Hi everyone, first time publishing on Medium. I am Jiuyuan(Hill) Tan, an international student here at the University of Sydney. I am the founding president of USYD Blockchain & Cryptocurrency Society, a non-profit student blockchain community under the University of Sydney Union. We plan on frequently publishing as a collaborative effort from members. We appreciate your feedback so please leave them in the comment section or contact us directly on our Facebook page: https://www.facebook.com/USYDBlockchainSoc.
This report is for informational purposes only, not investment or legal advice.
Co-author: Andrew Hwang (member)
Part 1: introduction to Libra
WHAT IS LIBRA?
Libra is a cryptocurrency developed by Facebook/Calibra designed to be highly scalable and facilitate low-friction transactions. According to the Libra Foundation, the key goal of Libra is the economic empowerment of 1.7 billion unbanked, economically insecure people in the developing world. As they outline in their problem statement:
“Despite… progress, large swaths of the world’s population are still left behind — 1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion [of these people] have a mobile phone and nearly half a billion have internet access.”
Blockchain technology plays a foundational role in how they plan to move forward with this cryptocurrency. The Libra Foundation notes that problems of accessibility and trustworthiness in financial systems are widespread among the poorest and unbanked people in the world, and subsequently claim that Libra can solve these issues through its blockchain characteristics, including:
- Distributed governance (no one entity has full control)
- Security in cryptography
- Open access (anyone can be a contributing member). Note that a plan for the implementation of open access has not been specified.
Each unit of currency is called a “Libra”, backed by a corresponding amount of fiat currencies and government securities in a deposit controlled by the Libra Foundation. This is important to the core value proposition of Libra, which is for it to be a medium of exchange — i.e., a stable currency.
HOW WILL LIBRA BE IMPLEMENTED?
Currently, Libra is using a permissioned node system for validation, built on an open-source blockchain dubbed the “Libra Blockchain”, the development for which Facebook created a new programming language called Move. These permissioned nodes will be run exclusively by the “Founding Members” of the Libra Foundation, which include Facebook itself, Paypal, Visa, Stripe, and other highly reputable financial organisations. Interestingly, some of the Founding Members also include handpicked nonprofit or charity organisations. According to the Libra Foundation’s technical paper:
“Initially, the Libra Blockchain only grants votes to Founding Members, entities that: (1) meet a set of predefined Founding Member eligibility criteria  and (2) own Libra Investment Tokens purchased in exchange for their investment in the ecosystem.”
These Members are the sole arbiters of when and how many Libras are generated and burned.
This initial system is designed to be Byzantine fault-tolerant (BFT), requiring a two-thirds majority for any decision to be passed with each Founding Member (including Facebook) expected to have a single vote. By Q2 2020, the Foundation plans to increase the number of Founding Members to 100 from the current 28.
Additionally, Facebook is expected to “maintain a leadership role” within the Libra Foundation through 2019, owing to its foundational contribution to the project. A time limit for this “leadership role”, however, has not been officially defined. Given Facebook’s shaky reputation with the general public, especially concerning the issues of user data exploitation and privacy, this has significantly decreased the credibility of Libra as a blockchain and global currency project, with some U.S. officials already calling for a halt to its development and even a ban of Libra altogether due to the enormous power it could give Facebook if widespread adoption is achieved.
In an attempt to invoke the libertarian spirit of blockchain technology, the Libra Foundation claims they will transition the entire Libra blockchain to a general proof-of-stake (POS) system within the next five years, which they say will be open for the public to access and run. Ostensibly, this will allow for the rapid scaling of Libra for the first five years while also being fully open and public in the long term. However, this roadmap is likely unfeasible, as explored later in this article.
Part 2: SWOT analysis of Libra
We conducted the fundamental SWOT analysis to help us see how the Libra project compares to other blockchain or cryptocurrency when it comes to providing financial inclusion for the 1.7 billion unbanked people globally.
