“FACEBOOK LIBRA – What we should and need to know so far”
By. Bashir Haji Ali
Good day, my beloved readers!
Do you enjoy reading about finance, banking, technology and payment systems? Are you in bed with digital coins and cryptocurrency? Well then, this comprehensive guide is for you. In this piece, I will briefly discuss and focus on world’s to-be youngest digital currency and cash called “Libra”.
I must first warn you, it is going to take a bit longer to finish reading the piece, but interesting, worthy and all.
Let’s begin, shall we?
We can all say what we like about Mark Zuckerberg, but the tee-shirted boy wonder doesn’t do things by halves. He is now not content with dominating how more than two billion of us (to be exact, around 2.4bln fb users) communicate with friends and access information on global political affairs and news – or harvesting the digital manifestations of our egos to sell advertising – he is now trying to muscle in on the territory of big banks by introducing the world a new digital currency called “Libra”.
And just before we start, let me give you a sense of where I am going to with all this.
I will start-off by tracing back Libra and its origin, then discuss what Libra is?, how it is going to look like and operate?, who is going to govern it?, is Libra different from other crytocurrencies (compare Libra with hard currencies like the US Dollar and other cryptocurrencies?, Libra’s role and how it can fit into the overall global financial and banking system. We will then conclude by highlighting some critics and concerns for Libra.
However, I must say, if we were to fully understand and make the most from this article, we first need to briefly say and understand one or two things about cryptocurrencies and blockchain technologies.
Crytocurrency is an internet-based medium of exchange which uses cryptographical functions to conduct financial transactions. Cryptographical functions is the process of converting ordinary plain text into unintelligible text and vice-versa. It is a method of storing and transmitting data in a particular form so that only those for whom it is intended can read and process it. Cryptocurrencies leverage blockchain technology to gain decentralization, transparency, and immutability. A blockchain is made up of a series of servers (also called “nodes”) that record and validate every transaction made on the network.
Well now that we understand one or two things about cryptocurrencies and blockchain technologies, let’s see how Libra has, all of the sudden, come into discussion.
LIBRA – a brief timeline:
To say that Facebook has had a rough 2018, will be a gross understatement. In March 2018, Facebook was rocked by the Cambridge Analytica scandal. Over 50 million Facebook users got their private data compromised in one of the worst data privacy breaches in history. The data extracted has been used to build psychological profiles to influence elections around the world. Following this, CEO Mark Zuckerberg was forced to attend a Congressional hearing. Directly because of this scandal, Facebook’s shares went for a tumble. The stocks dropped by a staggering 20% as the company lost $120 billion in value.
However, it was in the middle of a terrible 2018 that the first seeds of Libra were planted. In May 2018, it was revealed that Facebook is establishing a blockchain division which would run under the supervision of David Marcus, who had earlier overseen the creation of Facebook Messenger. This happened four months after CEO Mark Zuckerberg stated in his new year resolution post that he wanted Facebook to “go deeper and study the positive and negative aspects of” cryptocurrencies.
In May 2018, Facebook’s vice president David Marcus moved from Facebook Messenger to a new Blockchain divisios. First reports of Facebook planning a cryptocurrency, with Marcus in charge, emerged a few days later. By February 2019, there were more than 50 engineers working on the project.
Confirmation that Facebook intended a cryptocurrency first emerged in May 2019. At this time it was known as “GlobalCoin” or “Facebook Coin”. Libra was formally announced on June 18, 2019. A first version is projected to be released in early 2020. On July 15, 2019, Facebook announced the currency will not launch until all regulatory concerns have been met and the “appropriate approvals”.
WHAT IS LIBRA ANYWAY?
Libra is an astrological sign that represents justice. It’s an ancient Roman unit of weight, and it means “free” in French though it’s spelled “libre.” Libra is a cryptocurrency developed by Facebook. The company says Libra will make sending money online cheaper and faster, and it will improve access to financial services, especially for people without bank accounts or with little access to banking.
