So, the rumours were true. Facebook is releasing a cryptocurrency. Named Libra, it could potentially be the most significant event in the cryptocurrency world since Satoshi Nakamoto mined bitcoin’s genesis block on January 3, 2009. Not necessarily because it’s a good cryptocurrency or even good for cryptocurrency, but because with some 2.7 billion customers and counting, Facebook could conceivably create the most widely used form of currency in the world.
Let’s take a look.
King of the stablecoins
Essentially Libra will operate as a pseudo-stablecoin. If you haven’t come across stablecoins before, they’re tokens whose value is pegged to a single currency, typically the US dollar, or a type of asset. The purpose is simple: while the rest of the crypto markets might be racked by volatility, you can always count on one, say, USDC (USD Coin) to be worth US$1.
Given that it’s still not always easy to convert your crypto to fiat and vice-versa, stablecoins offer a huge reservoir of liquidity to the crypto markets. But they also offer a potential solution to one of cryptocurrency’s great dilemmas: how can you use crypto as a monetary system when the value of a currency can change by more than 30% in a single day?
The technical stuff
The reason I say “pseudo-”stablecoin is because Libra’s value will be based on a diverse basket of fiat currencies and bonds, meaning that its price will change over time, albeit in a slow, gradual fashion. But for the purposes of day-to-day transacting, you can assume that a single Libra will be worth roughly the same amount today as it was yesterday.
From a technical standpoint, Libra has a fairly straightforward proof-of-stake verification system, meaning that a bunch of masternodes – run by companies like Mastercard, PayPal, Spotify and Uber who will each stump up $US10 million for the privilege – are responsible for sharing the ledger that ensures no-one can double-spend or defraud the system. While Libra will be limited to straightforward monetary transactions initially, there are plans to open up Ethereum-style smart contract functionality later on.
These masternodes also sit on the currency’s governing board, wielding voting power in proportion to the amount of capital they’ve invested, allowing Facebook to avoid claims that it’s personally trying to usurp the concept of money. Fun fact: there are no banks involved in the project. Make of that what you will.
What’s it all mean?
So, let’s say this up front: this is unprecedented. Not the currency itself, obviously – that’s just been cribbed from a decade of crypto innovation – but the idea that a corporation of sufficient size can just up and create its own form of currency. For thousands of years, monetary supply has been one of the key ways that nation-states exert control over their people and territory. It’s why corporations have always been ultimately subservient to national systems and not vice versa. Now, well, who knows?
Of course, Facebook would argue that they’re not really creating a new currency: they’re merely facilitating the use of established forms of value in the digital realm. Unlike bitcoin, the value of a Libra token can be traced back to the basket of assets from whence it came. And it’s not like Zuck and friends will be personally running the thing; the Libra Association will be operating at arm’s length, wholly independent of Facebook Inc.
But the announcement has quite rightly sent shudders through governments and central banks all over the world. Whereas the powers that be still see bitcoin as something of a niche interest or curiosity, what Facebook is proposing is a ready-to-go, direct competitor with actual, real-world money.
Banking the unbanked (the what if)
While this might seem like an abstract concept in an advanced economy like Australia, where the friction point of money is already approaching zero, Libra isn’t really for us. (At least not to begin with.) Instead, it’s intended for people without access to proper financial infrastructure, who are far more likely to have a Facebook account than a bank account.
Take, for instance, India, a country where they’re proposing to make all cryptocurrency illegal, yet for most Indian citizens Facebook and WhatsApp is the internet. When that’s your digital landscape, how exactly do you legislate Libra out of existence?
Or look at Kenya, where sending cash via SMS has been the primary form of money transfer for a decade. Libra can offer better, simpler functionality and a currency that’s immune to the fluctuations of the global market. Why would you even need the Kenyan shilling? Or the Venezuelan bolivar? Or the Zimbabwean dollar? Or the Iranian real?
And what happens if sovereign currencies start collapsing en masse? If Libra becomes the world’s dominant currency and we realise that global financial policy now lies in the hands of Mastercard, Visa, PayPal and a handful of others? A bit Black Mirror perhaps, but unprecedented measures call for dangerous thought experiments.
What happens next?
Whereas regulators have been relatively slow to respond to the emergence of cryptocurrencies over the last decade, there has been no such hesitation in the case of Libra. The US Congress is hauling Zuck in to answer questions about how he’ll stop Libra from upending the global economy and the EU isn’t far behind. Such is the uncertainty surrounding the project that even the 27 partner companies announced on June 18 have their doubts about its feasibility.
On the flip-side, cryptocurrency companies and advocates have long bemoaned the hodge-podge nature of international digital currency regulation. The sheer global reach and ambition of the Libra project could finally bring clarity to the entire space. Hopefully, we like the answers we’re given.
Is Libra going to kill bitcoin?
Quite the opposite, probably. In the days after Libra was formally announced, bitcoin’s price soared from $13,000 to $18,000. While it’s simmered down a bit since, such a reaction suggested that rather than being seen as direct competitors, Libra will instead introduce even more people to the cryptocurrency economy.
There’s also an argument to be made that rather than making bitcoin redundant, Libra actually drives home its importance. After all, if one of the key themes of the current political moment is an erosion of trust in central authorities, then who better to illustrate the ongoing importance of an independent, uncensorable monetary system than a company like Facebook arriving on the scene, promising to do exactly that…
Image source: A breakdown of Facebook Coin (Libra), Medium, https://medium.com/coincorner/a-breakdown-of-facebook-coin-libra-ea332939adbd