Libra is likely to have a higher performance compared to most of the cryptocurrencies out there thanks to its permissioned design. It was estimated in the technical whitepaper that the network could handle a thousand transactions per second, which is higher than the majority of the cryptocurrencies, but not a staggering performance when compared with permissioned projects. Blocks are only produced by trusted nodes, allowing the network to reach consensus faster than a totally open and permissionless blockchain. This architecture shares some similarities with projects that have a “supernode” design, such as EOS and TRON. Consequently, Libra share concerns on the decentralisation as those projects, which will be discussed in detail later in the analysis.
The Libra token is designed to have limited value fluctuation by providing the cryptocurrency with intrinsic value supported by real-world assets. Unlike the mainstream cryptocurrency such as Bitcoin and Ethereum whose value is supported by the computational resources in the network and the trust of the community, Libra is backed by a reserve of low-risk assets, which is unlikely to fluctuate in value radically. The stability supported by the backing of real-world assets provides Libra with an edge for mass adoption since it holds its value better when used daily.
Large user base
One of the largest advantages Libra holds to other cryptocurrencies is its existing user base. Acquiring users has been a tough job for cryptocurrencies, especially in the early days when very little on-ramps were built. Facebook has an MAU (Monthly Active Users) around 2 Billion by Mar 31st, 2019, more than the all cryptocurrencies combined. Libra has the potential to access all those users almost immediately upon launching. The advantage of the network effect will be tremendous when users are basically acquired at zero cost directly. It will be much easier to transact with a friend or merchant using Libra than it is to use Bitcoin or any other cryptocurrency due to the easier and faster onboarding process.
When it comes to payment solutions, the network effect makes partners extremely important. A higher number of partners increase the value for each user, subsequently increase the value of those partners gaining out of the network, eventually attracting more partners and more users. With reliable partners such as Visa, MasterCard, Uber, Lyft, eBay and Paypal, the need for users to access other payment systems are significantly reduced as its ecosystem has been established to a usable scale. The full list of partners can be accessed here. The network effect of building up an ecosystem made out of partners is easier said than done. Cryptocurrencies have a hard time doing so due to their unfavourable reputation associated with scams and illegal usage and the oftentimes incomprehensible technology. The high-quality partners will give Libra a considerable edge when it comes to real-world adoption despite its late start. A complete ecosystem will encourage users to quickly switch to Libra, stick to Libra and use less of the other payment system. We will discuss in later paragraphs whether the ecosystem and the partnerships will remain stable for the upcoming years. However, it is unquestionable that the strong network of partners gives people reasons to trust the Libra association more than their government with a weak monetary system. It will be amazing to see how much trust Libra can earn and how the strength of their partnerships can contribute to their advantages when it comes to potentially competing with some small fiat currencies.
Privacy & security
One of the largest obstacles for Facebook to step into the financial sector is its reputation on privacy. Facebook has a rich history of misusing user data. Handling transaction records and account information such as balances are nothing like handling pictures of cats and dogs, especially when you have presumably 100 founding partners who should meet the same high standard when it comes to security and privacy protection. When the network becomes permissionless in five years, theoretically anyone can have access to transaction information. Whether Facebook can protect the privacy of account holders using privacy solutions like Zero-Knowledge-Proof were not heavily addressed in the whitepaper. One thing is for sure: privacy is some of the biggest challenge Libra will face, and it is almost certainly sitting behind cryptocurrencies with built-in privacy features such as Zcash and Monero.