Libra and the technologies to use it will be built upon a blockchain platform called the Libra Network. Unlike with many other cryptocurrency networks that allow any server to join the chain, the Libra Network is a “permissioned” blockchain, meaning only certain servers will be able to connect to the chain.
Facebook says, that will allow the network to run faster than other cryptocurrencies, making Libra practical for everyday uses like purchasing something online. The network is built with open-source code, meaning any developer will be able to create a digital wallet or other tool to use Libra on top of the network. Facebook has said it will eventually transition the Libra network to a public blockchain, though it has provided no details on that process.
A very important question here is; why does Facebook want to have a cryptocurrency? This isn’t actually Facebook’s cryptocurrency. It’s the project of the Libra Association, which Facebook co-founded. The association, which will serve as a monetary authority for the cryptocurrency, says Libra’s purpose is to “empower billions of people,” citing 1.7 billion adults without bank accounts who could use the currency.
But Facebook has its own interest in digital cash that predates Libra. The social network ran a virtual currency, called Credits, for about four years as a way to make payments on games played within Facebook. In May, Mark Zuckerberg said that sending money online should be as simple as sending photos.
Libra is designed to make it easier and cheaper for people to transfer money online, which might attract new users to the social network. Facebook may also have bigger plans for Libra, though it hasn’t shared them yet. A new subsidiary, called Calibra, will run a wallet that will be necessary in the initial rollout. Calibra is a Facebook subsidiary created to develop products and provide financial services using Libra.
The division’s first product will be the Calibra Wallet, a digital wallet that will let users store Libra and send it to friends like they’d send a text message at “low-to-no-cost,” Facebook says. The Calibra Wallet will be a standalone app, and will plug-in to Facebook’s Messenger and WhatsApp. Other companies and entities will also be able to develop wallets and other tools to use Libra on the network. Facebook expects Calibra will enable more transactions between users and businesses on its platforms, which could generate more ad revenue for Facebook. The company hopes to eventually offer more financial services and create new revenue streams through Calibra. Facebook says it will not use Calibra users’ data for ad targeting.
To protect user privacy, Facebook plans to keep the Calibra subisidary independent. The company says Calibra will not share customers’ account information or financial data with Facebook except in limited circumstances such as preventing fraud or complying with the law, or unless users have agreed to the sharing of their data. Facebook created Calibra, a regulated subsidiary, to ensure separation between social and financial data and to build and operate services on its behalf on top of the Libra network,” according to a white paper describing the Libra project. Analysts at RBC Capital Markets say those services will likely include games and commerce.
Having said that, Facebook is one of the members of the Libra Association, the nonprofit that will serve as a de facto monetary authority for the currency. (Facebook’s membership is through Calibra). Other founding members include MasterCard, Visa, PayPal, Uber, eBay, Vodafone and Mercy Corps. The association hopes to grow to 100 members, most of which will pony up $10 million to get the project going. Each member has the same vote in the association, which is headquartered in Switzerland. So Facebook won’t have any more say over the association’s decisions than any other member.
That said, Facebook will play an outsized role in the initial phases of the Libra project. In addition to running the Calibra wallet, Facebook expects to “maintain a leadership role through 2019.” After the network is launched, Facebook says its role and responsibilities will be the same as those of any other founding member.
LIBRA vs. OTHER CRYPTOCURRENCIES:
Is Libra different from other cryptocurrencies? How then? Let’s first start by addressing how Libra is similar to other cryptocurrencies, such as bitcoin and ether. Like them, Libra exists entirely in digital form. You won’t be able to get a Libra note or coin. And like other cryptocurrencies, Libra transactions are recorded on a software ledger, known as blockchain, that confirms each transfer. The Libra blockchain will be managed by the founding members in the early stages but evolve into a fully open system in the future.
Unlike bitcoin, ethereum and some other cryptocurrencies, which aren’t backed by anything and swing wildly in response to speculation, Libra will be pegged to a basket of assets that will anchor its value. The Libra Association hasn’t said what those assets will be but indicated they will include “bank deposits and government securities in currencies from stable and reputable central banks.” That suggests major global currencies, like the dollar and the euro, which don’t fluctuate violently day to day.
