Is Libra As Noble As It Is Made Out To Be

Facebook, the social networking giant, and cause of ire of many regulators and users, recently revealed plans for a new global digital currency, or cryptocurrency, called Libra, which is built on a secure, scalable, and reliable blockchain. The currency is backed by more than two dozen multinational groups ranging from payments gateways to technology and marketplaces, though financial companies are missing, and is backed by sovereign debt of a bunch of stable countries. This is the most significant effort by the largest social network in the world to transform financial services, and the scope of its ambitions for its new currency was made evident as it claimed 1.7 billion people around the world without a bank account would be able to use.

The company claimed the currency would enable users nearly free money transfers across the borders from their mobile phones and create a more efficient payment system that users would be able to use immediately and directly from their apps. This includes acting as a replacement for cash in underbanked areas, paying merchants for services, and transferring money to friends or family. Facebook intends for the new cryptocurrency to be a replacement and alternative for paper money and even credit cards. Even without banks, Libra can help people keep their funds safe and accessible by creating a simple system that offers similar fungibility to cash.

To manage the currency, an independent, not-for-profit membership organization, named the Libra Association, has been formed, which will preserve the stable value of Libra and will have the final decision-making authority. Each founding partner in the Libra Association contributed a minimum of $10 million to help kick-start the project, and so far, 28 groups including venture capital companies have agreed to become backers and integrate the technology into their services. Facebook, which played a crucial role in the creation of the Libra Association and the Libra Blockchain, hopes that at least 100 companies would join the organization and help in developing the technical roadmap of the Libra network.

To prevent the use of Libra as an instrument for speculation and investment, like Bitcoin and Ether, which have no underlying assets to back them, Libra will be supported by a set of stable and liquid assets to preserve its value. The underlying assets are known as Libra reserve, and it would help in protecting against the speculative swings, unlike other cryptocurrencies, and support stability and value preservation. The value of Libra will be effectively linked to a basket of fiat currencies, and the reserve will be invested in low-risk assets that will yield interest over time, including bank deposits and government securities in currencies from stable and reputable central banks.

While Libra uses cryptocurrency technology, with a public ledger, it is more restricted than other cryptocurrencies, and thus is not really a blockchain in the traditional sense. Blockchain can be widely categorized into permission and Permission less. In a permissionless chain, anybody can mine new coins, like Bitcoin and Ethereum, and are highly decentralized but they are much slower. Permission blockchains, on the other hand, are not as decentralized but are faster. While the goal of Libra is to become permission less chain eventually, it will start as a permission blockchain. For the new currency to be a success, the underlying system must be highly secure, to ensure the safety of funds and financial data, and should have the ability to scale to billions of accounts to handle a huge number of transactions.

The company in its White Paper explained that the cryptocurrency is intended to extend a digital payment method to under-served populations and does not see the cryptocurrency as an attempt to replace the current financial system. The paper stressed that even though one billion have a mobile phone and nearly half a billion have internet access, 1.7 billion adults remain outside of the financial system with no access to a traditional bank, and it is this gap the currency intends to fill. To facilitate transfers, Facebook is launching a digital wallet called Calibra, which will not be available until the first half of 2020 and will be integrated into its family of apps.

Outrage against the financial industry because of high transaction fees by banks, currency exchange companies and remittance intermediaries are common, but there is a good reason to doubt the intentions of the company which has a sketchy record of integrity. Even if users were to trust the digital currency, the company’s goal of financial inclusion is not as easy as the company claims. According to the World Bank, of the total 1.7 billion financially excluded people, three-quarters do not have internet access, limiting their ability to go digital. The digital penetration at financially-excluded regions in many emerging countries is still low by modern standards and broadband availability in many emerging economies is still missing. Moreover, the bulk of unbanked can be found in rural areas, which is far less likely to be digitally connected. Additionally, with regulatory concerns and know your customer issues, poor people are less likely to be able to prove their identity.

The proposed digital currency will face many regulatory hurdles, ranging from tax problems and money laundering to the stability of the financial system and effective transmission of monetary policy. Its mainstream adoption will be hampered by tax laws around the world. Rather than fix it in value against the domestic currency, it will be pegged to a basket of currencies globally. However, this will create capital gains and losses as Libra holdings will change as global exchange rates change. Moreover, the governing body will have to reassure concerned authorities that it can prevent fraud and undergo stringent anti-money laundering checks, which may include applying for money transmitter licenses from every regulator in the country it operates in. Apart from regulatory challenges, explaining the complexity of the currency to consumers and merchants would not be easy, especially to the part of the population it claims to serve the most, which might further hinder its usage.

Given the unanswered questions around accountability and control, the new currency is unlikely to become the default currency of the world any time soon. While some regulators have threatened close scrutiny of the currency, others have cautiously welcomed the project, and stressing the financial inclusion message seems like a ploy to win over policymakers. An asset would become a preferred mode for transaction only if it satisfies all the three conditions, namely unit of account, store of value, the standard of deferred payment, and medium of exchange. Libra’s best bet is to become a medium of exchange for a large part of the world, but even that looks viable for small and ordinary transactions.

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