Not likely to be open and permissionless
Libra made the promise that the user’s real identity will not be tied to their account, and it should be a system where everyone can join. The fundamental conflict of interest in this statement cannot be ignored. The founding members, besides a few academic institutions and NGOs, are supposed to pay $10 million each to run the node during the “permissioned” state of the network. If the network is to become a PoS permissionless system, anyone can join the network by putting down a tiny amount of token and enjoy the same privileges as those founding partners. It will be reasonable to assume that the founding partners will be reluctant to let someone else put their hands on this data gold mine. This puts a huge question mark on whether the founding partners will be willing to fulfil the promise of a permissionless blockchain when doing so will destroy their very own privilege. From a regulatory perspective, an open and permissionless network is almost impossible. When using Libra token would require government-issued IDs, it would simply be insane to allow “anyone” on the internet to operate the network and process transactions. Therefore, Libra may never want to be permissionless, and it may never be allowed. For other cryptocurrencies that are built with open access and fully permissionless from the get-go, this is one of their most significant advantages over Libra. The idea that anyone can run a node is fundamental to the libertarian spirit of crypto, and it is mostly where the confidence of “you can’t kill/ban Bitcoin” came from, which is a unique and tremendous value proposition for Bitcoin users and investors.
Claiming to be decentralised, it is hard to avoid noticing that some members of the associations have substantial influence over the other members. Their relationships are not merely independent and working with each other within Libra. Instead, some of them are very likely to compete with each other, and some of them have already been working together. It is simply naive to assume that the decision-making process will be fair, simple and benefit the entire user base as a whole like a public good. Libra is a non-profit association made up of a bunch of for-profit corporations. None of the members other than Facebook/Calibra has access to 2 billion people, especially when it comes to targeting developing countries. Therefore, it is easy to see that Facebook’s voice will be critical to other members who would wish to benefit from Libra. It would be hard to argue that Visa and MasterCard will reach consensus easily due to their competitive nature; the same applies to Uber and Lyft. The decentralised form of governance is undoubtedly a brave shot, but there is very little evidence to prove that it will work, especially in the public sector where the decision-makers are not allowed to put the people as a priority rather than their shareholders. Libra has yet to disclose its charter and by-laws, so we have minimal information regarding how the association is managed, but due to their for-profit and competitive nature, it will only be a matter of time before a few of the weaker members get out-competed in the political battles and decide to quit. We might, or will, eventually end up with an oligarchy of associates having full de facto control of Libra. Maintaining the interest balanced between each member of the association to avoid centralisation is difficult. Although the Matthew effect is not unseen in traditional blockchains such as the mining pools in PoW, they are less worrisome considering they are permissionless so anyone can join and challenge fairly.
Overall, the weaknesses of Libra lies with the authenticity of the spirit of blockchain. It is challenging to provide privacy, security, fairness, transparency and regulatory compliance at the same time, but all of which are crucial to bank the unbanked.
Libra is aiming for a 1.7 Billion people market. To provide financial infrastructure as a public good, the Libra association will not profit from the blockchain project directly. However, this opens up a range of opportunities for the founding partners of Libra association. The increased coverage to new users is unimaginably high, with the potential to significantly accelerate the market expansion for those companies, especially in the developing countries. An increase in financial inclusion will allow more people to move from the cash economy to the digital economy, which usually leads to larger trades, higher economic growth and empowerment to personal freedom. This subsequently will increase the need for goods and services Libra members provide, such as Facebook ads, uber rides, shopping on eBay, etc. Besides the services already provided by the members, the increased adoption of Libra will also allow new services to be provided on the platform. Financial services, for the first time, can be accessed by a user’s electronic wallet. The success of Alipay and WeChat Pay in China have allowed millions of people to obtain loans, wealth management and insurance products on their phone without having to go to a branch. Libra is very likely to carry out similar offering on users’ wallets and allow the wallet operators, most likely Calibra, and earn huge profit.
Digital Identity Standard
With digital payments comes with digital identity. After all, real money has to be associated with real identity to comply with KYC and AML regulations. Even in today’s developed world, there lacks a unified international digital identity standard. To promote a widely accepted financial infrastructure, Libra association is leading the adoption of a universal digital identity standard. However, this opportunity is only given a small paragraph in the Libra whitepaper; no detail regarding how it will be carried out is provided. Nevertheless, a widely accepted digital identity standard should empower a range of service to join the ecosystem, such as credit assessments, insurances and personal loans.
