The long-awaited stable coin project of the social media giant Facebook finally has a whitepaper. Libra’s whitepaper has been released on its web site. In this story, I will try to explore the content of the white paper from the regulatory perspective by touching upon some major points.
Before advancing further, let’s start spreading clouds by some general remarks. Firstly, although Libra is commonly associated with Facebook, it is not Facebook’s private project. In fact, there are other major players — such as Visa, Mastercard, Vodafone, Uber, Paypal, Spotify and Andreessen Horowitz— involved in Libra project through Libra Association, a non-profit and independent organization located in Geneva, Switzerland and aimed at providing a governance framework for the Libra network. It is explicitly stated in the whitepaper that, once the Libra network launches, Facebook will have the same rights and obligations as other members. Secondly, we will not be seeing Libra coin until 2020, so do not search “How to buy Libra coin?” on Google yet.
2 What is this hype about?
Then what is going on here? What is the reason for every crypto news web site getting all psyched up? It is not what Libra has actually done but what it aims to do and what it represents. Libra is an extensive and ambitious long-term blockchain project backed by huge firms and aimed at social impact, which is not something we can see every day in the world of crypto.
Libra’s whitepaper starts with an ambitious mission statement:
Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.
The principal aim of the Libra project seems to be increasing financial inclusion worldwide. Let’s remember the launch of Bitcoin and its whitepaper for a second. Bitcoin was a reaction to the centralized financial system and well-established financial institutions acting as middle-men. However, the ultimate aim of Bitcoin and cutting middle-men was to reduce costs and create peer-to-peer electronic cash. Now, Libra aims for a similar goal from a different starting point, which is the lack of financial inclusion as well as the problem that, among the ones who have access to the financial system, ‘people with less money pay more for financial services’
Looking back after a decade it is clear that Bitcoin is proven to be a solid and resistant crypto asset. However, neither Bitcoin nor any other crypto token has managed to become a stable and peer-to-peer alternative payment system that is spread enough to be considered as money. Although it is certain that Bitcoin can be used to store some value, its value was — and still is — volatile. Regarding its status as a medium of exchange, Bitcoin failed to satisfy this one criterion as well considering that crypto tokens are purchased as a means of investment in most cases rather than as a means of payment.
These problems of current blockchains are acknowledged in Libra’s whitepaper. It cites volatility and lack of scalability among the problems of current blockchains that have prevented them to be the mainstream. In addition to acknowledging the problems of the former projects in this field, Facebook has something that other crypto-companies did not have so far. The social media giant has 2.4 billion monthly active users 1.56 of which use Facebook on a daily basis. By using this platform advantage, Facebook could overcome the fear and suspicion against the crypto tokens and make it as mainstream as no one else could do so far.
3 Libra and Regulatory Issues
3.1 Libra, Blockchain, Law
At the end of the day, Libra is a crypto token and the Libra network is a blockchain aimed to operate in the financial world, which is a regulation-intensive sector. From the beginning of Bitcoin’s journey, the crypto world has been in a love and hate relationship with the law and regulation. The initial actors, which were actually cyberpunks, tried to evade regulation whereas the recent more established and institutional actors tried to cooperate with regulators after realizing that regulation is not that bad for a crypto-project to spread and become mainstream. This shift became even more apparent with STOs getting mature and spread over non-security token offerings.
Apparently, Facebook is aware of this conflict between the law and regulation and blockchain applications. An important point from Libra’s whitepaper is that by reminding that some blockchains tried to circumvent regulations, it calls for collaboration and innovation with the financial sector as well as regulators. Shortly after the release of Libra’s whitepaper, David Marcus, the head of Blockchain at Facebook said that, unlike Bitcoin and some other crypto tokens, Libra’s data will be shared by authorities for crime prevention and compliance.
3.2 Reactions from Public Authorities
As expected, with its potential influence worldwide, the release of Libra’s whitepaper attracted attention from regulatory authorities and even governments.
On the same day, in the US, the Chairwomen of the House of Representatives’ Financial Services Committee Maxine Waters requested Facebook to halt the development of Libra until the US Congress and regulators examine it, naming it as another example of Facebook’s “unchecked expansion”. Additionally, Representative Patrick McHenry requested a hearing from Waters with a letter stating as follows:
… Unlike existing digital currencies, Facebook has a worldwide platform and scale that can impact global payments and the digital currency market.
While there is great promise for this new technology in fostering financial inclusion and faster payments, particularly in the developing world, we know there are many open questions as to the scope and scale of the project and how it will conform to our global financial regulatory framework. It is incumbent upon us as policymakers to understand Project Libra. We need to go beyond the rumors and speculations and provide a forum to assess this project and its potential unprecedented impact on the global financial system.
On the other hand, the Bank of England’s governor Mark Carney stated that BoE was considering how to provide access to fintech companies in addition to major traditional banks to its payment system and balance sheet. Carney said that the target was SMEs and the reform was triggered after a report showing that small businesses were turned down by major high street banks. He emphasized that:
…the financial system was outdated and denying funds that startups and other smaller companies need to expand
This statement and BoE’s move are actually in line with the financial inclusion goal embodied in Libra’s whitepaper. Specifically, with regards to Libra, Carney said that he welcomes the Libra Project with an open mind but not an open door. Carney also told that the major banks and financial institutions would need to have direct regulatory oversight.
