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Facebook this week finally announced its long-awaited cryptocurrency, and it's a doozy.
The company announced its new Libra crypto asset launching in 2020, the Libra blockchain it'll run on, an independent Libra Association with high-profile founding members to govern it, and a new subsidiary called Calibra that'll release a Libra wallet and other financial products to serve the Libra ecosystem.
There's a ton of detail to unpack across the Libra white paper, the developer documentation, and what Facebook execs are saying. Libra has the potential to realize one of the core promises of cryptocurrency since its inception: upending banking, credit, payments, and the financial world order with a seamless digital economy where billions of users worldwide can securely send and receive money, and make everyday crypto-based transactions in an instant.
But there are a lot of trade-offs, compromises, and questions. There are questions about privacy, security, and regulation; about trading complete decentralization for transaction speed and scale; about how much power the Libra Association will wield as a result; about the multi-currency-backed stablecoin and Libra Reserve; about the mechanics of actually using the cryptocurrency in all the ways Facebook envisions; and about what it all means for Facebook's future. Plus, how do Calibra and other companies plan to make money on all of this?
What Can Consumers Do With It?
The easiest way to think about Libra's digital cash, at least in how Facebook initially envisions it being used, is as a crypto-based alternative to web-based and mobile transfer services like Apple Pay Cash, PayPal, and Venmo.
Using Calibra or other cryptocurrency wallets like Coinbase (a founding Libra Association member), users can exchange their fiat currency into Libra, send and receive money from other contacts, and pay for products or services all within the app.
Facebook will of course make it easy to use within its own apps. Calibra will be built into both Messenger and WhatsApp (though not Instagram for now) to transfer money with a few taps.
Calibra will also be available as a standalone Android and iOS app, and Facebook expects it to compete with plenty of third-party wallet apps supporting Libra.
Facebook execs including Mark Zuckerberg and VP of Blockchain David Marcus say they see Libra first and foremost as a simple global currency for the billions of people around the world who don't have a bank account but do have a smartphone. There are a host of practical questions as to how unbanked users would actually get and use Libra, but more on that in a minute.
Is Libra a Decentralized Cryptocurrency?
The answer is yes, but not in the same way as Bitcoin, Ether, Ripple, and most of the other popular cryptocurrencies in the market. If you're looking for a speculative investment asset that you can drop money into in the hopes of seeing a huge price spike that doubles your investment, this stablecoin isn't it.
Libra is laser-focused on payments, and the Libra Reserve is designed to preserve value and keep prices stable over time to ensure smooth transactions. Rather than working with a fixed supply of tokens like Bitcoin, Libra will always have exactly as many coins as the basket of fiat currencies backing it. When a user exchanges dollars, euros, pounds, Swiss francs, yen, etc. for Libra, new corresponding assets are created. When they pay or cash out, those tokens are destroyed.
How Does the Libra Blockchain Work?
Libra isn't entirely centralized, but it's not truly decentralized either. On the Bitcoin or Ethereum blockchains, for example, anyone who knows how and has the hardware to run one can set up a node and begin validating transactions. The Libra blockchain is permissioned; only Libra Association members can operate nodes, the 28 founding billion-dollar companies all invested at least $10 million into the Libra Reserve for the privilege.
Facebook said Libra will be able to process and validate up to 1,000 transactions per second (Bitcoin and Ethereum can only handle between 7 and 15) but the trade-off is that there aren't that many nodes and we all know who's operating them.
The Libra blockchain itself will be fast and modern, incorporating advanced cryptographic techniques like Byzantine Fault Tolerance and Merkle Trees that (to simplify a bit) will let Libra's nodes quickly verify transactions, write them to the permanent blockchain, and easily come to consensus on changes made to the blockchain.
Libra also doesn't use Bitcoin's Proof of Work model, which will keep its energy footprint low. Transactions all incur fractional processing fees to cover the technical cost; Facebook said these will be negligible to users but add up enough to deter malicious actors from flooding the system.
Developers will be able to build distributed apps and smart contracts atop the Libra blockchain using the new Move programming language, which is still in development. One worrying aspect is that Facebook said neither itself nor the Libra Foundation will be in charge of vetting and approving apps, meaning there could be the potential for fraudulent or scam apps.
What Does the Libra Association Get Out of This?
The 28 founding members of the Libra Association—which will be based in Geneva, Switzerland—include venture capital firms (Andreessen Horowitz and Union Square Ventures), e-commerce and tech companies (Booking.com, eBay, Uber Lyft, Spotify), blockchain companies (Anchorage, Coinbase, Xapo), telecommunications companies like Vodafone, and some big credit card and payments companies (Visa, MasterCard, PayPal, Stripe). And, of course, Facebook and Calibro.
As mentioned, the members all invested $10 million for a node on the Libra blockchain and a voting stake in the Libra Association council, which will oversee Libra's development, adding new members, and control adjustments to the Libra Reserve to maintain the stablecoin's value. The council will also vote on a managing director, elect a board, and oversee incentive programs and research initiatives to spur activity in the Libra ecosystem.
Most importantly, though, that $10 million buys each member a share of Libra Investment Tokens. If the cryptocurrency grows popular enough and accrues an ever-larger asset reserve, Libra Association members get dividends back on the interest. Facebook hopes to grow the association to 100 members by launch in 2020, and to get banks and more big tech companies onboard.
What About Privacy and Security?
Mark Zuckerberg has decided that the future of Facebook is a privacy-focused platform, and how the company handles Libra and Calibra are a big part of that vision. In his Facebook post on Libra and Calibra, Zuck said "privacy and safety will be built into every step," even if how that's executed is somewhat counterintuitive. Calibra will require a government-issued ID to set up an account in order to prevent fraud, but Facebook also says Libra transactions will not include any personal info.
