Libra. Bitcoin. Dollars
What is Libra? What is The Libra Association? Is it the new PayPal? Is it just bitcoin? Are we talking about a new blockchain? Is it a new cryptocurrency? Is it a new token?
All these questions may come up after reading about Facebook’s newest release (https://www.facebook.com/zuck/posts/10107693323579671) announced by Mark Zuckerberg, (one of the world’s newest economic references).
These days shifts in the economy are announced on the social networks, as technology continues to set the economic and political course of the western world. In fact it seems now that regulatory frameworks should be adapting to these new technological developments, before they become too large to regulate.
Let’s try to explain this new currency.
I start from the official definition and then go into detail, explaining the questions posed by comparing it to Bitcoin and the regular economy (regulated by governments and banks, which I will refer to as ‘fiat economy’).
- For those who don’t know what a fiat currency is, Investopedia gives this definition “ Fiat money is government-issued currency that isn’t backed by a commodity such as gold. Fiat money gives governments’ central banks greater control over the economy because they control how much currency is printed.”
Libra and The Libra Association, the definition
Below is the official definition, I took a screenshot from the Libra Association website in order to show it exactly as they defined it.
Libra vs Bitcoin
Is Libra a currency?
Yes. Because it is money and will be used to pay for goods and services.
Is it a new cryptocurrency?
Yes. Because it is a digital asset and ‘lives’ in a blockchain, its transactions are cryptographically secured.
It lives and dies in the blockchain, which is one of the points where we should pay special attention. How are the other currencies created and destroyed? US dollars, Euros and the rest of the fiat currencies are issued by the governments through their central banks. There is nothing to back those currencies, governments are able to print notes whenever they want. They are also in charge of destroying or taking those notes out of the economy once they have them back in their possession.
In the case of Bitcoin, it never dies. It’s impossible for a Bitcoin to die, be taken out of circulation or burnt because when Bitcoin was defined, its death wasn’t determined. The Bitcoin supply will be around 21 million once all of them are minted. Bitcoin is mined, the same as we do with precious metals, but in this case it is computational minery. I won’t go further on the minery process, the important thing to know is that the Bitcoin issuance is already defined. The opposite happened with the Bitcoin burning. There are several cases of ‘frozen’ Bitcoins, and that happens because someone lost the private key to move them. As they are cryptographically secured, if you don’t have your private key, you will not be able to spend your BTC. What happens if I have BTC and I lose the private key? You are screwed, because there is nobody to complain to, Bitcoin doesn’t have any bank or government who is capable of ‘fixing’ that error. Your coins live in a blockchain where it is impossible to set a prior state.
Who rules Bitcoin? Every decision is taken based on a consensus within the ecosystem. Whoever wants to be part of the Bitcoin ecosystem can do it, as a developer, as a miner, as an influencer, as a speaker, or as an exchanger. As we talk about people, your ‘right to vote’ depends on your contribution to the cause and how recognized it is by the rest of the community.
Libra and its Reserve
In the case of Libra, the issuance will be controlled by The Libra Association. It is a consortium of world-renowned organizations who will govern this new cryptocurrency. The consortium will be headquartered in Switzerland. Each member of the association will hold a vote, and major decisions will need ⅔ of the votes to be approved. The Libra Association will issue coins when any of the ‘authorized resellers’ (it does not refer to ‘us’, it refers to other big companies) have purchased them with fiat assets to back those new coins, and will also burn or destroy coins when any of the ‘authorized resellers’ have used Libra to buy fiat assets from the Reserve.
What does it mean? Libra is a cryptocurrency that is fully backed by ‘real assets’. They call ‘real assets’ those assets issued by banks or governments, such as bonds or deposits. But we’ve seen before that the value of those assets is measured in fiat currencies, which are issued and destroyed whenever the governments decide. Therefore, we have a new currency whose value goes up or down in the same way as the Reserve does.
If the Reserve contains bonds issued by a country that goes into a war, the value of the Reserve will go down because the value of those bonds will most likely decrease. However, they say that the Reserve will be formed by stable assets. At this point, Libra is much more like a government currency that a cryptocurrency. The intrinsic value of Libra is the fiat economy, but the intrinsic value of Bitcoin is its usage and the mass it reaches.
