Facebook’s planned digital currency Libra has been at the center of a regulator and lawmaker-fueled whirlwind since the social media giant announced the project.
In this article, we explore Libra from its secretive inception to its long-awaited reveal. We also discuss the response the project has received as well as the potential changes to the global financial systems that may be inspired by it.
In early 2018, Facebook took a decidedly anti-crypto stance when it revealed that it was banning any and all advertisements related to cryptocurrencies. The global giant cited the 2017 ICO boom and the increased level of cryptocurrency-related fraud, much of which was facilitated or consulted through Facebook products such as Messenger, as the reasons for their action.
As a result, the rumors that Facebook was working on its own digital asset offering came as a surprise to many. It had seemed that the communication giant had decided there was not much of worth within blockchain technology and digital assets. The rumors seemed to hold some water when David Marcus, the head of Messenger at Facebook, announced his departure in May 2018 from the aforementioned position to another post within the organization.
Marcus, who has worked in a number of leading companies in the fintech sector, such as PayPal and Coinbase, explained that he was absconding all current positions to initiate and head an entirely new department at Facebook. This new department would be focused on exploring blockchain technology as well as how it could be leveraged by the social media giant.
In June 2018, Facebook submitted paperwork to the United States Patent and Trademark Office in an attempt to acquire the rights to the name Libra. Filling the paperwork under a subsidiary named JLV, the tendering gave a clue to the concretization of Facebooks’ digital asset plans. At the end of the year, a Bloomberg report gave further clue to the project, revealing that the social media giant was working on a digital asset, which would take the form of a stablecoin, for use within its messaging platform Whatsapp. The report claimed that Facebook would trial the project in India.
Despite these revelations, Facebook itself did not give further clarification on its Libra project. The only visible manifestation of a blockchain-based project in conception within the social media giant was the slew of related job postings. Facebook continued to hire blockchain professionals in the last quarter of 2018 and the first half of 2019.
Finally, in June 2019, Facebook announced its long-rumored and long-awaited cryptocurrency project, Libra, to the public through a press release, the social media giant revealed that it had created a new subsidiary named Calibra. Through Calibra, Facebook users would be able to participate in the Libra network.
Enter Libra and Calibra
In the press release, Facebook touted its new offering as an attempt to harness the power of the internet to better the financial accessibility of those who are inadequately served by the global fiscal system.
Facebook explained that though the internet has brought with it myriad advantages for people across the world, these advantages had not transferred to financial services. “If you have an internet connection today, you can access all kinds of useful services for little to no cost — whether you’re trying to keep in touch with family and friends, learn new things or even start a business. But when it comes to saving, sending, and spending money, it’s not that simple.”
Thus, Facebook was attempting to leverage blockchain technology to provide an efficient method of transferring and storing value, especially for those underserved by the global financial system such as women, those in developing countries, and immigrants. “This is the challenge we’re hoping to address with Calibra, a new digital wallet that you’ll be able to use to save, send and spend Libra.”
Calibra would create and develop software through which it would be possible to spend the digital currency Libra. The wallet would be named Calibra and would available through Facebook products Messenger and Whatsapp as well as a stand-alone application. The social media giant stated that the wallet was expected to launch in 2020.
The blockchain-based digital currency that Calibra will support is named Libra. According to its whitepaper, Libra is a stablecoin. However, in a slight rework of the stablecoin paradigm currently in existence, Libra will not be backed by just one fiat currency. Instead, its value will be underwritten by different sovereign currencies in varying percentages. The whitepaper states: “Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra.”
The decision to back the stablecoin with more than one currency or asset, as is currently popular, was informed by the need to foster a higher degree of stability and reduce volatility. The Libra Reserve refers to a basket of assets that the value of Libra Coin will be backed by. It is made up of a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable, reputable central banks.
At the time of its release, the specific fiat currencies were not included in the whitepaper. However, on September 20, 2019, Reuters published a report claiming that Facebook had divulged the fiat currencies, and the relevant percentages, which would be included in the Libra reserve to a German legislator named Fabio De Masi.
Quoting Der Spiegel, Reuters explained that Facebook had sent a letter to De Masi divulging that the Libra reserve would be composed of fiat currencies in the following proportions. “The dollar would make up 50% of the basket, followed by the euro with 18%, the yen with 14%, the British pound with 11%, and the Singapore dollar with 7%.”
Facebook’s decision to exclude the Chinese yuan, the sovereign currency of the world’s second-largest economy, from the Libra Reserve is likely informed by growing tensions between the Asian powerhouse and the US. Additionally, Facebook itself is facing significant pushback from American authorities and is likely attempting to allay their fears with this decision.
The stablecoin will be available for use within all of the products and services housed under the Facebook umbrella. People will reportedly be able to use Libra to purchase goods and services within Facebook, Messenger, Instagram, and Whatsapp. To access Libra, users will be required to cash in their local currency, after which they will receive a proportionate amount of Libra, to be stored in Calibra, after which they are free to transact or save as they see fit.