The regulatory concern is one of the most mentioned threats when it comes to cryptocurrencies. From the early days of ICO where tokens might be considered as securities to the later KYC, AML and CTF considerations, regulators have always been keeping an eye on the industry. With the potentially significant influence brought by Facebook, regulators are taking a more serious look at Libra than other cryptocurrencies. As mentioned in the weakness sector earlier, the European regulators are already calling for a halt on the project. India is already a big NO-NO for Libra. A recent letter from the United States House of Representatives Committee on Financial Services requested that “Facebook and its partners immediately agree to a moratorium on any movement forward on Libra- its proposed cryptocurrency and Calibra-its proposed digital wallet. It appears that these products may lend themselves to an entirely new global financial system that is based out of Switzerland and intended to rival the US monetary policy and the dollar. This raises serious privacy, trading, national security, and monetary policy concerns for not only Facebook’s over 2 billion users, but also for investors, consumers, and the broader global economy. “ The scope of global operations that Libra is capable of have a good chance to break lots of rules in different places simultaneously. We will only briefly discuss the areas to keep an eye on rather than go into the legal technicalities.
Privacy: Privacy is a substantial legal issue, especially in Europe. Article 17 of GDPR grants EU citizens the right to be forgotten and to data erasure, which requires companies to stop processing and delete personal data upon request. Blockchain projects, including Libra, will have a hard time complying with that rule when the data is protected by the Merkle tree, designed to be immutable. The only way to arguably getting around the problem is to store all personal data off-chain, which is not ideal. How Libra will technically be able to comply with seemingly “anti-blockchain” regulation is yet to be disclosed. One thing is for sure: Libra is able to gather such an insane amount of consumer data that is complying with privacy laws across different jurisdictions is a must, not a choice.
Trading: The Libra stable coin share similar concern with other ICOs that their token might be considered as securities and should comply with security regulations. This requires them to acquire specific licenses beforehand, register for certain accounts and follow dedicated guidelines, depending on the jurisdiction. The Libra Investment Tokens issued to founding partners are not a big worry but cannot be ignored as well. Minimal information regarding how Facebook convinced those partners to join and what legal obligations are involved is disclosed.
National security: Since Libra will be backed by a basket of low-risk assets, rather than any sole national currency, it might be able to compete with basically any existing fiat currencies to become the default unit of account. This poses threats to different jurisdiction’s financial security for various reasons. The US dollar does not want its dominance on international trading and settlement to be challenged. Countries with capital controls and restrictions, such as China and Russia, would not be happy if capital can escape through their fingers. Libra’s potential to challenge some countries’ monetary sovereignty may lead to all kinds of negative consequences, including but not limited to fines and halt of development.
Monetary policy: Central banks will have a hard time adjusting the economy if people no longer use the currency they issue. If Libra, or any other cryptocurrency, can gain enough traction that it becomes a widely adopted unit of account and medium of transaction, the traditional tool for executing monetary policies will become useless, making the central bank irrelevant. Similar to its threat to national security, hindering the capability of central banks can never be allowed and will bring adverse reactions from regulators across jurisdictions.
The success of Libra lies with the security of the entire ecosystem. From the onboarding process such as software installation and KYC verification to future operations such as communication between nodes and withdrawing from the wallet. Most people might focus on the double spending of the Libra token and the security of users data, ignoring the other parts of the system, such as the custodian of the reserve assets, the safety of users device and the features built into the accounting system such as password recovery procedures. Overall, the entire system has to be watertight. A small leak will sink a great ship.
