On June 18, 2019, Facebook’s David Marcus announced Libra – a proposed open source stablecoin backed by government issued stable stocks and assets, and supported by a 28-member association comprised by some of the world’s biggest corporations, including Visa, PayPal, Booking Holding, Uber and more. The next day, Libra had become the year’s biggest headline in tech, financial and political news – and perhaps the biggest development in cryptocurrencies since Ethereum.
Soon after Libra’s announcement, the expected reactions materialized. Regulators sought to regulate, cryptocurrency critics criticized, and developers started developing on top of the Libra blockchain. Many questions emerged. Will Libra be a liberating force for people around the world; the billions that have never been able to access a stable currency? Or will it be yet another data collection scheme, bolstering Facebook’s database on everyone, and leading us further down the road of financial authoritarianism? For many, the track record of Libra’s parent company is enough evidence to be wary.
Nevertheless, after reviewing Libra’s white papers, I must disagree. Libra looks poised to become one of the most effective applications of distributed ledger technology thus far; and as a smart contract enabled stablecoin platform, it will set the stage for a series of innovative distributed financial applications that will further the interests of the whole industry – not just Facebook.
The standard criticism of Libra includes its quasi-distributed nature and leadership structure. The Libra Blockchain nodes, which are run by selected partners and trusted servers, seems to be in the center of all arguments against Libra. The association’s control over the Libra protocol is another point of conflict. Finally, in a platform where the transactions validating nodes are publicly known, why should development talent dedicate time to a platform that can be shut down by hostile governments without notice?
However, what Libra lacks in decentralization, it gains in scalability and usability. The Libra blockchain and Move, its dedicated programing language, are structured conveniently enough to grow in both transaction output and outcompete Ethereum’s smart contract capabilities. The Libra blockchain, being centralized, can also offer basic financial assurances, like fraud protection and account recovery, which come standard in today’s financial world and will help expand user adoption in rates not possible for public blockchain. The platform also aims to become exceedingly more decentralized as adoption grows – aiming to have over 100 association members, and thus servers, signed up and running over the next few years.
The most promising aspect of the Libra white paper is the honesty in which in portrays the protocol shortcomings. In the blockchain industry, a trilemma has been consistent since the Bitcoin white paper. An permissionless public blockchain can achieve only two out of either scalability, decentralization and security – finding a way to achieve all three has been the most sought after and debated innovation in the space.
In Libra’s case, the protocol aims to be scalable and secure, with decentralization limited to only trusted partners. This has been publicly stated in its white paper. With this in mind, Libra will never compete with Bitcoin, or even decentralized stablecoins like Maker’s DAI. Yet, compared to existing fiat-backed stablecoin incumbents which are also centralized, regulated and sometimes mistrusted, Libra might very well be the most decentralized alternative.
Furthermore, both the creation of Libra and the regulatory response have been tremendously important for the cryptocurrency ecosystem. On the regulatory front, House Rep. Maxine Waters was the first one to speak against Libra. She soon issued a formal letter calling for the cease of Facebook’s Libra operations until regulatory consensus was reached on the subject. Additional criticism came from President Trump, who outright attacked the stablecoin through his social media. His surprising outcry for more regulation was soon followed with an official statement by State Secretary Mnuchin. In the weeks following, Congress organized a series of hearings on Libra and the cryptocurrency industry as a whole.
An official regulatory position on blockchain and cryptocurrency by the US government has been elusive for years. The progress that Libra’s introduction has made on potential regulatory clarity is a sign that Facebook involvement in the space has already advanced the interest of the whole industry. Additionally, it seems that Libra has awakened some of the largest corporations in the world – Walmart, for example, has already issued a patent for a similar cryptocurrency to Libra.
On a final note, and although the Senate and House hearings have yet to materialize into official legislation, their concerns should be analyzed. One of the clearest issues was on Facebook’s role as the monopoly power within Libra – but these concerns are meant to be answered with the division of Calibra, Facebook’s Libra wallet, and the Libra association and protocol. Secondly, Know Your Customer and Anti Money Laundering and Terrorist Financing compliance seemed to be the most important point brought up by both the House and Senate hearings. Libra’s response was that fiat-to-Libra transactions will absolutely follow existing legislation – similar to the current operation of Cryptocurrency exchanges.
In conclusion, Facebook’s Libra has achieved the near impossible in unifying crypto-anarchists and regulators at its critics, and simultaneously achieved the most sought after development in the industry; the official recognition of Blockchain technology by the US government, and potential regulatory clarity. As a structure, although not permissionless and public, Libra looks like a big step forward for the rest of the ecosystem. Whether the proposed implementation materializes by 2020 is yet to be seen. But if Facebook is able to implement the current version of the Libra white paper, they will be creating a financial tool whose benefits outweigh its flaws, and for that they have my full support.
By Xenofon Kontouris - Writing for Stable Report