Libra: A global payment platform for traditional currencies
Prof. Dr. Philipp Sandner — Head of Frankfurt School Blockchain Center
Abstract
Libra could become a global payment platform that can bring a broad array of existing currencies on a blockchain system. It would make multiple currencies “programmable” and easily transferable end-to-end within a couple of seconds. If the Libra technology would be implemented in popular smartphone apps such as Whatsapp, sending money would be as easy as sending an image via Whatsapp around the globe. An example would be a money transfer from a Swiss citizen to a person in Argentina within a couple of seconds at close-to-zero transaction costs. If such a money transfer would be done via Whatsapp it would bypass the existing financial system. Yet, this requires currencies to be plugged onto the Libra platform and individuals (or companies) to be onboarded. The former requires compliance with regulatory frameworks and the latter an integration for example in Facebook’s apps spanning hundreds millions of people.
This highly complex global monetary system is challenged by blockchain technology — a technology out of the family of new DLT. The first and most famous application is the Bitcoin network, which was introduced by Satoshi Nakamoto in 2008. It enables a digital, decentralized, peer-to-peer monetary system in which a digital value called Bitcoin can be transferred without the need for a trusted third party.
Libra was initiated by Facebook and revealed in summer 2019. The goal at that time was to have one currency basket that could serve as stable global money. Libra primarily seeks to improve financial inclusion in emerging and developing countries, but significant impacts can also be expected for developed countries.
After tremendous criticism by regulators after the announcement in summer 2019, Libra has lost some important consortium members such as Mastercard, Visa, PayPal and Vodafone. In April 2020 the Libra Association changed its concept and seeks to comply with many demands from regulators and central banks. With these changes it is therefore reasonable to argue that the Libra platform might be launched later this year.
The following key aspects are the key building blocks in the new Libra concept: announcement of single-currency stablecoins, introduction of a capital buffer for crisis situations, commitment to a permissioned blockchain system (Libra platform), and the implementation of a profound compliance strategy in cooperation with regulators. We will explain these aspects in more detail below.
Multiple single currencies such as EUR, USD, GBP
The older Libra concept was designed as a platform and planned to be a global means of payment backed by a basket of existing fiat currencies, like the euro and the US dollar, and government bonds. Now, Libra is becoming a global value platform where multiple single currencies can be “plugged” onto — not necessarily blended in one basket.
In 2021, the digital Swiss Franc might be available running on the Libra platform next to the digital euro, the digital US dollar, the digital British pound etc. Such single digital currencies in a programmable form will provide various benefits for the industry and end customers. The number of single-currency stablecoins is planned to be increased over time in cooperation with regulators, central banks and financial institutions.
Libra Coin backed by multiple currencies
Additionally, for regions where there is no stable currency the Libra Coin could fill this void and act as a “replacement” to increase financial inclusion. Besides various single-currency stablecoins, there will be one multi-currency Libra Coin, which consists of the single-currency stablecoins and is therefore a composite of the single-currency stablecoins. The exact composition and the share of the respective single-currency stablecoins will be defined in terms of fixed nominal weights, e.g., applied in the Special Drawing Rights (SDRs) issued by the International Monetary Fund (IMF). The paper mentions an exemplary composition of 50% US dollar, 18% euro, 11% British pound etc. for the multi-currency Libra Coin.
Smart contract functionality
Smart contracts will be possible on the Libra Blockchain — similar to smart contracts on the Ethereum Blockchain today. In the beginning, they will be audited by the Libra Association, later on more freedom can be expected. In theory, financial products such as loans or escrow accounts are technologically feasible — denoted in US dollar, euro, British pound etc.
However, the Libra Association stresses that the Association will not provide loans itself but rather — if ever — through third parties. Therefore, it could also be possible that banks could collaborate and could offer loans denominated in Libra via the Libra platform.
Composition of the reserve of Libra
Both the single-currency stablecoins and the multi-currency Libra Coin will be fully backed by respective reserve assets to preserve the stability of the payment system. Single-currency stablecoins will be backed by at least 80% short-term (up to three months’ remaining maturity), highly-rated government bonds denominated (at least A+ rating from S&P) in that currency, and to 20% by cash or cash equivalents. Libra tokens can only be created and minted by the Libra Association in response to market demand.
Compliance and cooperation with regulators
The Libra Association stresses the importance of being compliant with regulatory frameworks: Libra should not be designed to interfere with monetary sovereignty and monetary policy but more to “integrate smoothly with local monetary and macroprudential policies and complement existing currencies by enabling new functionality, drastically reducing costs and fostering financial inclusion”. Therefore, the Libra Association seeks to incorporate a robust compliance framework in order to prevent illicit activities like money laundering and terrorist financing.
Conclusion
Libra could become a global platform that can bring a broad array of existing currencies on a blockchain system. It would make multiple currencies “programmable” and easily transferable end-to-end within a couple of seconds. If the Libra technology would be implemented in popular apps such as Whatsapp, sending money would be as easy as sending an image via Whatsapp around the globe.
In this article, we have shown some aspects how DLT in general and Libra specifically could transform our current money and payment system into a more technological advanced, futuristic, reliable and safe system. DLT can provide tremendous benefits with respect to payment efficiency and settlement speed. Further, DLT-based systems enable smart contracts that have the potential to automate business processes tremendously. While Libra seeks to improve financial inclusion in emerging and developing countries, significant impacts can also be expected for developed countries. Therefore, it is important to understand the chances and risks of Libra. Libra is not the only prominent project to establish DLT-based payment networks as other systems — e.g. in China — are also on the rise. It is time for financial organizations and central banks to participate in the process of innovating and digitizing the money and the payment system.
About the Author
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. The expertise of Prof. Sandner in particular includes blockchain technology, crypto assets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship.
The FSBC advises companies concerning their blockchain activities, e.g. the first European crypto fund, various startups and corporations. Prof. Sandner is a member of the Fintech Council (FinTechRat) of the Federal Ministry of Finance and also engaged in the Blockchain Observatory established by the European Union and, additionally, founding member of the German Blockchain Association e.V., the International Token Standardization Association (ITSA) e.V., and the Multichain Asset Managers Association.
