The animated narrative about Facebook’s Global Coin over the fast couple of months culminated in the unveiling of the Libra coin on 18th June 2019. The social media is full of half-baked comments and opinions about the impact of this new digital coin which will be launched in 2020. Such media generated frenzy is not conducive to understanding what libra is about. Is it a cryptocurrency like bitcoin that works on a decentralized ‘permissionless’ blockchain? Is it a stablecoin like Tether which reduces risk of volatility as it is pegged against a fiat currency? Or is it as Waters, Chairperson of the US House Committee on Financial Services said, an attempt to usurp the role of the Government by launching a private currency? The only way to find out is to dive deep into the White paper released. So, I did just that.

Philanthropic: Music to the Ears

The Mission Statement of Libra White paper borders on the philanthropic with its purported aim ‘to create a new opportunity for responsible financial services innovation’ and its promise of ‘enabling a simple global currency and financial infrastructure that empowers billions’.

All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 just to borrow $100.When people are asked why they remain on the fringe of the existing financial system, those who remain ‘unbanked’ point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.

Most governments have failed in their endeavour to offer the last-mile financial inclusion to the poor and economically backward strata of society who live in far-flung geographical areas that remain ‘unbanked’. More than 1.7 billion adults worldwide, have no access to banking facilities. So, the goal of the ‘Libra coin’ to offer financial services to the unbanked sector at low cost is music to the ears and would most certainly benefit the economically backward nations. The Libra White Paper claims that the Libra digital coin will make moving money around globally as easy and as cost-effective as sending a text message or sharing a photo. Cheers to that.

Cryptocurrency: A misnomer?

Libra is being touted as a cryptocurrency with a difference. Cryptocurrency experts are divided in their opinion on that. The purists strongly believe that Libra is not really a cryptocurrency. So, the fundamental question that begs an answer is- Is Libra a cryptocurrency in the real sense of the word? Yes and No. The parameters that define a cryptocurrency are few but definite. Let’s check them out one by one. Is Libra decentralized? Hmm… That surely gives pause for thought. It is true that Libra does not rely on third-party approval and sanctions of Central banks but it is also a fact that it will be minted by the Libra Association, a private conglomerate, set up for this specific purpose. The White Paper spells it out clearly:

The association (Libra) is the only party able to create(mint) and destroy (burn) Libra. 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.

Is it built on a permissionless blockchain? Not Quite. The technology underlying the Libra coin, is undoubtedly blockchain technology but a blockchain with a difference called a ‘Libra blockchain’ which will be open source. What is the difference you might ask? Well! While the blockchain technology underlying the bitcoin (BTC) or Ethereum (ETH) or a host of other altcoins is ‘permissionless’, the Libra blockchain is for the moment ‘permissioned. This means that to be a part of the Libra blockchain one will require the permission of the Libra founding fathers. So, access will be granted to run a validator node on the Libra blockchain only to a select few unlike the Bitcoin or Ethereum blockchain which anyone can join as a validator node. The Libra blockchain is thus evidently not decentralized in the true sense of the word. Just moving towards a permissionless network. The White Paper makes no bones about this:

the association will develop a path toward permissionless governance and consensus on the Libra network.

So to use the word cryptocurrency for libra coin today will be a bit of a misnomer.

A Stablecoin with Sovereign Guarantee?

The White paper claims that 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. Libra will not be pegged to a single fiat currency but will be backed by a collection of low-volatility assets, such as ‘bank deposits and short-term government securities from reputable Central banks’. Sounds hunky dory as such a currency is a hedge against volatility which is the bane of the cryptocurrency traders. The recent flash crashes of bitcoin are a case in point. Also, liquidation of such assets will require the consensus of at least one-third members of the Libra association so as to ensure that the reserve is not siphoned off to plug other deficits or losses as was alleged by the New York Attorney general (NYAG)in the case of Bitfinex, a cryptoexchange, which purportedly shifted out the reserves of Tether ($850 million)to plug losses elsewhere in the system. Here, we have the Libra coin being pegged to sovereign assets such as government securities. So, the Libra coin offers a safety net against volatility but its dependence on traditional sovereign assets, thus giving a sovereign colour to the coin. This has raised hackles. This also means that every time the interest rates are tweaked by the US Federal Reserve or the Central Bank of the European Union or any other Central banks to which Libra coin is pegged, interest garnered from such assets used for maintenance of the Libra systems would be directly impacted. Not quite what Satoshi Nakamoto had in mind when he wrote his white paper on P2P electronic money.

Private Currency Minted by a Conglomerate

The Government and the Central banks are up-in-arms against Libra as they see it is an attempt to usurp the power of the Government who is the only agency vested with the right to mint coins. The representatives of the Governments feel that this coin would have great potential for money laundering and terrorism financing. Waters, Chairperson of the US House Committee on Financial Services has in very harsh words suggested that Facebook should be stopped from going ahead with its project unless it had been examined by the government. The heads of various worldwide Central banks have also expressed their reservation about the libra launch. There are also privacy concerns considering Facebook’s Cambridge Analytica antecedents and the apprehension of regulators that such a currency could be used for money laundering or financing terrorism.

From Oddball to mainstream Pin-up boy

Up until now bitcoin was a bit of an oddball and was of interest only to coders or investors or hackers. Interest had spiked for the first time in 2017-2018 but after the bitcoin bubble burst in 2018, the interest levels plummeted. This was also because the bitcoin price rise in 2017 was based on speculation and not on strong fundamentals. The price rise of the last three months has indicated an increase in institutional interest. The trading volumes of bitcoin futures have hit highs on CME in both May and June. The impending launch of libra coin by social media giant with 2.38 billion monthly active users (MAU), suggests that cryptocurrency as a unit of currency is up for mainstream global and borderless adoption. The run-up to the Libra launch will not be a cake walk though. What with the Congressional hearings in July, the scrutiny of Central Banks and Regulators world-wide- the Libra team will have its hands full reassuring regulators that Libra would adhere to the diktat of financial regulations and policy makers globally. The drawbacks of blockchain technology- scalability and security have been glossed over in the White paper. Without scalability Libra would be a non-starter. So, Libra has a long hard trek ahead. No point lauding or dismissing Libra out of hand just yet. Let’s wait for the much-awaited Libra launch of 2020. After all the proof of the pudding in in the eating.

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