Libra: Coin Of The Realm

First Notes On Facebook & Libra

The word “Libra” comes from the Latin word for weights & balances - related to the mythology of Libra and a Greek “Titan” named Themis, a Greek goddess of justice, and is an inspiration for the “Lady Justice” image we may recognize from courthouses.

It’s also the name for Facebook’s digital currency and inspired a lot of “hot takes”.

Here’s my one line oversimplified take:

Libra is not bitcoin and looks more like a futuristic traveler’s checks network based in Switzerland.

Let’s move step-by-step through the details.

Libra is being developed by a team headed by a former executive of Facebook Messenger and Coinbase board member, David Marcus. The New York Times reported on February 28, 2018 that Facebook’s move was prompted in part by rival Telegram raising $1.7B USD to build its own cryptocurrency. But Facebook’s ambitions may be less about crypto and more about cash.

First a few details regarding Libra.

From the Libra whitepaper:

The mission for Libra is a simple global currency and financial infrastructure that empowers billions of people. Libra is made up of three parts that will work together to create a more inclusive financial system:

  1. It is built on a secure, scalable, and reliable blockchain;

  2. It is backed by a reserve of assets designed to give it intrinsic value;

  3. It is governed by the independent Libra Association tasked with evolving the ecosystem.

Libra’s 3 Parts: The Blockchain, the Reserve and the Association

The Blockchain:

The blockchain is described in the technical paper’s abstract as:

The Libra Blockchain is a decentralized, programmable database designed to support a low-volatility cryptocurrency that will have the ability to serve as an efficient medium of exchange for billions of people around the world.

We present a proposal for the Libra protocol, which implements the Libra Blockchain and aims to create a financial infrastructure that can foster innovation, lower barriers to entry, and improve access to financial services.

To validate the design of the Libra protocol, we have built an open-source prototype implementation — Libra Core — in anticipation of a global collaborative effort to advance this new ecosystem.

The Reserve:

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 real assets would be “bank deposits and short-term government securities in currencies from stable and reputable central banks”.

The Association:

The Reserve would be controlled by the “Libra Association”, an independent, non-profit membership organization, based in Geneva, Switzerland. It’s effectively a cooperatively owned international private bank governed by a “Libra Association Council” whose major decisions would require a super-majority two-thirds vote.

Libra is not “mined” like Bitcoin:

The Libra coin itself would not be mined like bitcoin. It would be created and “burned” though the deposit and withdrawal of real assets. “Coins are only minted when authorized resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorized resellers sell Libra coin to the association in exchange for the underlying assets. The Libra Reserve acts as a “buyer of last resort.”

What Some Experts Think of Libra:

Various experts have shared first reactions to Libra and at the moment it all feels like they are all in a pitch black room with a giant beast. One person has the tail, another the trunk and others the legs and so on. Assembling their initial reactions to Libra has been very helpful.

For Facebook’s official P.O.V., we can look to David Marcus’ twitter account to help us understand Facebook’s, and the Libra Association’s, intentions. Additional views, including Scott Galloway, Brian Roemmele, Jameson Lopp, and Muneeb Ali have been shared in part below.

Marcus’ description of Libra’s mission and main components:

Libra's mission is to enable a simple global currency and financial infrastructure that empowers billions of people.

It's time to try something new for the 1.7 billion people who are still unbanked 30 years after the invention of the web.

Libra has 3 distinct components:

1) a BFT-based (LibraBFT) permissioned (to start) scalable blockchain;

2) a reserve-backed cryptocurrency designed to be a medium of exchange;

3) a new programming language (Move).

From Jameson Lopp’s review of Libra:

Libra is a generic crypto asset protocol and the first asset will be a stablecoin.

…in order for the stablecoin peg / basket to be maintained, some set of entities must keep a bridge open to the traditional financial system. This will be a persistent point of centralized control via the Libra Association.

