, and even some backlash from the US Government. These reactions point to a mixed understanding of what Libra is and what it will become.
From all the cacophony, here are six things you need to know about Libra.
1. It could really be big
Let’s get that out of the way first. Facebook is a behemoth that put together a consortium (the Libra Association) of 27 (soon to be 100) enterprises, each of whom paid a minimum of $10 mn (Rs 70 crore) for a place at the big boy table. This partnership is a strong validation of the technology; the sort of validation that eluded the majority of crypto investments in 2017-18.
Libra’s blockchain is built for speed, and payments will cost a fraction of what they do on conventional systems. Then there’s the "nation" of Facebook, which has over two billion people. Libra will launch, and many people are likely to use it.
2. It will boost fresh participation in crypto
Ryan Selkis, Founder of Messari, said Libra would be a "gateway drug for crypto investors". A large enterprise like Facebook is effectively a lead blocker, someone who would push against and lobby regulations in a way you or I cannot.
So businesses and investors alike looking for a broader crypto experience would most likely begin with Libra. Despite some understandable concerns over the as yet unvetted developer platform, coders too would want to get in on the action without themselves having to worry about regulation.
3. It will force banks to up their game
The aftermath of the 2008 crash saw a mushrooming of tech companies that offered financial services. They did it faster and better than banks. Quick on their feet and with a richer user experience, they were touted as the beginning of the end of banking.
But time proved that they could not achieve the sort of scale that big banks had, that they couldn’t weather changes in regulations like banks could. This was possible only for FinTechs set up by big banks themselves – Like Goldman Sachs’ Marcus. But when the likes of Amazon or Facebook come in to play, that really shakes things up. A JPMC or a Goldman Sachs could do what Facebook is trying to do, but not faster, or with the user experience that Facebook can provide. Yet.
4. Big, yes. Global, not likely
Right off the bat, Libra hobbled itself with borders and heavy regulation. For all intents, Libra is a security, subject to a raft of rules in any jurisdiction. While the Association is itself based out of neutral Switzerland, the currency can flow only in those places that allow it.
So if you’re a Libra wallet provider based out of the US, you can’t service any country or individual in the ever growing OFAC list. No Libra in China or any country that doesn’t want it (or have banned Facebook too) in the first place.
Libra can’t get into places where a permission-less crypto asset like bitcoin cannot. So we’re looking at a big splash in two dozen countries, surely not across 194.
For instance, in its current form, it is not likely to come into India. That ‘basket of currencies’ approach makes it a hedge fund, and doling out a token backed by this is a can of worms you can’t open in India.
If the objective of Libra is large scale adoption and monetisation of its ecosystem, it’s on the right track. If the mission is to provide financial freedom to the unbanked, a centralised and heavily restricted digital stable currency with no possibility of dividends might not really be the most exciting bit of news to a tiller in Silaimalaipatti.
5. Nothing altruistic about it
Altruistic companies and unicorns. More people believe in the latter. It’s safer. Facebook went through great pains to distance themselves from controlling Libra. But Calibra is a wholly owned subsidiary that will profit from offering future services like lending.
Then there’s the Libra Association itself, which controls/holds the money of everyone that uses Libra, is run by companies who were given Libra Investment Tokens on joining the association. They will earn dividends on not just the at-least-$10-million they invested, but on every dollar everyone deposits into the reserve. The beneficiaries of all the money in the reserve will number 27 to 100.
For now, the reserve is not fractional. This may not always be the case. Facebook’s recent run-ins about privacy, and the ambiguity on the business model of Libra sparked some high-profile concerns in the US. A senior Democrat demanded a block on developer work until Congress had had a chance to vet it, a Senator warned that Facebook "was already too big". French and German leaders too joined the chorus, warning that Facebook could turn into a "Shadow Bank".
6. Libra isn’t really crypto
Global, unopinionated and permission-less. These are the three basic characteristics of a crypto experiment. To be fair, it is impossible for any company, where control is centralised, to create a decentralised system. They are identifiable, they belong to a place and are subject to the rules of that place.
By design, the Libra blockchain is permissioned – some special entities that fulfill some conditions are allowed in; it cannot be global, it has boundaries. It is not unopinionated – this means it has a say on who participates on the platform. All transactions would go through "the system".
If a government where Libra exists so chooses, it can enforce know-your-customer (KYC), which is not a bad thing. Or it could decide to monitor, cap or freeze your account, which is not a good thing. Just like a bank.
What Might Weigh Down Libra
While the clout of Facebook and the founding members infuse Libra with huge potential, there are two factors that might stop it from even launching.
1. The Reserve
The first is the management of the basket of assets that will back the token. This will need to be highly regulated if it is to be global. India, for instance, has capital controls. The Libra Association is a single entity, but managing this basket cannot be a distributed affair. Whose is that one throat to choke?
Working this out is going to take a long time. Besides, it is hard to see which country would warm up to this idea. Not China, of course, but I can’t imagine the US being thrilled about it, either.
2. The Politicking
Libra/Facebook have offered different narratives based on who is asking the questions. They don’t talk about Calibra much, though every transaction will happen on that platform.
When there’s a question of privacy, they point to Libra the blockchain. When there’s a question of stability, they point to Association and play the ‘not like Bitcoin’ tape. It isn’t a stretch to imagine that there will be tailored financial products based on your transaction data (and garnished with your personal data?), offered on Calibra – wholly owned, as you’ll remember, by Facebook.
This creates a huge trust deficit which lawmakers around the world are already calling out.
What’s the Libra legend?
The Libra whitepaper contradicts itself, the promises of gradual decentralisation are too far fetched, and the dissing of ‘all other’ crypto assets is naive. Far as I can tell, the Libra legend looks something like this:
A blockchain, not owned by a single entity and not distributed either, but run by a highly selective, curated group. The group asks that you trust them to hold and track your money, and the group profits from it. Any downside in the value of the currency on the blockchain is borne by you the user, and any upside is enjoyed by the group.
Not awe inspiring, as far as legends go. Let’s take a look at the ‘coin’ that started it all – Bitcoin. A common refrain about bitcoin, which Libra also used to bolster the stability of its stable currency, is this: "There’s nothing backing Bitcoin. It is too volatile".
In fact, there is an anti-bitcoin vibe to any new coin that leaps onto the stage. But here’s the thing – Bitcoin is still here, and I contend will be for a long time. This isn’t because of technical superiority or unlimited utility. Not because it can, unlike an asset backed currency, absorb infinite speculation. Bitcoin endures because it is an elastic, global and ‘alegal’ meme. Because of its legend.
Disillusioned by the institutional greed and authoritarianism that led to the 2008 crash, a coder, under the pseudonym Satoshi Nakamoto created Bitcoin and gave it away to the world. Embraced by a vast spectrum of stakeholders and owned by no single person or entity, Bitcoin is the precursor to some of the most exciting technology on the blockchain – a confluence of sociopolitics, economics and technology. It has also evolved into a store of value that is today superior to gold.
I’ve heard and participated in many stories, but I know which ones I prefer.
(Vignesh Sundaresan (@vigsun) is an entrepreneur, coder and angel investor in blockchain technology. A Y-Combinator alumnus, he is the founder of Lendroid, a credit engine that powers financial services on the blockchain. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)