Facebook claims that the code underlying the Libra blockchain is open-source, with the only proprietary software being that of the wallet Calibra. The Libra blockchain will initially be structured as a permissioned blockchain, with plans to eventually transition to a permissionless network. According to Facebook, the Libra blockchain possesses a speed of up to 1,000 transactions per second. These speeds are much faster than Bitcoin’s seven transactions per second and Ethereum’s 15 TPS.
In the initial stages, nodes within the Libra Network will be owned and operated by the members of the Libra Association.
The Libra Association
Facebook hopes to position Libra Coin as the new cryptocurrency of choice for the online consumer. From acquiring goods and services from physical merchants and online vendors, with Libra as a mode of payment, customers will also be able to trade the digital asset to acquire fiat currency through a slew of third-party apps.
It is believed that Facebook settled on the permissioned model of blockchain governance to balance the dual needs of decentralization and coordination. A permissioned model comes with greater levels of control while still leveraging a certain level of decentralization, especially in comparison to structures with a central authority.
Initially, the token’s governance will be overseen by the Libra Association. These companies will vote on any and all decisions regarding the Libra digital asset. Companies who signed up as founding members of the Libra Association contributed significant amounts of money, upwards of $10 million, to acquire the right to participate in the governance structure of Libra Coin. These funds went to creating the Libra Reserve. Founding members will be entitled to interest earned on the Reserve in the relevant proportions.
Lastly, Facebook aims to leverage the association to “develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.” Though it is unclear how this will come to pass, though it may involve a combination of Libra with a global identity network.
The association is intended to be 100-man strong, with any company able to meet the requirements encouraged to apply. Initially, Facebook announced that the Libra Association would be composed of 28 founding members. These members were composed of big names across a wide berth of industries. Some of the most notable names included Mastercard, PayPal, Stripe, Visa, Lyft, eBay, and Uber, among others. However, recent events have led to a significantly smaller group at the inaugural meeting of the Association.
Since the announcement revealing Libra, the US has shown significant resistance to the idea of a Facebook-backed digital currency. Only days after the announcement, Maxine Waters, the Democratic Head of the House Committee on Financial Services, sent a letter to Mark Zuckerberg, Sheryl Sandberg, and David Marcus asking them to cease and desist with the project pending investigation.
Citing Facebook’s global reach, past privacy breaches, and the somewhat secretive whitepaper, Waters and the committee held that Libra a threat saying: “The scant information provided about the intent, roles, potential use, and security of the Libra and Calibra exposes the massive scale of the risks and the lack of clear regulatory protections. If products and services like these are left improperly regulated and without sufficient oversight, they could pose systemic risks that endanger US and global financial stability.” The Chairman of the Federal Reserve, Jerome Powell, the Treasury Secretary Steve Mnuchin, and President Donald Trump have also shared concerns on the implications of the digital asset.
Tensions between Libra and American authorities reached a fever pitch when a duo of senators, namely Brian Shatz and Sherrod Brown, sent a letter to a number of companies who had been named as members of the Libra Association. In the letter, the senators expressed concerns that Libra could be used to facilitate global organized crime, terrorism, money laundering, and child abuse.
In the letter dated October 8, 2019, the senators finalized: “Facebook appears to want the benefits of engaging in financial activities without the responsibility of being regulated as a financial services company. Facebook is attempting to accomplish that objective by shifting the risks and the need to design new compliance regimes onto regulated members of the Libra Association like your companies. If you take this on, you can expect a high level of scrutiny from regulators not only on Libra-related activities but on all payment activities.”
On Friday, October 11, several companies announced their exit from the Libra Association. Visa, Mastercard, and Stripe joined eBay, Mercado Pago, and PayPal, who had already left the association in the weeks preceding. Despite its embattled status, the Libra association held its first meeting in Geneva, Switzerland, on October 15, with 21 of the 28 original members.
In Europe, the project has also been heavily criticized by authorities, with both France and Germany threatening to ban it. However, some countries – like Sweden and China – are taking Facebook’s foray into the digital asset space as a sign of the times to come, and are reportedly planning to release their central bank backed-cryptocurrency.
Speaking to CNBC, the head of Sweden’s central bank Stefan Ingves, explained: “It has been an incredibly important catalytic event to sort of shake the tree when Libra showed up out of the blue, and that forced us to think hard about what we do.”
Despite this Ingves was quick to add that Libra may not succeed due to its private sector origins stating: “But the old issues — private sector money or public sector money — they are basically identical, and if history gives us any guidance at all then almost all private sector initiatives have collapsed sooner or later.”
What is clear is, if Facebook is able to surmount the large mountains of regulatory resistance that stand before it, its digital asset project is likely to affect the global financial system in a significant manner, and may also result in an influx of people to the cryptocurrency sector, through their interaction with the Facebook-backed Libra.