From a data structure perspective, Libra is more like Ethereum or Ripple than Bitcoin… Facebook is unlikely to be concerned with privacy while it does sound interested in smart contracts.

Sounds like Facebook has not solved any of the massive problems that Ethereum has been working on for years.

[I]t sounds like the Libra coins are actually the native unit of the protocol much like ETH is the native unit of Ethereum. Which leads to more questions about the pseudonymous nature of Libra; can you acquire coins without AML/KYC? If not, then it seems like you wouldn’t be able to use any of the system’s functionality anonymously.

From reading about the Calibra wallet, it will require AML/KYC, thus I wonder if there will eventually be on-ramps into the system that aren’t tightly controlled.

The Libra Blockchain” is not actually a blockchain. It’s really weird that this protocol seems to be very well designed and yet they keep calling it a blockchain when the data structure of the ledger history is a set of signed ledger states. Validators are making commitments for each ledger state, and all of the historical ledger states are also committed to in Merkle trees, but I have yet to actually see any backlinked lists of data that form a chain, much less a chain of blocks.

Muneeb Ali’s line-by-line review of the whitepaper overlapped with Jameson Lopp’s notes. Ali is the CEO of decentralized computing venture Blockstack:

Fairly positive mission

It’s the “global currency”part that might raise flags with entities that don’t want Big Tech to move into the business of printing money

“transition to permissionless - this is the hard challenge” with the “biggest question mark”

A part of Libra capturing many experts’ attention including Ali
The Libra Reserve: This is potentially more interesting than the blockchain tech.

A digital currency that can have stable value outside gov[ernment].

Overall a pretty solid approach. This is not some clueless bank jumping on the “hype train”

In my view the biggest challenges will be: (a) switch to permissionless (b) earning trust of developers(c) any potential conflicts with FB business model

Both Jameson Lopp’s and Muneeb Ali’s notes have two overlapping observations:

First, Libra’s technical design may be sound but it is not strictly speaking “blockchain” and

Second, the objective of Libra making a “transition from permissioned to permissionless state” - of delivering the promise of a truly decentralized service for billions of users in just five years - will be a challenge worthy of the Greek gods.

The immediate concern about Facebook’s involvement: Privacy

David Marcus noted that while Facebook may have helped to start Libra’s development it is trying to allay concerns about the company’s intentions:

Facebook has created a subsidiary, Calibra, …that will build services on top of the Libra network and currency, starting with a wallet (one of many that will launch on Libra).

One of the reasons … was to have a dedicated, regulated entity that will make strong privacy commitments to its customers as we've heard loud and clear that you don't want social and financial data commingled. We understand we will have to earn your trust.

While Facebook / Calibra will continue to contribute and work on this project, we will not have any special rights or privilege with the Libra Association and the network by the time it launches. In other words, we will have the same governance rights as any other member.

Building Libra itself may prove far easier than trusting Facebook. But the Libra whitepaper’s story about on-boarding the Great Unbanked of 1.7 billion people is a desirable dream.

Scott Galloway shared both the dream & the reality about Libra serving the Unbanked:

The Libra coin is simply brilliant. Other than education and healthcare, the industry most ripe for disruption is financial services. It’s figured out a way to avoid 1.7 billion people — a quarter of the planet — whom we refer to as "unbanked." Yet two-thirds of them own a mobile phone that could help them access financial services. Within financial services, the remittance industry (wires, sending money home) is a $500 billion industry where the unbanked (the poor) are molested with 7% fees.

A stablecoin that facilitates inexpensive transfers of funds across borders could be the largest tax cut for the poor since vaccinations. In addition, hundreds of millions of banked people are vulnerable to poor governance and unstable currencies that result in vaporization of their savings (Argentina) or eating trash to survive (Venezuela).

Galloway, however, has also described the reality which looms over the dream.

Nobody was going to place a smart camera in their home from a guy who puts tape over his computer camera. And no elected official will let an organization with the culture of Uber, the negligence of Facebook, and the centralization of Visa replace their central bank.

