Facebook's Libra, Heavenly Gift Or Poisoned Chalice?

Last month, Facebook released a white paper for their “Libra” digital currency. Libra’s mission is “to enable a simple global currency and financial infrastructure that empowers billions of people”. It will enable you to buy things or send money to people with nearly zero fees. You’ll be able to buy or cash out Libra online or at local exchange points like grocery stores, and spend it using interoperable third party wallet apps or Facebooks own Calibra wallet that will be built into WhatsApp, Messenger and its own app.

The announcement has aided the resurgence of bitcoin as the cryptocurrency continues its remarkable recovery by trebling in value in 2019. It is currently trading at around $11,400 after reaching an 18 month high of $13,600 just a couple of weeks ago.

Like bitcoin, Libra will be based on blockchain technology but with a number of key differences. These differences, Facebook believe, will set its digital currency apart from bitcoin and other cryptocurrencies. They will also shed some light on the future of Libra and whether it will be a heavenly gift or poisoned chalice.

Libra will, at least, make people ask questions. What is money? What determines its value? What is a cryptocurrency? What is the difference between Libra and Bitcoin? What is decentralization? All very important questions that prompt us to understand the fundamentals of our financial system while helping drive mainstream cryptocurrency adoption. This leads many to believe that Libra might simply be the Trojan horse to decentralized alternatives, such as Bitcoin.

Before we explore that last statement, I would like to point out that I am not a cryptocurrency expert. My main aim is to collect and organize my thoughts and help others gain a deeper understanding of this complex topic. This article attempts to summarize the main differences between Libra and Bitcoin from the articles and books I’ve read, podcasts I’ve listened to, and interviews I’ve watched. Although it contains information from a number of sources, I have to give special thanks to Andreas M. Antonopoulos and Caitlin Long for their devotion to the subject and for providing the public with a wealth of information, some of which forms and inspires the majority of this piece.

The topic fascinates me so much because we are potentially at one of the greatest societal shifts since the separation of church and state. In 2009, Bitcoin gave people the ability to transact value without the need for a government management system. No one owns Bitcoin and no one can take it down. Bitcoin marked the beginning of the separation of money and state.

With Libra likely to become mainstream within the next couple of years, many will ask — what is the difference between Libra and Bitcoin? I hope to shed light on at least some of these key differences.

Libra Will Be A “Stablecoin”

Unlike Bitcoin, Libra will be a “stablecoin” aimed at preventing complications due to price fluctuations. Libra will, therefore, be pegged to a basket of currencies and short-term government securities, including the dollar, pound, euro, Swiss franc and yen rather than a single currency like the U.S. dollar. The Libra Association can change the balance of this composition if necessary to offset major price fluctuations in any one foreign currency so that the value of a Libra stays consistent. Libra is, therefore, designed for price stability. Overtime it may even choose to include Bitcoin and other assets as part of the basket.

This may come as a relief for those uncomfortable with Bitcoin’s price fluctuations but it also comes at a cost. The influencing factors that create price stability for fiat systems and how they are achieved should be of greater importance than actual price stability itself. Fiat currencies remain stable over the short-term because of central banks and their intervention in markets. Such interventions are aimed to suppress market volatility by insulating economies from the worst effects of the natural boom and bust business cycles. Since fiat money is not scarce or a fixed resource like gold, central banks have much power to distort natural market signals (i.e. interest rates, credit supply, liquidity, money velocity). This artificial suppression of natural volatility can be successful short-term but it often builds long-term risk. We need not be reminded of the mortgage crisis of 2007 or the 130,060% inflation rate in Venezuela in 2018 to demonstrate this.

Bitcoin, on the other hand, prioritizes security (system stability) over price stability. So much so that Bitcoin’s hash rate (security) reached an all-time-high as it broke 74.5 million tera hashes per second making the Bitcoin network more powerful than the world’s top 500 supercomputers combined. This is one reason why Bitcoin has survived every attack thrown at it to date and its security continues to grow.