The supply of Libra will grow or shrink based on how popular it is. If people want to use Libra, the association and destroy, or “burn,” the proper amount of Libra. Backing a currency with an asset isn’t anything new. In fact, it used to be common. The US dollar was backed by gold until 1971. The value of the Hong Kong dollar is pegged to the US dollar and managed by a currency board, which can only issue new notes if it has enough in reserves.
LIBRA vs. US DOLLAR:
The US dollar is tried and true and pretty much accepted anywhere in the world. Some countries like the greenback so much that they use it instead of their own money. And dollars earn interest, although at current rates that won’t add up to very much.
Of course, the dollar has weaknesses. Using dollars, particularly across borders, can be expensive because banks take a cut to convert them into local currencies. If you’re using dollars on a prepaid card, the credit card company is probably charging the merchant a portion of your purchase. And if the US government prints too many dollars, inflation could follow.
Despite the hype, cryptocurrencies aren’t widely used. Try buying a cup of coffee with ether. (Yes, it’s possible. But not widespread.) The value of cryptocurrencies is volatile, often rising or falling more than 5% a day, making it difficult to get a sense of the long-term worth of the asset.
Cryptocurrencies can make it easy to send money directly to someone. Though not private, cryptocurrencies can be pseudonymous. Some cryptocurrencies, notably bitcoin, have a cap on the number that can be minted, meaning that owners of existing coins don’t have to worry about the arbitrary creation of new coins.
LIBRA vs. PRIVACY, INFORMATION & DATA:
By now, we all know Facebook doesn’t have a great reputation for privacy protection. The social network says “don’t worry”, not that you expected it to say anything else. Calibra, the maker of the wallet you’ll need to use Libra, is set up as a subsidiary of Facebook. The arrangement allows for Calibra to be regulated by authorities to prevent money laundering and other financial crimes. But it will also keep Calibra’s financial data separate from Facebook’s social data, according to the company.
Calibra says explicitly that customer data won’t be used to improve ad targeting, Facebook’s money spinner. “Calibra customers’ account information and financial data will not be used to improve ad targeting on the Facebook Inc. family of products,” it said in a release.
The company says it will only share customer data with third parties in limited cases, such as to comply with the law, prevent fraud or facilitate payments. It also says Calibra will seek customer consent before using Facebook data to improve features.
HOW DOES LIBRA WORK?
By now, we all know the basics of Libra. Cash in a local currency, get Libra, spend them like dollars without big transaction fees or your real name attached, cash them out whenever you want. Feel free to stop reading and share this article if that’s all you care about. But the underlying technology, the association that governs it, the wallets you’ll use and the way payments work all have a huge amount of fascinating detail to them. Facebook has released more than 100 pages of documentation on Libra and Calibra, and we’ve pulled out the most important facts. Let’s dive in.
THE LIBRA ASSOCIATION — crypto’s new oligarchy:
Facebook smart and knew people wouldn’t trust it to wholly steer the cryptocurrency they use, and it also wanted help to spur adoption. So the social network recruited the founding members of the Libra Association, a not-for-profit which oversees the development of the token, the reserve of real-world assets that gives it value and the governance rules of the blockchain. “If we were controlling it, very few people would want to jump on and make it theirs,” says Facebook’s Marcus.
Each founding member paid a minimum of $10 million to join and optionally become a validator node operator (more on that later), gain one vote in the Libra Association council and be entitled to a share (proportionate to their investment) of the dividends from interest earned on the Libra reserve into which users pay fiat currency to receive Libra.
The 28 soon-to-be founding members of the association and their industries, previously reported include:
• PAYMENTS: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
• TECHNOLOGY AND MARKETPLACES: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
• TELECOMMUNICATIONS: Iliad, Vodafone Group
• BLOCKCHAIN: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
• VENTURE CAPITAL: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
• NONPROFIT AND MULTILATERAL ORGANIZATIONS, AND ACADEMIC INSTITUTIONS: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking.
