Advantages and polemics around Libra, the Facebook cryptocurrency

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The path of the Libra Association is becoming complicated. Under the attacks of the financial market regulators and a few banks, seven members of the Association have decided to withdraw and exit from the Association.

The first was PayPal, which reproached Libra for not having valid solutions on the anti-terrorist financing and anti-money laundering. And this week other very important partners such as Visa, Mastercard, MercadoPago, eBay, Stripe and a last surprise addition was Booking-Holding, all announcing their ascent from the project.

So, Libra was left with partners specialized in payment systems. Only PayU, a Dutch company that created an online payment network in South America, remains, but it is still too small for a project like Libra.

On October 14, 2019, the Libra Association met together in Geneva for the first meeting of the Board of Directors, and the Communications Head released the information that Libra is optimistic and that the exiting partners will be replaced by new incoming members. He said that the Libra Association has received around 1,500 membership applications of which 180 fulfill the requested requirements.

October 23, Mark Zuckerberg appeared before the Congressional Financial Services Committee to present the Libra project. Attacks on Libra have intensified lately. The BCE has declared that it won’t allow Libra to circulate in Europe; the Central Bank of France has stated that the Libra is a threat to the “monetary sovereignty”. In the United States, the President of the Fed has invited Facebook to stop the project until it has resolved the regulatory problems, beyond the fact that it represents a risk for the international financial system and even Donald Trump tweeted on Twitter is of little consequence and that the United States have only one currency: the US dollar.

Libra is the cryptocurrency announced by Facebook, which will begin functioning sometime during 2020. This cryptocurrency has already generated dissimilar debates because some feel that it will change cryptocurrencies into a real option and bargain for the almost 2,000 million people who don’t have bank accounts at present; meanwhile, others watch this project — protected by the Libra Association — warily, considering it an attempt at controlling cryptocurrencies by big businesses.

Facebook Planet

Facebook is, by far, the largest digital social network in the world, with more than 2300 million users. Therefore, Libra has already created a very ample base of potential clients.

The global technological context is also favorable for this cryptocurrency’s development. For example, India is the country with the largest number of Facebook users, with 270 million, 60 million more than the United States. India is also the country with the second largest number of people without a bank account, almost 200 million. The penetration of informatic and communication technologies will also facilitate Libra’s road. These days there are more than 5200 mobile phone users in the world and more than 4,000 people access Internet; additionally, the total of digital social networks  users is nearing 3,200 million.

What is the Libra cryptocurrency?

According to the White Book, published this past June, Libra is a low volatility cryptocurrency, based on decentralized blockchains with the objective of creating a new opportunity for innovating responsible financial services.

This cryptocurrency five essential components: it will be built on a secure, scalable and trustworthy blockchain; it will be a “stable cryptocurrency” (stablecoin), protected in an assets reserve; governed by the Libra Association, an independent organization, composed by 27 big businesses and the codification of intelligent contracts will be made through the “Move” programming language.

Facebook created its own digital wallet that it called “Calibra”. The users will have the possibility to send Libra from their intelligent devices through this wallet, which can be reloaded through a list of payment providers that form part of the Libra Association, like Visa, MasterCard and Stripe (PayPal withdrew from the Association). People will be able to convert their dollars or Euros into Libra through local or digital exchange offices. Calibra will have an independent app for iOS and Android.

Libra will incorporate the chance to offer advertisers an instrument with which the consumers can buy their products or services directly. Currently, Facebook and Google control more than 80% of online publicity.

Libra will be a “stable cryptocurrency”, protected by the Libra Reserves. These will be certified by real assets, like bank deposits and short-term public values of stable and reputable central bank currencies. When a customer buys Libra using dollars, these will go immediately to the Reserve, which will then invest them in low volatility assets. Bitcoin and Ethereum don’t have this concept, which has provoked a lot of volatility in the prices of these cryptocurrencies.

There are three types of “stable cryptocurrencies” and, in Libra’s case, it can be considered as “fiat collateral”, such as happens with Tether. Its operation mechanism is simple: a certain amount of money is guarded as collateral and the cryptocurrencies are issued in a 1 to 1 ratio. Contrary to what occurs with Tether, Libra’s value will fluctuate the same way that the American dollar’s exchange rate varies with the Euro or the Yen.