While it’s certainly fair to criticize Bitcoins lack of price stability, the history of the cryptocurrency actually shows a gradual decline in volatility through time. Some months have even shown lower volatility than gold, albeit for a short period of time. It is clear that the height and depth of Bitcoin’s peak and trough cycles are decreasing and it’s not unlikely that a more comfortable price stability scenario will develop through time. For now, it might be important to consider Bitcoin at least as a divestment opportunity so that your money is not only stored in a short-term price-stable currency but also a long term system stable one too. Only the future will tell us how valuable doing this will be.

Is Libra A Real Blockchain?

To answer this question we must first lay out the fundamentals of open blockchain. To do so, one should look no further than the “The Five Pillars of Open Blockchain” expressed by serial entrepreneur and Bitcoin evangelist, Andreas M. Antonopoulos. The five pillars of blockchain should be “open, public, borderless, neutral, and censorship resistant”. All of these components are critical to freedom.

Bitcoin encompasses all of the five pillars whereas Libra fails on all accounts. This is because centralized institutions, like Libra, cannot guarantee any of these fundamentals due to the law and jurisdiction with which it resides. This simple fact is the main reason why Libra is not considered as a threat to Bitcoin. Libra is, however, a wake-up call for big banks. But let’s explore why Libra cannot contain the five pillars of open blockchain.

Open

The first pillar is open, meaning accessible to anyone without vetting. Bitcoin is entirely open as it does not care if you are human or a piece of software. Anyone in the world can send and receive Bitcoin without any authorization and you would be unable to tell whether or not a human is using it.

Libra, however, is not open. One can simply look at the US-Iran situation to illustrate why an open blockchain cannot be achieved by Libra. President Trump is increasing sanctions against Iran. This means that Libra will never be available in Iran (or North Korea) and therefore it is not open. Facebook also cannot give you complete access to Libra, extract it, or sell it to someone outside the Libra platform. With Bitcoin, you can.

Public

Public is the idea that everything you do is verifiable on the network by anyone else. In other words, all transactions are recorded (and immutable) and publicly available for anyone to see. Public also means that anyone can work on the network and extend it. For example, Paypal is not public because you cannot connect to it, but Paypal handles all the transactions. You cannot build an app on top of Paypal to extend their services.

With both Bitcoin and Libra, you can build and extend its protocols. You can build an app that allows Bitcoin or Libra payments for your local restaurant. You can even write code for applications that enable smart contracts. This is one of the powerful components of a Public blockchain.

However, although Libra will allow anyone to build on the technology, it will not be fully public. Instead, it will be a permissioned blockchain, kind of like a hybrid public-private blockchain. This means that only a few trusted entities (Association Members) can keep track of the ledger. Security is provided by the Association Members making it fully reliant on the established reputations of these organizations so that no malicious interventions occur. The members that will provide this security/consensus range from traditional payment networks (Mastercard, Visa) to internet companies (eBay, Lyft) to blockchain natives (Xapo), as well as others.

Bitcoin, on the other hand, is entirely Public, every transaction on the Bitcoin blockchain is completely transparent and accounted for. Anyone can see the public keys of any transaction they want, although there are no names associated with transactions.

So which scenario is best, a permissioned blockchain like Libra or a public blockchain like Bitcoin? To help illustrate the importance of a public blockchain let’s take a look at how we transact today. In the developed world we are increasingly moving away from physical cash to using electronic transfers even for small-scale transactions. We now tap a contactless payment terminal at the supermarket, all of which goes through an intermediary such as Visa or Mastercard. This technology is becoming ubiquitous. However, when we explore this further it is easy to see why a simple credit card tap might actually be an erosion of democracy. A bold statement but one that’s worth pondering.

This leads to a 1984 Orwellian scenario where every transaction you ever partake is authorized and recorded by a privately run commercial bank. If a bank does not like your enterprise, such as Wikileaks, then you can be completely removed. You may argue that this should not matter if you have nothing to hide. However, the desire not to be watched does not mean you have something to hide. Privacy is fundamental to a free society. It comes as no surprise that 74% of all domestic transactions in Germany are with physical cash. This is partly due to their profound concerns about trust, privacy, and the role of the state.