Facebook says it hopes to reach 100 founding members before the official Libra launch and it’s open to anyone that meets the requirements, including direct competitors like Google or Twitter. The Libra Association is based in Geneva, Switzerland and will meet biannually. The country was chosen for its neutral status and strong support for financial innovation including blockchain technology.
LIBRA GOVERNANCE — who gets a vote?
To join the association (Libra Association), members must have a half rack of server space, a 100Mbps or above dedicated internet connection, a full-time site reliability engineer and enterprise-grade security. Businesses must hit two of three thresholds of a $1 billion USD market value or $500 million in customer balances, reach 20 million people a year and/or be recognized as a top 100 industry leader by a group like Interbrand Global or the S&P.
Crypto-focused investors must have more than $1 billion in assets under management, while Blockchain businesses must have been in business for a year, have enterprise-grade security and privacy and custody or staking greater than $100 million in assets. And only up to one-third of founding members can by crypto-related businesses or individually invited exceptions. Facebook also accepts research organizations like universities, and nonprofits fulfilling three of four qualities, including working on financial inclusion for more than five years, multi-national reach to lots of users, a top 100 designation by Charity Navigator or something like it and/or $50 million in budget.
The Libra Association will be responsible for recruiting more founding members to act as validator nodes for the blockchain, fundraising to jump-start the ecosystem, designing incentive programs to reward early adopters and doling out social impact grants. A council with a representative from each member will help choose the association’s managing director, who will appoint an executive team and elect a board of five to 19 top representatives.
Each member, including Facebook/Calibra, will only get up to one vote or 1% of the total vote (whichever is larger) in the Libra Association council. This provides a level of decentralization that protects against Facebook or any other player hijacking Libra for its own gain. By avoiding sole ownership and dominion over Libra, Facebook could avoid extra scrutiny from regulators who are already investigating it for a sea of privacy abuses as well as potentially anti-competitive behavior. In an attempt to preempt criticism from lawmakers, the Libra Association writes, “We welcome public inquiry and accountability. We are committed to a dialogue with regulators and policymakers. We share policymakers’ interest in the ongoing stability of national currencies.”
LIBRA – is it a Stable?
The value of a Libra is meant to stay largely stable, so it’s a good medium of exchange, as merchants can be confident they won’t be paid a Libra today that’s then worth less tomorrow. The Libra’s value is tied to a basket of bank deposits and short-term government securities for a slew of historically stable international currencies, including the dollar, pound, euro, Swiss franc and yen. The Libra Association maintains this basket of assets and can change the balance of its composition if necessary to offset major price fluctuations in any one foreign currency so that the value of a Libra stays consistent.
The Libra Association is still hammering out the exact start value for the Libra, but it’s meant to be somewhere close to the value of a dollar, euro or pound so it’s easy to conceptualize. That way, a gallon of milk in the U.S. might cost 3 to 4 Libra, similar but not exactly the same as with dollars.
The idea is that you’ll cash in some money and keep a balance of Libra that you can spend at accepting merchants and online services. You’ll be able to trade in your local currency for Libra and vice versa through certain wallet apps, including Facebook’s Calibra, third-party wallet apps and local resellers like convenience or grocery stores where people already go to top-up their mobile data plan.
THE LIBRA RESERVE — one for one:
Each time someone cashes in a dollar or their respective local currency, that money goes into the Libra Reserve and an equivalent value of Libra is minted and doled out to that person. If someone cashes out from the Libra Association, the Libra they give back are destroyed/burned and they receive the equivalent value in their local currency back. That means there’s always 100% of the value of the Libra in circulation, collateralized with real-world assets in the Libra Reserve. It never runs fractional. And unliked “pegged” stable coins that are tied to a single currency like the USD, Libra maintains its own value — though that should cash out to roughly the same amount of a given currency over time.