Again, my one-line take is:

Libra is not bitcoin and looks more like a futuristic traveler’s checks network based in Switzerland.

Imagine what can happen when you don’t have to exchange money or move it between services, to buy anything, and the unit of value for your digital currency doesn’t take a roller-coaster ride every other hour? And you had the equivalent of one-third of the world’s population using one app for cheap and instantaneous financial transactions?

The building of a payments layer, with a new global medium of exchange, on top of a social network - accessible to 2.7 billion users of WhatsApp and Messenger - reflects an intention to create a global alternative to payment apps constrained domestically such as Tencent Holdings’ WeChat Pay and Alibaba’s Alipay.

Recently, Zuckerberg announced that the heads of the company’s four app families - Facebook, Instagram, Messenger and WhatsApp - would report to him directly. This was meant to be in keeping with a pivot to a “privacy-focused vision” of one-to-one messaging with end-to-end encryption. At the same time one of the biggest roll-outs in the history of money may be unfolding and these managers could become key players.

There were many hot takes after the Libra announcement because Facebook is the same company struggling with concerns about user privacy and employee working conditions. It’s drawn opposition from politicians, investment and tech professionals.
Should we worry that a very centralized finger has been pressed on the scales? Some in Congress aren’t waiting to find out. Libra’s development meets its first roadblock.

The U.S. Congress would not be the only governmental entity for Libra to work with. The Financial Times reported that Bank of England Governor Mark Carney would keep an “open mind” about Libra but that it would not have an “open door” with regulators. Carney noted that strict regulation would be used to address money laundering, hacking, and user privacy. Other parties include the G7, the Bank of International Settlements (BIS), the Financial Stability Board and the International Monetary Fund.

France, which heads the Group of 7 (“G7”), has already appointed a former ECB board member to lead a task force to examine central banks’ role to ensure how cryptocurrencies would be “governed by regulations ranging from money-laundering laws to consumer-protection rules”.

The BIS has released commentary within its annual report relevant for Libra. While the Bank recognizes that it’s early days, for what could be a huge new opportunity for tech giants and for the Unbanked, it also cautioned “big techs have the potential to loom large very quickly as systemically relevant financial institutions”, and that their “entry presents new and complex trade-offs between financial stability, competition and data protection”. Too Big To Fail, Part 2 may be the scenario the BIS fears.

Cameron Winklevoss, of Facebook and Gemini (another crypto horoscope name) predicted that every FAANG company will have its own coin within 24 months. I wonder if they will all follow this same global non-profit association model but they will most certainly face the same scrutiny as Facebook and Libra.

Carney’s stance is understandable.

Last year about $1.7B USD in cryptocurrencies was stolen in 2018 according to CipherTrace Cryptocurrency Intelligence. Setting aside fears of Facebook there are other bad actors ready to defraud and steal from billions of Unbanked people who would be ripe targets.

As a permissioned blockchain, at least for the next few years, Libra would have both the vulnerability of censorship by those who govern Libra (since despite the Council’s “2/3 supermajority” rule there are bound to be politics) and more significantly potential vulnerability to outside attacks.

Facebook will not be the only company involved in this process.

It’s early days for Libra, likely filled with many meetings with public officials, with long road ahead to serve billions of people by 2020 and then somehow go “permissionless” by about 2025. Who else besides Facebook will be in the mix?

The Block analyzed the formation of the Libra Association - which will eventually have 100 members. The first members appear to be natural candidates, including on-demand Cos. and fintechs.

From Frank Chapparo’s report on the Libra Association:

Facebook charged each member $10 million to manage their own node, which allows members to access and view the network. Originally the company had ambitions to get Wall Street involved, but found a lack of interest among institutional giants like Goldman Sachs and JPMorgan.

It is still looking to have 100 members in the governing association…

This funding from the consortium members will back the coin, which will be pegged to a basket of currencies. If successful, Facebook could net $1 billion from the 100 companies it hopes to include in the project.