Borderless

Borderless refers to being purely international and global. Just as the internet has no borders, neither does Bitcoin. With Bitcoin and Libra, all your money is on the blockchain. If you land in a country and pass through customs, the border rules are designed with the idea that money is in a physical location. It is a relic of the gold/coinage era. With Bitcoin and Libra, the money is not here or there. This is why Bitcoin and Libra revolutionize the concept of money to becoming information that has no physical form, no physical presence and does not exist in any place.

However, Libra is still not borderless for e.g. innocent Iranian, North Korean or Venezuelan families living in the U.S. cannot send funds to their relatives back home using Libra since Facebook is permitted by law to block transactions to these specific countries. In fact, this would be a felony and could lead to jail time. With Bitcoin, this is possible in spite of sanctions.

Neutrality

The concept of neutrality can be compared to net neutrality of the internet. Many think that the power of the internet comes from the ability to transmit information fast. The real power of the internet comes from net neutrality. Net neutrality is the concept that the internet does not discriminate based on source, destination or content. Bitcoin is the first financial network that exhibits neutrality.

Libra, however, is not neutral as it is not borderless. It is also centralized, has a controlled infrastructure and lacks privacy. This goes against the current underpinning of what a cryptocurrency is — Libra is not decentralized.

Censorship-Resistant

Last but not least, an open blockchain should be censorship-resistant meaning that an authority cannot stop the transfer of funds from one account to another. The fact that Libra is a permissioned chain, where the Association Members know the identities of all transactions, means that Libra cannot be censorship-resistant. The Libra Association has even stated that “law enforcement would be able to directly work with nodes to screen out bad addresses”.

Money is a means to exchange value and exchanging value is an integral part of communication. Who, where, what, when, why and how someone spends their funds is an expression of their interests, political alignment, social groups, etc. The idea that money is a form of communication means that it should be given the same sanctity as a human right and people should be able to send and receive funds without censorship. Like religion, money should be separate from the state. Bitcoin removes the intertwined nature of banks and government. This ultimately removes the positive feedback loop of banks corrupting government and government corrupting banks. Separating money/finance from government implies censorship-resistance in money, which is open blockchain/cryptocurrency. Something Libra cannot offer.

Last Words

Like any new technology, cryptocurrency will be used by criminals. The same happened on the internet and even the automotive industry. Welcome to a world where criminals use technology. Instead of focusing on a small percentage of criminals we should focus on the billions of people living in developing countries who cannot trust their government.

Libra will bring a lot of benefits to society. I do not doubt this. It will shake-up the banking sector, erode fees, remove remittances and ATM charges, and ultimately empower millions if not billions of people, particularly the poor. I deeply respect Mark Zuckerberg for taking such a risk. I just wonder if Google and other tech companies will do the same or if they will go down the road of open blockchain instead. Maybe that’s a tad too optimistic.

The main concern with Libra is that it allows Facebook to close the loop on our data. Facebook has already garnered a reputation for questionable privacy practices having found itself in a political scandal with Cambridge Analytica. Since selling user data is Facebook’s business model, the Libra digital currency will open up a whole new revenue stream for Facebook. It will now be able to track its currency from a “free” network and sell the data to third parties. Perfect timing considering Facebook has lost 15 million users in the last two years.

Once people experience the downsides of Libra, especially with regards to privacy, they might realize there are decentralized alternatives and opt out.

Libra, heavenly gift or poisoned chalice? Only time will tell.
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Again, thanks to Andreas M. Antonopoulos and Caitlin Long for being a great source of information. Much of which is regurgitated here. My opinions may change with time but for now these are my thoughts and I’d love to get your questions and feedback.

Get me on Twitter Sean Mackie

Interested in the latest science and technology shaping the world of tomorrow… along with the odd political dabble.

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