Double spending: Cheating the system via double-spending has been around almost as soon as transferring money electronically became a thing. Libra shall not be an exception in the never-ending game of cat and mouse. Thanks to the blockchain system, Libra does not have a single point of failure. So even if a few of the founding partners are compromised, as long as more than two-thirds of the node operators are honest, the network can hold its integrity. Notice that the ⅓ security threshold of the BFT consensus adapted by Libra is lower than the ½ security threshold of PoW, the consensus adopted by Bitcoin. Despite a lower threshold, the permissioned blockchain makes Libra a harder target for hackers to get in than an open blockchain such as Bitcoin. Some regard Bitcoin as “the safest banking system” out there, suggesting that the economic mechanism of mining will provide better protection to the system than “building a wall”. With a permissioned design, Libra’s double-spending threat lies not with the security of its blockchain, but that of its node operators.
Data security: The problem of data security should be heavily addressed both to the node operators and the users. Data leakage are not unheard of from heavily armed organisation such as Equifax and Centrelink. Libra should make sure that all founding partners’ “wall” should be high enough to prevent similar instances from happening. Nevertheless, this is a threat faced by all payment processors out there, and we haven’t seen a convincing solution yet. The majority of the security work will rely on wallets, as the data on the blockchain is supposed to be non-identifiable data, and the wallet is basically the only point of interaction the user will have. There is no information disclosed on how the association will try to maintain the quality of wallet apps so that they meet a certain level of security standard. A recipe for disaster would be if a wallet chooses to transmit a user’s password without encryption or keep their database in an unsafe place but somehow gets popular. Moreover, Libra’s operating environment in developing countries is not ideal. Cheap smartphones, outdated and not very secure operating systems and lack of security infrastructure are all in the way of reducing the users’ chance of getting hacked individually. Attacks at the users’ wallets, private keys, accounts and even identities are considerable issues Libra must address. It is currently unclear how they plan to address it. Even in the developed world, we hear security instances happening now and then targeting individuals on all wealth levels such as credit card fraud and SIM card swaps. Lack of security at the user’s end is a massive barrier to financial inclusion, and Libra is not the only one facing it. Overall, the security of the entire value chain must not be breached. Users might have many reasons to choose a bank, but they only need one reason to have a run.
Libra has lots of competitors when it comes to the global remittance market. Despite the non-profit nature and the strong support from a range of partners, consumers might prefer competitors for a variety of reasons. In the last part of our SWOT analysis, we will name a few competitors from different industries that can pose a threat.
Traditional Players: Traditional industry leaders such as WestUnion and MoneyGram are the mainstream forces when it comes to providing remittance service. They each take 40% and 24% market share when it comes to payout locations in Africa. Their extensive network and market coverage is what’s keeping them in the game. In order to compete, the establishment of a cashless ecosystem may be vital. Otherwise, Libra would have to build up their local network and agents to attract users.
Fintech: Several fintech startups have aimed at this market. Some of them are already considered in size and cover a wide range of users, such as PayPal, Venmo and Square Cash. There are also niche players focusing on a specific area, solving problems for a particular group of people such as payAgri for farmers and Leaf for refugees. Some of them are built upon another blockchain network or utilise blockchain technology to an extent but do not issue cryptocurrencies (the solutions that do issue a cryptocurrency will be discussed in the following paragraph). App-based mobile payment providers rely heavily on partners, whether they are local banks or agents on the field. It is worth mentioning that players from a completely separate internet system can strongly compete if they decide to extend their current cash economy. WeChat Pay and Alipay, being the main force of driving financial inclusion in China, have figured out a very profitable way to monetise digital economy. China’s development of cashless society has been regarded as one of the most successful. It is basically unnecessary to carry any cash or card in a lot of the Chinese city thanks to the payment system based on QR codes. Despite the fundamental differences between how Alipay and WeChat pay works and how Libra would work, it is clear that Facebook is trying to duplicate their success on a global scale. If the two Chinese payment/fintech giant decides to expand into the global market and allow other currencies to be transacted on their platform, they can be some of the fiercest competitors Libra may ever face. They are somewhat inexperienced when it comes to dealing with international money and users, but one point is clear: user’s pain points are fast, easy and cheap money transfers. Whoever can provide a solution wins the game, regardless of their level of decentralisation.