In line with Carney’s oversight statement, French Minister of Economy stated that creating money is in the competence of States and cannot be left to private companies. He added that they will be asking for guarantees that this project could not be used to finance terrorism or in other illicit activities and that consumers will be protected.
France also created a task force in G7, whose rotating presidency is held by France. France’s central bank governor François Villeroy de Galhau announced that the task force will study how it can be ensured by central banks that crypto token projects like Libra can be covered and governed by regulations such as AML and consumer protection rules.
The regulatory framework is not clear in other jurisdictions either. It has been stated by an Australian investment firm that in order to launch in Australia, Libra will need to have at least five regulatory approvals. In Russia, the Chairman of Russian State Duma, a subpart of the Russian Federal Assembly, stated that Libra will not be legal in Russia as it is a threat to the country’s financial system. Libra is not expected to launch in US-sanctioned countries and countries where crypto tokens are banned. In short, Libra has a long way to go in removing regulatory obstacles in different jurisdictions.
4 Structural Overview
The whitepaper defines libra as “a simple global currency and financial infrastructure that empowers billions of people”. Similar to most crypto tokens out there, whether Libra is legally money or currency or maybe even something else is open to debate.
Libra Network will run on a newly-created Libra blockchain. Libra blockchain uses the Move programming language and it allows smart contracts. The network is comprised of validators which are, at the same time, members of the Association, the non-profit entity to govern the Libra blockchain.
There will be two native tokens in the Libra Network, the Libra Coin and the Libro Investment Token (“LIT”). Assets will be stored in a wallet named Calibra. It will be available as a standalone app as well as through WhatsApp and Facebook Messenger.
Libra Coin aims to function as a payment token. However, unlike traditional payment tokens, in order to prevent volatility and establish a relatively foreseeable price, it will be backed by a basket of low-volatility assets including bank deposits and government bonds in currencies from stable and reputable central banks. In its initial release, Libra Coin will be backed by assets denominated in four major currencies: USD, EUR, GBP, and JPY. By doing so, Libra aims to give Libra Coin an intrinsic value that will protect it against speculations.
Libra is similar to stable coins however it is not exactly a stable coin as we understand it for now since it is not pegged to a single fiat currency. Libra’s whitepaper acknowledges that there will be fluctuations at the price of Libra but the ultimate aim is to keep these as minimal as possible and maintain a stable price. These assets experience low inflation and as a result of this design, the whitepaper argues, Libra shall inherit this feature. In overall, this is like bringing back gold standard but this time for crypto tokens.
The amount of Libra Coins in circulation will be governed by the Libra Association. However, even the Libra Association has limited power in this context. It can mint or burn coins only as a response to a demand from authorized sellers in order to keep all Libra Coins in circulation backed by the reserve.
The other token, LIT, is a typical investment token, meaning that it might be classified as a security under several jurisdictions. Libra Coin users will not have a profit or dividend from the reserve. The reserve will be invested in low-risk asset and the revenue of this investment will primarily be used for operating expenses, the development of the ecosystem and supporting investments in growth as well as nonprofit, multilateral organizations. After all of these, the remaining revenue, if there is left any, will be distributed as dividends to LIT holders.
Libra is something new. The idea is an old one we have seen in other projects, mainly in Bitcoin. However, the structure and strategy, combined with Facebook’s significant influence worldwide, make it something bigger than just another crypto token.
From the regulatory perspective, it will be wise to accept that the debate has just begun. It has been only 4 days since the release of Libra’s whitepaper and reports from regulatory authorities as well as governments are flowing from all around the world. Although the legal concerns seem similar to the ones in the current projects, it is evident that the size of these concerns has been magnified and the problems have been intensified due to Facebook’s reach mentioned above.
Initial regulatory concerns focus on the protection of national economies, the relationship with the state sovereignty over the monetary system and the prevention of Libra being used in illicit activities such as money laundering and financing terrorism. Libra’s cooperative attitude will definitely make it easier for governments and the Libra Association to agree on debated issues. However, considering that multiple jurisdictions from all around the world will be involved, it will still be a difficult task to reach an agreement.
Regarding the legal status of crypto tokens, Libra Coin and LIT have a similar structure and functioning, albeit with some differences, with some of the current crypto tokens and at this point, it is likely to consider that Libra Coin shall be treated as a payment token whereas LIT will be treated as an investment/security token. On the other hand, it must be borne in mind that the legal status of crypto tokens is already being highly-debated worldwide. It is possible that Libra’s impulse on regulatory authorities and international organizations facilitate and speed-up the agreement on and harmonization of rules with respect to crypto tokens.
In light of the above, having both advantages and risks, the release of Libra’s whitepaper is a breakthrough in crypto tokens becoming mainstream and their regulation. We will watch and see how it will turn out.