Libra is an inflationary currency just like the fiat economy because it is based on it, Bitcoin is deflationary by nature because it has a defined issuance.
But let’s talk a bit more about the Reserve of Libra. The assets in the Libra Reserve will be held by a geographically distributed network of custodians with investment-grade credit rating to provide both security and decentralization of the assets. Everything is great, but what’s going to happen with the money? That money will be ‘working’, and interests will be used to cover the costs of the system, ensure low transaction fees and pay dividends to investors who provided capital to jumpstart the ecosystem. Users of Libra do not receive a return from the reserve. This last point generates many doubts, because they assure that the association is a non profit one, but its members are all huge profitable companies. It is very likely that the members of the association will be those who contribute with the initial capital, so they will get dividends.
The Libra Blockchain
It’s built based on the experience gained from other existing projects and research, therefore they say it will be scalable, fast, flexible and highly secure, to ensure the safety of funds and financial data. I don’t have many doubts about the first attributes, because many of the companies that are part of the project have already demonstrated that are capable when it comes to developing new high-quality technological products. But, what about the security of funds and financial data? Libra Blockchain accounts will not be linked to any real identity, they will be pseudonyms, and each user will be able to have as many accounts as they want, something pretty similar to holding several email addresses. They don’t have your name, but they do have your account’s ins and outs, so if needed, I think any government should be able to ask Libra for the movements of any specific account. So? Although many of the email accounts are pseudonymous, there are many cases in which they are taken as an evidence to be judged.
Let’s compare again. We know that Bitcoin’s accounts cannot be confiscated because nobody can take advantage of the funds without the private key, I don’t think that Libra will be capable of reproducing a similar behaviour because it’s supported by a formal organization embedded in a government regulated framework. Bitcoin balances are public, anyone is able to see the balance of every account (which are anonymous), because the blockchain is public, we just need to download it or browse through a ‘blockchain explorer’ and play a little, but Libra doesn’t have the same policy. The Libra’s Blockchain is a permissioned blockchain, it means that only Libra Association’s members can see and add new registries.
While in Bitcoin anyone can run a node, in Libra, only members of the Libra Association are allowed to do so. Their plan is to convert Libra to a public blockchain in five years so let’s wait and see.
Transactions and financial inclusion
As we are talking about a distributed blockchain, any movement of funds has an operative cost called ‘fee’. This fee is used to maintain the network and the data across the nodes, and it will be covered by the Reserve interests, therefore, we can assume that user fees will be really low and money transfer will be done in a matter of seconds at almost zero cost, regardless of where and from where that money goes. This is great, because every day we have more places that are connected to the Internet and not to banks. That is why this is one of the main advantages of cryptocurrencies, they brought cheap financial services for the whole world, and Libra is contributing to it.
Final considerations
Libra is an excellent middle point between fiat economy and the rest of the cryptocurrencies headed by Bitcoin. Although I criticize the fiat economy model because I consider it centralized, expensive, corrupt and old, I do believe that true economic and financial inclusion should happen gradually, and in order to achieve it, it’s a must to be in a stable economy. Libra has that stability condition and also has several of the good qualities of Bitcoin and cryptocurrencies. Sadly, it’s not truly decentralized, because the governance of the network is still in the hands of big companies and they will benefit from the huge interests of the Reserve, which is not so different from the current fiat situation.
On the other hand, we should be happy because it is a digital economy, it has immediate transactions, it is cheap, open source, and they are willing to include more actors, more transparency and decentralization. I celebrate such news and think it is a great step forward.
Sources
https://libra.org/en-US/white-paper
https://hackernoon.com/welcome-libra-the-facebook-cryptocurrency-aa024cc7161
https://www.coindesk.com/facebooks-libra-cryptocurrency-a-technical-deep-dive
https://www.investopedia.com/terms/f/fiatmoney.asp
About the Author
Javier Esses is Head of Development at Avenews-GT.
Avenews-GT provides a platform for the commercial trade of agricultural produce where industrial sellers and buyers can conduct the entire trade process in a secure and transparent ecosystem. To find out more about the business, his approach to developing the platform or with any other questions you may have about Libra email: javier@avenews-gt.com
