Analysing Facebook’s Libra whitepaper: Stability, security and subsidiaries

James has a passion for how technologies influence business and has several Mobile World Congress events under his belt. James has interviewed a variety of leading figures in his career, from former Mafia boss Michael Franzese, to Steve Wozniak, and Jean Michel Jarre. James can be found tweeting at @James_T_Bourne.

Rumours had been rife for months around Facebook’s dalliances with cryptocurrency. In recent times, this has turned into reality. In March, it was first reported that the company was offering up no fewer than 22 jobs in its blockchain division. At the time of writing, it has gone up to 29.

Last week came the announcement and launch of Libra, a global cryptocurrency which will aim to be launched in 2020, alongside the blockchain network supporting it. The goal is for Libra to be unlike a traditional cryptocurrency but as more of a digital currency backed by assets. The 27-strong list of partners reads like a who’s who of payments, from PayPal, Coinbase and Stripe on one side to Visa and Mastercard on the other. Investors such as Union Square Ventures and Andreessen Horowitz are also on board.

“Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people,” the company outlines in its whitepaper. “Existing blockchain systems have yet to reach mainstream adoption. Mass-market usage of existing blockchains and cryptocurrencies has been hindered by their volatility and lack of scalability, which have, so far, made them poor stores of value and mediums of exchange.

“We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure and trusted framework underpins this new system,” the paper adds. “This approach can deliver a giant leap forward toward a lower-cost, more accessible, more connected global financial system.”

The target users are the great unbanked in developing markets. ‘Parts of the financial system look like telecommunication networks pre-Internet’, as the company puts it. Indeed Vodafone, another member of the scheme, has enjoyed success for more than a decade with its M-Pesa mobile money initiative in Kenya.

Libra’s opportunity is summed up therefore across several boundaries; expanding the reach of financial services, providing greater trust in decentralised forms of governance; and, most intriguingly, that ‘a global currency and financial infrastructure should be designed and governed as a public good.’ But what else can be learned from the whitepaper?

The ‘reserve of assets’

Facebook will look to cede the Libra project to a larger community long-term – as per Google and Kubernetes, among various others – with the goal of having approximately 100 members on board by launch in the first half of 2020. The company is also setting up Callibra, a subsidiary with the goal of ‘provid[ing] financial services that will let people access and participate in the Libra network.’ The first product, again touted for next year, is a wallet available in Messenger, WhatsApp and as a standalone app.

For now, the ‘reserve’ of assets is a term which may offer more questions than answers. Boston Consulting Group (BCG) analysts Steven Kok, Kaj Burchardi, Or Lier and Yann Senant explore this model in a recent post. “From an ecosystem perspective, Facebook is in a rather unique position in that it has the platform (and user base), the right to play, and the ability to drive the use case definition,” the analysts write. “But Facebook needs the other participants for access to the broader financial services ecosystem and as a means to generate and validate use cases.”

Will Facebook move away completely and operate at arm’s length, or will it be an orchestrator? BCG added questions remained around how the company would use the basis of participation to secure adoption in particular local jurisdictions.

“As one member among many, Facebook’s role in governance of the association will be equal to that of its peers,” Libra notes.

The stablecoin angle

Naturally, being backed by assets puts Libra into the stablecoin category – to a point. 2019 has been a big year thus far in terms of interest for stablecoins particularly given Bitcoin’s continued tumult – although analysts have argued the current resurgence is in part down to Libra’s introduction.

“The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability and security needed to support billions of people and transactions across the globe through a permissionless network,” the paper notes. “Essential to the spirit of Libra, in both its permissioned and permissionless state, the Libra Blockchain will be open to everyone: any consumer, developer, or business can use the network, build products on top of it, and add value through their services.

“Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers,” it adds. “This is foundational to the goal of building more inclusive financial options for the world.”

BCG argues that the development ‘might impact the cryptocurrency and coin-based blockchain offerings… it may be a validation for some coin-based use cases, or it may strike a dagger into existing stablecoin solutions based on a single asset class, which may try to shy away from the problem of managing that asset pool.’

Ultimately, the centralised nature of Libra marks it as different from other stablecoins, and it is expected to work differently to the likes of Tether et al. Speaking to Coin Telegraph, Xavier Rashotsky, director at Salt, noted: “We can be certain that Libra will have a reasonably different profile than the inflationary and economically volatile underpinnings of a USD-backed stablecoin. Libra will compete with popularised stablecoins as a new, innovative and substitutable product deployed on proven and adopted forums.”

Trust us

Given Facebook’s prior reputation in terms of trust – Cambridge Analytica, anyone? – it was not a surprise that the opinion columns were raging. This opening from The Atlantic was typical. “Facebook, one of the world’s most distrusted companies, wants us to trust its new Libra cryptocurrency which, it hopes, will be used by billions of people around the world. We shouldn’t.”

Using a Byzantine Fault Tolerant (BFT) approach will help to engender trust, Facebook argues in the whitepaper, as well as ‘Move’, a programming language to implement smart contracts on the Libra blockchain. “Because of Libra’s goal to one day serve billions of people, Move is designed with safety and security as the highest priorities,” the paper reads.

BCG looks at the question of trust from a different angle. “No question, this solution will de facto provide full visibility into payment behaviours, opening up demographic contexts where Facebook, and all other nodes will have, essentially, almost 100% share of spend on any digitally supported trade users will make,” the analysts note. “But to truly achieve success, it will need to shift behaviours and relationships that have been established.

“Can Facebook sway those loyalties with a low-cost global marketplace? For consumers, can it become the primary digital wallet for two billion people? These are areas worth watching.”

You can read the full whitepaper here.

Interested in hearing more in person? Find out more at the Blockchain Expo World Series, Global, Europe and North America.


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