Cryptocurrencies: Theoretically speaking any cryptocurrencies that allow on-chain transactions are qualified for the fight. For this specific analysis, we choose three cryptocurrencies that are reasonably sized, well-known and each with their own approach when providing a solution for financial inclusion: Bitcoin, OmiseGo and Ripple.
BTC: The good old Bitcoin, “a purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution”, as stated in Satoshi’s original whitepaper. The initial proposition did not mention financial inclusion, but that does not stop it from actually behaving like a tool for people without a bank. People in Venezuela are found using Bitcoin instead of their national currency and examples of real-world adoption of Bitcoin is plenty. Being the oldest and the most recognised cryptocurrency, Bitcoin is often the go-to choice when it comes to transacting money without fiat currency. Libra can easily outcompete Bitcoin when it comes to scalability, price stability and arguably the rate of adoption and acceptance. However, the decentralised nature of Bitcoin is hard to replicate, and it will always hold its place where Libra cannot touch.
OMG: OmiseGo enables transparent, peer-to-peer transactions in real-time on the Ethereum network, aiming to improve financial inclusion and interoperability through the public, decentralised OMG network. Sharing a similar vision with Libra, OMG starts much earlier in 2017, with a long history of tackling financial inclusion from its parent company Omise, a fintech company in Thailand. OMG is aiming for a decentralised architecture via operating on the PoS consensus, which is also similar to Libra’s plan to go permissionless. While Libra has at least five years to go before it becomes permissionless, OMG has already launched its network and has been continually working on iterations. Libra is falling behind in terms of technological development, and the system’s stability has not been tested publicly. However, OMG does not provide an in-house stable coin solution, relying on third parties to put a value on its chain. Overall, Libra’s comparison with OMG can be similar for several other cryptocurrencies out there that are building up their track record, compared to which Libra is not the cutting-edge leader in terms of its blockchain technological advancement.
XRP: Ripple connects banks and payment providers via RippleNet to provide one frictionless experience for sending and receiving money globally. It is one of the earliest and largest players that target the remittance market in the blockchain space. Similar to Libra, it remains a permissioned design while claiming to be decentralised. It also has lots of partners, including payment processors. Libra has yet to reveal any partners from banks, but Ripple has already secured several banks as customers and partners. It is worth noting that Ripple’s XRP token is not used by the banks; they only use the payment processing solution provided by RippleNet, casting a shadow on the future of its cryptocurrencies. Nevertheless, Ripple is one of the largest “direct” competitors to Libra. Clearly, Ripple has had a massive head start, and Libra is a long way from catching up in terms of technical aspect and adoption aspect. However, the XRP token does not have an entirely positive reputation due to its centralised nature. If Libra can prove that its operation turns out to be relatively more centralised, together with its massive customer base and partnerships, it’s not hard to see how the battle can be won.
Due to the length of this article, we are not able to cover all the competitors. Financial inclusion can be improved in many ways, but one thing is for sure: the solution should be tailored to the situation where the “unbanked” earn and spend their money. The market is simply too big for only one player.
The Libra initiative comes with strong characters. It comes with clear strengths but not without natural weaknesses. The opportunity it is trying to seize is hugely impactful but facing many hurdles at the same time. The information disclosed at the time of publishing this article is minimal, and there is no guarantee that the Libra Association will stick with their current plan. If eventuated, the mass adoption of Libra could set an impressive precedent of how to combine blockchain technology, decentralised governance and multi-jurisdiction compliance in the right way — or it could lead to Facebook and other companies hijacking the global financial system for their gain under the guise of blockchain technology. Thus, Libra signifies two pathways for the future — one in which innovation in blockchain/decentralised technology changes the world for the better, helping lift billions of people out of poverty, and one in which a small number of megacorporations control the world’s finances via their effective control of blockchain systems. Alternatively, Libra could be killed by regulators. O brave new world.