THE LIBRA BLOCKCHAIN — built for speed:
Every Libra payment is permanently written into the Libra Blockchain — a cryptographically authenticated database that acts as a public online ledger designed to handle 1,000 transactions per second. That would be much faster than Bitcoin’s 7 transactions per second or Ethereum’s 15. The blockchain is operated and constantly verified by founding members of the Libra Association, which each invested $10 million or more for a say in the cryptocurrency’s governance and the ability to operate a validator node.
When a transaction is submitted, each of the nodes runs a calculation based on the existing ledger of all transactions. Thanks to a Byzantine Fault Tolerance system, just two-thirds of the nodes must come to consensus that the transaction is legitimate for it to be executed and written to the blockchain. A structure of Merkle Trees in the code makes it simple to recognize changes made to the Libra Blockchain. With 5KB transactions, 1,000 verifications per second on commodity CPUs and up to 4 billion accounts, the Libra Blockchain should be able to operate at 1,000 transactions per second if nodes use at least 40Mbps connections and 16TB SSD hard drives.
Transactions on Libra cannot be reversed. If an attack compromises over one-third of the validator nodes causing a fork in the blockchain, the Libra Association says it will temporarily halt transactions, figure out the extent of the damage and recommend software updates to resolve the fork.
Transactions aren’t entirely free. They incur a tiny fraction of a cent fee to pay for “gas” that covers the cost of processing the transfer of funds similar to with Ethereum. This fee will be negligible to most consumers, but when they add up, the gas charges will deter bad actors from creating millions of transactions to power spam and denial-of-service attacks. “We’ve purposely tried not to innovate massively on the blockchain itself because we want it to be scalable and secure,” says Marcus of piggybacking on the best elements of existing cryptocurrencies.
Currently, the Libra Blockchain is what’s known as “permissioned,” where only entities that fulfill certain requirements are admitted to a special in-group that defines consensus and controls governance of the blockchain. The problem is this structure is more vulnerable to attacks and censorship because it’s not truly decentralized. But during Facebook’s research, it couldn’t find a reliable permissionless structure that could securely scale to the number of transactions Libra will need to handle. Adding more nodes slows things down, and no one has proven a way to avoid that without compromising security.
That’s why the Libra Association’s goal is to move to a permissionless system based on proof-of-stake that will protect against attacks by distributing control, encourage competition and lower the barrier to entry. It wants to have at least 20% of votes in the Libra Association council coming from node operators based on their total Libra holdings instead of their status as a founding member. That plan should help appease blockchain purists who won’t be satisfied until Libra is completely decentralized.
USING LIBRA – Libra on the move!
So, how do you actually own and spend Libra? Through Libra wallets like Facebook’s own Calibra and others that will be built by third-parties, potentially including Libra Association members like PayPal. The idea is to make sending money to a friend or paying for something as easy as sending a Facebook Message. You won’t be able to make or receive any real payments until the official launch next year, though, but you can sign up
None of the Libra Association members agreed to provide details on what exactly they’ll build on the blockchain, but we can take Facebook’s Calibra wallet as an example of the basic experience. Calibra will launch alongside the Libra currency on iOS and Android within Facebook Messenger, WhatsApp and a standalone app. When users first sign up, they’ll be taken through a Know Your Customer anti-fraud process where they’ll have to provide a government-issued photo ID and other verification info. They’ll need to conduct due diligence on customers and report suspicious activity to the authorities.
From there you’ll be able to cash in to Libra, pick a friend or merchant, set an amount to send them and add a description and send them Libra. You’ll also be able to request Libra, and Calibra will offer an expedited way of paying merchants by scanning your or their QR code. Eventually it wants to offer in-store payments and integrations with point-of-sale systems like Square.
The Libra Association’s e-commerce members seem particularly excited about how the token could eliminate transaction fees and speed up checkout. “We believe blockchain will benefit the luxury industry by improving IP protection, transparency in the product life cycle and — as in the case of Libra — enable global frictionless e-commerce,” says FarFetch CEO Jose Neves.
