Is the dream over for Facebook’s Libra? If so, what next? Perhaps we should start by understanding firstly what Libra is and then understand that Libra and Facebook are not the same thing.
Facebook’s Libra, it’s supposedly in tatters, but isn’t really Facebook’s at all
Libra is the name given to a planned new currency, supported by a coterie of powerful companies. The currency uses blockchain, but differs from cryptocurrencies such as bitcoin in three important respects:
- It will be backed by a basket of currencies
- It will be permission based
- And with Libra? there will be no crypto mining
If you are not a big follower of blockchain, that may sound like gibberish, so let me explain.
Blockchain, or let’s call it distributed ledger technology, or DLT, is a system in which a ledger, recording ownership of an asset is held on multiple computers. There is no definition of how many computers there must be on a DLT. I have heard it said that could be as few as three computers.
In the more well known examples of blockchain, such as bitcoin, an incentive system is in place to encourage as many computers as possible to makeup the system. The reward takes the form of tokens, in the case of bitcoin for example, the reward would be bitcoin tokens. To receive these rewards, the computers must engage in ‘mining’, which in practice means solving problems. The processing power they provide is essential to make this blockchain work, but the mining process is massively complex, and the network uses a huge amount of electricity, and can make the system cumbersome.
Permission versus permission less
The more well known examples of blockchain typically use a permission less system of blockchain, meaning anyone can provide a computer that makes up the network.
Libra, by contrast, is permission based, meaning that members of the network are carefully vetted. In fact, the members of the Libra network, or association, must invest $10 million and there are certain vigorous conditions relating to their size, and operation.
The computers that make up the Libra network must posses certain minimal processing capability.
All this means that the Libra currency does not suffer from many of the disadvantages of say bitcoin.
Blockchain versus DLT
I need to explain the words blockchain and DLT for a moment. They are, for all intents and purposes, the same thing. But there is a fear that currencies such as bitcoin have given the technology a bad name. In fact, the technology can be used in multiple ways, not just as a currency, but for storing all kinds of records, including, by the way, health records in the NHS — something that is being actively considered. Many prefer the term DLT because it is not tainted with the same negativity associated with blockchain.
Libra was initially Facebook’s idea. The concept was to create a digital currency. One of the many benefits would be a massive reduction in the cost of international currency transactions.
Libra is not for profit, it has gained support from the various organisations making up the Libra Association because they could see the benefit to them in the existence of such a currency.
Facebook and Libra
Facebook was keen to advance Libra for several reasons.
- Firstly, it feared that if it didn’t advance such a system, a rival, such as Google or Amazon, might and thereby get access to data on transactions across the Facebook network.
- Secondly, it expects such a currency to facilitate commerce on the Facebook platform, and it makes money by advertising. The more transactions, the more advertising opportunities.
- Thirdly, Facebook’s involvement with Libra is via a project called Calibra. And Calibra is providing a wallet for the currency. Presumably Facebook sees an advertising related revenue opportunity in that.
There were several concerns with Libra
- A sense that it is up to governments and central banks to run a currency not commercial organisations.
- Fears that Libra could make Facebook too powerful.
- Related to the above point, that the model could disrupt ‘poor helpless banks.’
- Fears over privacy, not exactly an area where Facebook has an exemplary record — although, Libra has insisted privacy will be respected.
- From a user point of view, although Libra’s value would be fixed to a basket of currencies, reducing volatility, the value of your Libra holdings will fluctuate in value, when measured in your local currency, as its value rises and falls in currency markets.
- Regulation of Libra — although Facebook has said the currency would only be launched once full regulatory approval is in place.
- Although the dream was to create a kind of international currency, we all know, from looking at the euro, the problems associated with one size fits all currencies.
- As Libra would not be controlled by central banks, their ability to use monetary policy to either reduce the risk of inflation or stimulate the economy, would be greatly weakened.
What has happened?
PayPal, eBay, Stripe, Mastercard, Visa and Mercado Pago and now Booming have all pulled out of Libra. Various reasons have been cited, but you only have to look at the issues listed above to get a sense as to why.
Clearly, there is now a big question mark over whether Libra will actually happen.
But there are alternatives.
China is working on its own cryptocurrency with no less a goal than breaking dollar hegemony. I think that this currency is more likely to succeed than Libra.
For more information see: Facebook announces Libra cryptocurrency: All you need to know and Everything you need to know about Facebook's Libra cryptocurrency.
These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees