Digital currencies : Libra

Digital Currencies

Final Research: Libra

Unveiled in June 2019, Libra is a digital currency that will allow peer-to-peer payments and commerce (online and brick & mortar) with the same ease of sending a photo or text. As per Facebook’s Libra White Paper, it will improve access to financial services, especially for people without bank accounts or with little access to banking.

In January 2018, Facebook founder and CEO Mark Zuckerberg used his blog to discuss the concept of cryptocurrencies and its socioeconomic implications. He wrote, “There are important counter-trends to this – like encryption and cryptocurrency – that take power from centralized systems and put it back into people’s hands”. Later in June 2019, Zuckerberg announced Libra, which he dubbed a “new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aims to create a new opportunity for responsible financial service innovation”.

Libra has been designed to be a stable digital currency that will be fully backed by a reserve of fiat money and stable, low-risk assets that yield interest over time (the Libra Reserve) and not pegged to any single physical currency. It is an attempt to share similarities with currencies such as the US Dollar or Euro. For example, the value today will be similar to the value the day before or the day after. The investments return will not be returned to users of Libra Coin, they will be deployed to grants to nonprofit organizations, engineering research and investments into development of the ecosystem. This differentiates Libra from other cryptocurrencies like Bitcoin and Ethereum, which are known to have volatile price swings.

Silicon Valley giant, Facebook has entered the financial engineering space by playing a key role in the creation and leadership of the Libra Association, an independent, not-for-profit membership organization headquartered in Switzerland, one of the most friendly regulatory environments for cryptocurrency projects and quite far from Facebook’s California headquarters.

The consortium, including initially 27 major tech and payment network companies, created both a payment system (medium) and a payment method (Libra Coin - with an exchange protocol). In addition, the Libra Blockchain will be open-source, allowing developers to build on it.

The Association is committed to security and privacy regarding the project: in order to secure the blockchain, they have created a cryptographically authenticated database as well as LibraBFT which is a consensus protocol to guard the blockchain safely. The LibraBFT protocol is maintained by the network of validator nodes which can absorb one-third of the validator nodes being compromised while remaining unbreached. Libra also has its own programming language called the Move Programming Language.

The public blockchains such as Bitcoin happen to be much more decentralized than Libra’s ‘permissioned’ blockchain. Bitcoin can process only about 7 transactions per second, whereas Libra is expected to process 1,000 transactions per second. This is in lieu to accommodate Facebook’s 2.7 billion monthly users, as well as the users of the other association members.

In parallel, a new subsidiary has been established, called Calibra, which will serve as a digital wallet for the users to store and exchange libra. It is supposed to be a regulated entity ensuring separation between “social and financial data”.

Government agencies and lawmakers have been casting doubt about the Libra Association mission and also Facebook's control over the project since its launch. It is also unclear ifs the payment system will be sourced through Facebook's application.

Some serious threats have also appeared this week when Visa, Mastercard and eBay announced they were withdrawing from the Association, following PayPal which dropped out last week.

Even if the banking industry decided not to join, the idea was that merchants including eBay, Uber and Spotify would accept Libra as a form of payment, and that Mastercard, PayPal and Stripe and would enable consumers and merchants to convert their national currencies into and out of Libra. Now, the loss of four of the major payment companies is a drawback and we can question the viability of the project, although Facebook called the news of partnership losses “liberating”. This hasn’t prevented the company to organize the Association inaugural meeting on October 14th with 21 members.

        As to whether Libra contains the attributes of a currency, we have summarized our analysis in the chart below. Even though the Libra coin seems to act as most currencies and satisfies the other 6 currency attributes, it faces the acceptance issue and may not survive as a digital coin.

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