Each of these nodes will also reportedly get a seat in the Libra Association as node operators, sending a representative to the consortium.

Reports of a Facebook cryptocurrency began circulating in May of 2018, when Cheddar reported the social media giant had begun looking into blockchain nearly a year prior. Facebook then announced David Marcus, vice president of its Messenger app and once-member of Coinbase’s board, would lead its blockchain efforts. Prior to Marcus’s appointment, Morgan Beller, a member of Facebook’s corporate development team, was the only employee studying blockchain.

Since then, Facebook expanded the project and talk of a stablecoin increased with each step the company took into the blockchain world.

In May of this year, Facebook registered Libra Networks LLC in Geneva, Switzerland, where it is working on blockchain developments, according to its register. BBC later reported that the company is looking towards a Q1 2020 launch of the coin, and has plans to begin testing it later this year before launching in a “dozen” countries.

What are Libra Association members getting out of being involved?

Brian Roemmele, an expert and commentator on voice and payment technologies, shared relevant thoughts about what Libra is relative to money and crypto:

You know Libra has great parents, the Money Order and the Travelers Check dressed in a great crypto wardrobe. The internet needs Libra but it is not really Crypto or Bitcoin it is a currency arbitrage system that will make the 100 owners wealthy.

Libra is needed for the Internet to move forward. Libra will never replace Bitcoin. Bitcoin will be bolstered by Libra as it moves to 6 digits. There will be many more coins to come.

You know from my perspective Libra is like any other proxy currency. More an American Express Travelers Check or Postal Money Order then it is Bitcoin. It just happens to borrow some minor aspects of Bitcoin. So Libra come with all these features.

There needs to be a way to instantly transact anyplace in the world. Cross border transactions today are fractured. The potential to embed a payment protocol into the Internet stack is vital. Nano and micro payments are needed to pay for content.

And Tyler Cowen’s observations on Libra included a similar perspective:

Imagine a private payment company issuing SDRs, or some other similar basket, based on 100% backing. They would offer you new transactions technologies for greater convenience (WhatsApp?), in return receiving access to your transactions data and sharing some of the float and spread all around, to merchants and customers too.

I mentioned WeChat Pay earlier. Chinese mobile payments in aggregate, with 90% of it via Alipay and WeChat Pay, was over 277+ trillion yuan ($40+ T USD) in 2018.

A global version, built on multiple currencies, could dwarf that volume. That’s part of the allure for Facebook, Calibra, and the Libra Association’s members and so $10M USD a piece for an opening gambit seems like a small price for each member to pay.

Ben Thompson of Stratechery has described the potential endgame for Facebook:

the implication that digital currencies will do for money what the Internet did for information is that the very long-term trend will be towards centralization around Aggregators.

When there is no friction, control shifts from gatekeepers controlling supply to Aggregators controlling demand.

To that end, by pioneering Libra, building what will almost certainly be the first wallet for the currency, and bringing to bear its unmatched network for facilitating payments,

Facebook is betting it will offer the best experience for digital currency flows, giving it power not by controlling Libra but rather by controlling the most users of Libra.

Before anyone panics over a “Bank of Facebook”, we should be reminded that there will be hurdles to overcome before a Libra coin goes live. The hurdles, in summary, from the New York Times article How Libra, Facebook’s Cryptocurrency Would Work For You include:

The Swiss association governing Libra will first have to agree on the final design of the cryptocurrency. Then the association will have to find banks willing to hold the money that will back up the currency. Financial regulators, many of whom have been hesitant about cryptocurrencies, will need to sign off on the design.

Much to do in Geneva and everywhere else.
The dream for billions and Libra Association members is big (and slightly boring).
Goodbye Gnomes of Switzerland.
Hello to the new Kings and Queens of Crypto Cantons.

(Wikipedia from Romy Biner-Hauser)