Libra, like Ethereum, operates with the gas concept, which is a standard measure for calculating the cost of the transaction. Each transaction and intelligent contract uses this gas. Whereas the intelligent contract is more complicated, Libra will consume more gas. The total gas consumed will be converted to Libra, starting from the price of gas, and this amount will be paid by transmitting money. About the price of the transmission, Facebook only says that it will be “free or low cost”.

Libra Association, one of the centers of polemics

One of the most distinctive elements of Libra is the “Libra Association”. Cryptocurrencies call a lot of attention to their decentralized character, meaning that no controlling body appears behind them. Libra isn’t like that. The Association has an independent nature and is a non-profit. Its headquarters are in Geneva, Switzerland. It emerged with 28 members, all of them with equal votes, Calibra, representing Facebook, among them. When Libra begins operations, the Association will be formed by more than 100 businesses, non-profit organizations, multilateral organisms and academic institutions. Supposedly, any organization can join the Association if they run a network node and play a part in governing it.

MasterCard, Visa, Stripe, eBay, CoinBase, Andreessen Horowitz and Uber are among the Libra Association’s founding partners. All of them was required to invest a minimum of 10 million USD to guarantee their position. Each investment assured them a vote on the council. Up to now, Apple, Amazon, Microsoft and Google, four of the big technological businesses, haven’t wanted to open the project.

PayPal was part of the initial group of the Libra Association’s 28 businesses; however, it decided to withdraw from the project in October of this year. PayPal didn’t present the exact reasons, however different means of communications agreed in pointing out that the American business wasn’t clear about how the Association will impede money laundering and, therefore, facing possible problems because of this subject, it opted to exit.

Libra vs. Bitcoin

Libra applies many of the same concepts and the same block structure as Bitcoin. It employs blockchains, cryptograms and digital wallets.

The main difference between Libra and Bitcoin is the way they manage their blockchains. In Bitcoin’s case, it’s an unlicensed chain, or rather, anything with a hardware infrastructure can apply mining protocols and participate in validating the transactions and can be converted into a node validator of the Bitcoin network. At present, Bitcoin depends on almost 10 thousand nodes.

Meanwhile, Libra will work, at least for an initial period of five years, as a centralized blockchain, where the consent and software mechanism is controlled by the members of the Libra Association, who are the only ones to have the permission for validating transactions.

Furthermore, the architecture of Libra was designed so that it had other advantages over the cryptocurrencies that were already on the market. For example, it will consume less electricity than Bitcoin and could achieve up to 1,000 transactions per second, while Bitcoin produces only 7 and 15 with Ethereum.

Fears regarding Libra

Many doubts have arisen about Libra since being announced. The first of these is linked to privacy. The Cambridge Analytics scandal and other accusations of security flaws on Facebook have worried many around the world, so that calming its users is key to Libra’s destiny. According to Facebook, “ except for limited cases, Calibra won’t share financial or account information with Facebook or any third party without the customer’s consent”. Fraud prevention appears among these “limited cases”. “Calibra can share global data with Facebook third parties, related to the profits from its products and services. An example will be a graph where the total number of users of the service. Calibra will use techniques for preventing global data from being linked to a person.”

Other worries related to Libra originate from the financial sector. According to Margarita Delgado, Deputy Governor of the Bank of Spain, Libra could become “a destabilizing element of the economy”. She reassured that it’s “reasonable” to doubt regarding the actual safeguard of privacy “every time that the accumulation of large amounts of economically valuable information constitute a clear incentive for cyber delinquents”.

In addition, the Deputy Governor of the Bank of Spain shows her preoccupation about the international nature of the operations with Libra and the “important challenges to the effectiveness of an adequate prevention of money laundering and “financing terrorism”.

Libra could be “a factor that amplifies the volatility of the financial markets, also affecting payment negotiations and the bank activity of accepting deposits with the resulting erosion of their resulting accounts,” Delgado explained.