Libra 2.0 Turned Out Another PayPal Clone
Disclaimer: further information is analytical and educational only. It can’t be considered as any form of accusation as it represents just one point of view. For comprehensive understanding, always make your own research.
The king is dead, long live the king! Or no? Libra, one of the most discussed and long-awaited cryptocurrency projects, revealed a new white paper on April 16. Particularly, the system abandons the idea of its fiat-backed token, moving to several stablecoins. Libra will become permissioned, with stricter control over participants. Sadly, the changes made for better regulatory compliance may destroy the original idea completely.
Superorder studied the available resources to conclude the current situation with Libra. Let’s look at how the project made its U-turn. Spoiler: traditional financial regulators won once again.
FSB G20 Recommendations
Starting from the very basics, we want to analyze why Libra chose this path. Of course, there’s no secret that banks and other finance firms met the project with hostility. They were (and are) afraid that Libra may disrupt the global economy, harm fiat currencies. The Libra Association had to change something to launch the solution.
However, there’s one more precise reason. Two days before white paper updates, the Financial Stability Board (FSB) established by G20 in 2009, published its consultative document regarding regulations of stablecoins. The body is afraid that stablecoins may threaten global financial stability, lead to new risks, fail to become secure enough.
As a result, the FSB stated ten suggestions to banks and FinTech firms:
- Authorities should be able to regulate stablecoins fully.
- Stablecoins should feature the same rules as other similar assets.
- Authorities should oversight cross-border payments.
- The global governance framework should exist.
- Stablecoin operators should mitigate various risks, have KYC/AML policies.
- Stablecoin operators should collect, store, and protect data.
- Stablecoin operators should have recovery and resolution plans.
- Information should be open to regulators and users.
- Stablecoin operators should guarantee redemption.
- Authorities should ensure that stablecoins meet all the rules before launch.
Surely, the document isn’t the main reason for Libra’s changes. According to the German-speaking magazine FinanceFWD, the Libra Association was working on updates since January 2020. Nevertheless, recommendations from the FSB will change all stablecoin markets and the entire crypto industry, including Libra.
Noteworthy Changes in New White Paper
In November 2019, we discussed why Mark Zuckerberg isn’t the crypto messiah. The Libra Association may emphasize that Facebook is only one of several companies involved in the project development but we know who started it all. The recent changes prove that Zuckerberg doesn’t care much about crypto, most likely. Libra 2.0 reminds a polished version of blockchain-based PayPal, not the financial game-changer.
Further, we analyze three core shifts in the vision of the Libra Association. This information is taken from the project’s white paper directly.
Multi-Currency Stablecoin
The first major change refers to the token itself. Originally, Libra was planned as a single stablecoin backed by numerous fiat currencies. Such an idea was too revolutionary for regulators, evidently. According to the new description, Libra will host several digital currencies, each backed with its own fiat. For instance, there will be LibraEUR, LibraUSD, and so on. Each stablecoin will be active in the relevant region.
On top of that, the project keeps LBR — the native Libra token. However, it will be backed by the aforementioned stablecoins instead of fiat currencies directly. The Libra Association also encourages banks to use this platform for their own central bank digital currencies (CBDCs) instead of inventing native solutions for each country. Overall, this decision makes Libra less innovative, eliminates its threat to the dollar.
David Gerard thinks that this change may kill the original idea. He notes:
“I can see the new Libra working as an ordinary, regulated payments processor — PayPal, but it’s Facebook.”
Permissioned System
Initially, Libra had to start as a permissioned network and then become a permissionless project. The concept was based on the golden rules of decentralization. According to it, no single party could have control over the network as anybody could help to run it. The newly published white paper doesn’t feature any mention of permissionless solutions. Thus, Libra will become centralized, controlled by the Libra Association.
Strict KYC Policy
Following the previous change, the developers of Libra added more control layers, as regulators wanted. Precisely, the new structure will be compliant with the FATF guidelines on what participants can do. Thus, the Libra Association will verify all wallets and control everything going inside the network. Unregulated parties will face strict limits. Eventually, this change is highly likely to prevent the global financial inclusion initiative.
Switzerland Regulation
While making the necessary tech changes, Libra is looking for more regulatory approvals. The Libra Association launched the process of licensing in Switzerland. In case of success, the local Financial Markets Supervisory Authority (FINMA) will allow the project to provide banking and monetary services to customers. Of course, there are the same plans for the US market.
Results and Reactions
While the recent updates are focused on better compliance, it seems that Libra is in an extremely dangerous position now. On the one hand, it becomes less compelling to the entire crypto community due to increasing censorship and control. It’s not the best way to offer something ground-breaking and then move away from the concept.
On the other hand, regulators also aren’t satisfied! Rep. Sylvia Garcia said:
“There are simply too many questions left unanswered regarding why Facebook is even developing a cryptocurrency and how it will affect the global economy and consumers.”
The US lawmaker thinks that the native Libra token is still too dangerous.
At the end of the day, it seems that Mark Zuckerberg is close to success. With new changes, Libra is turning into a traditional payment system with a few buzzwords in its description. Stephen Palley states that he “wouldn’t be surprised” if this was the plan of Facebook and Zuckerberg, personally.
“If you are Facebook and you want to grow, it would be really useful to have a functional, stable, cross-border payments system just to be used on the platform itself.”