PRIVACY — at least from Facebook:
Facebook CEO Mark Zuckerberg explained some of the philosophy behind Libra and Calibra in a post. “It’s decentralized — meaning it’s run by many different organizations instead of just one, making the system fairer overall. It’s available to anyone with an internet connection and has low fees and costs. And it’s secured by cryptography which helps keep your money safe. This is an important part of our vision for a privacy-focused social platform — where you can interact in all the ways you’d want privately, from messaging to secure payments.”
By default, Facebook won’t import your contacts or any of your profile information, but may ask if you wish to do so. It also won’t share any of your transaction data back to Facebook, so it won’t be used to target you with ads, rank your News Feed, or otherwise earn Facebook money directly. Data will only be shared in specific instances in anonymized ways for research or adoption measurement, for hunting down fraudsters or due to a request from law enforcement. And you don’t even need a Facebook or WhatsApp account to sign up for Calibra or to use Libra.
“We realize people don’t want their social data and financial data commingled,” says Marcus, who’s now head of Calibra. “The reality is we’ll have plenty of wallets that will compete with us and many of them will not be in social, and if we want to successfully win people’s trust, we have to make sure the data will be separated.”
In case you are hacked, scammed or lose access to your account, Calibra will refund you for lost coins when possible through 24/7 chat support because it’s a custodial wallet. You also won’t have to remember any long, complex crypto passwords you could forget and get locked out from your money, as Calibra manages all your keys for you. Given Calibra will likely become the default wallet for many Libra users, this extra protection and smoother user experience is essential.
For now, Calibra won’t make money. But Calibra’s head of product Kevin Weil said that if it reaches scale, Facebook could launch other financial tools through Calibra that it could monetize, such as investing or lending. “In time, we hope to offer additional services for people and businesses, such as paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass,” the Calibra team writes. That makes it start to sound a lot like China’s everything app “WeChat”.
LIBRA – a global coin?
Facebook got one thing right for sure: Today’s money doesn’t work for everyone. Those living comfortably in developed nations likely don’t see the hardships that befall migrant workers or the unbanked abroad.
Preyed on by greedy payday lenders and high-fee remittance services, targeted by muggers and left out of traditional financial services, the poor get poorer. Libra has the potential to get more money from working parents back to their families and help people retain credit even if they’re robbed of their physical possessions. That would do more to accomplish Facebook’s mission of making the world feel smaller than all the News Feed Likes combined.
If Facebook succeeds and legions of people cash in money for Libra, it and the other founding members of the Libra Association could earn big dividends on the interest. And if suddenly it becomes super quick to buy things through Facebook using Libra, businesses will boost their ad spend there. But if Libra gets hacked or proves unreliable, it could cost lots of people around the world money while souring them on cryptocurrencies. And by offering an open Libra platform, shady developers could build apps that snatch not just people’s personal info like Cambridge Analytica, but their hard-earned digital cash.
LIBRA vs. CRITICS
Lawmakers and regulators are concerned about a new financial tool that will suddenly be available to Facebook’s 2.4 billion users, and they are scrambling to determine how to oversee it. Facebook will attend two public Congressional hearings this week, to evaluate Libra’s potential impacts on consumers and global financial systems. Some have proposed legislation to stop Libra altogether.
In a press conference Monday, Treasury Secretary Steven Mnuchin said the government is worried Libra could be used for human trafficking, purchasing illegal drugs and other illicit uses. Last week, Federal Reserve Chairman Jerome Powell told Congress Libra “raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability.”
Facebook said it is willing to delay its entrance into the cryptocurrency market to work with regulators, though that may not stop the Libra rollout altogether.
Facebook just tried to reinvent money. Next year, we’ll see if the Libra Association can pull it off. Well, at least now we can make up our own mind about whether to be scared of Facebook crypto or not.
Thanks, and hope you enjoyed reading it!
Bashir Haji Ali