One thing we do know is that Facebook, which is clearly conscious of its reputation around privacy, will keep social and financial data completely separate. The company said it won't collect any transaction data, which will be encrypted on the Libra blockchain, and won't share any data (except for anonymized research and law enforcement requests) or use it for ad targeting.
Marcus, who is also heading up Calibra, said Facebook won't import any contacts or profile info when setting up Calibra. The company doesn't even require a Facebook or WhatsApp account to sign up.
As for security, Calibra will have a dedicated fraud team and policies, but the more centralized nature of the Libra blockchain means the infrastructure itself may be more vulnerable to attack.
How Will It Be Regulated?
That's the big question. Facebook ceding control over Libra to the nonprofit foundation is, at least in part, a calculated move to distance itself from day-to-day governance in light of already intense regulatory scrutiny over its data and privacy practices. The US Senate Banking Committee has sent an open letter about the cryptocurrency, and European regulators are reportedly already looking into Libra.
Libra is set up in a permissioned manner that should help it avoid the money laundering and illegal transactions that have plagued Bitcoin and other cryptocurrencies, but regulators around the globe will be paying close attention. Zuck said "Calibra will be regulated like other payment service providers," but how Libra is regulated on a country-by-country basis may have ripple effects for the crypto market writ large. Facebook is pulling global currencies in to back its crypto assets while positioning Libra to disrupt the banking and money world order.
The SEC and CFTC, and regulatory agencies worldwide will likely have a lot to say about what Libra can and can't do leading up to its public launch in 2020. The House Financial Services Committee has already called a hearing and requested that Facebook pause development on Libra "until Congress and regulators have the opportunity to examine these issues and take action."
How Will People Without Bank Accounts Use It?
Facebook is touting Libra as a decentralized solution to remittances and cross-border payments in developing countries and an alternative to options like Western Union, which can include exorbitant fees.
The thing is, a host of crypto solutions are already trying various ways of doing that, and have been for years. The problems that arise are always the same, and they're logistical, not technical: how do you actually get the digital money into the hands of unbanked people in a way they can use?
Libra needs to either give people ways on the ground to exchange cash for crypto and vice-versa, or they need to be paid and have the ability to buy goods directly in Libra. Even for Messenger and WhatsApp users around the world using Calibra, Facebook's verification requirements to comply with anti-money laundering and fraud regulations can also have the adverse effect of creating friction for cash-first users who need to send or receive money from another country.
Marcus has thrown out ideas such as physical stands to set up wallets and exchange cash for Libra or prepaid cards loaded with Libra. There are significant logistical challenges to either of those potential approaches, neither of which is expressly mentioned in the white paper. Solving the digital banking and money problem for billions of unbanked users is a vital effort, but it remains to be seen how Facebook will solve the very real challenges of making that happen on the ground.
Why Would Businesses Use Libra?
The prevailing wisdom with cryptocurrency (and really any new payment method) has always been that once enough users adopt it, merchants will follow suit to keep up with market demands. The same holds true with Libra, especially given the fact that Facebook's billions of users across its app family will have instant access to it.
Facebook and the Libra Association want to spur merchant adoption to expand the Libra ecosystem, which also plays into Facebook's big push toward e-commerce as a significant revenue source. Merchants and services that already offer products through Facebook might be incentivized to get more people signed up, offer discounts, and launch Libra-based rewards programs. Merchants also get a percentage of each Libra transaction back in addition to lower fees compared to credit card processors.
For companies like Uber, Lyft, and Spotify, which also serve as foundation members with investment tokens, there are also potential financial benefits of offering discounts, incentives, and reward programs to users for paying in Libra, knowing they'll get a greater dividend back the more users who sign up. As the Libra Association works to sign up more members to pay into the reserve, they'll also be spurring more market activity as more companies set up nodes and the ecosystem grows.
Will the Libra Blockchain Ever Be Truly Permissionless?
All practical indications point toward no. The Libra white paper states a goal of moving to a permissionless blockchain within five years, but the reason Facebook went permissioned with Libra is because they couldn't figure out a way to scale a permissionless blockchain while maintaning fast enough transaction speeds. If Libra becomes popular and widely used, there may be even less incentive for the governing members to give up their power.
Jerry Brito, Executive Director of nonprofit research organization CoinCenter, said that over time the idea of investors giving up control and moving to a truly decentralized model may become less likely.
Is Facebook the Next Financial Services Giant?
Facebook wants its apps and technology to be indispensable in users' lives. That began with "connecting the world" and becoming the most convenient way for people to communicate across Messenger, Instagram, and WhatsApp.
With Libra and Calibra, Facebook wants to do the same for money. Libra itself has the potential to grow far beyond the bounds of Facebook, and the company is encouraging that open-source growth from the jump.
But pumping Libra coins into Facebook's app ecosystem could spur an explosion in e-commerce and shopping within its interconnected platforms that only grows as a revenue stream as more companies, merchants, and services sign on and begin accepting Libra as payment.
Then there's Calibra. It's starting off as just a wallet, but down the road Facebook has designs on rolling out a whole suite of financial services to ultimately make Facebook a bank in and of itself: global money transfers, loans, credit, commerce, and who knows, maybe even Libra checking and savings accounts or investment vehicles.
Of course, Facebook will likely take interest and transaction fees. Even if they are (dramatically lower) than competitors, Zuck is also going to make sure he gets paid.