The Importance of Libra – Marcos C. Veremis
On June 18, Facebook, the 6th largest company in the world by market cap, announced a potentially groundbreaking, exciting and widely misunderstood project, the Libra project.
Libra will be a digital stablecoin powered by blockchain technology. It will be fully backed by reserves in the form of a collection of currencies at least during the first few years of its launch. It will be managed by an independent foundation of up to 100 member organizations who are expected to deposit the initial reserves in exchange for interest generated in the reserve as it grows. These 100 members will also run the nodes in the blockchain system that validate transactions. Once and if Libra launches the idea is that people will be able to seamlessly transact online as easily as they can send a text or a picture. This includes the close to 1.7 billion people in the world who do not currently have bank accounts of which an estimated 1.5 billion have phones and internet access.
Many articles have already been written about Facebook’s Libra initiative. It is one of these rare cases where both the proponents of decentralization as well as established centralized interests such as corporations or the press have reacted negatively as Libra neither satisfies the criteria for decentralization but it also neither satisfies the criteria for centralization. Libra is a new structure and initially and intelligently (in my view) relies on a middle of the road approach.
Whatever the criticisms from both sides, in my view, Libra is a major development and validation for the crypto and blockchain space. Libra is positive for the space as a whole including for truly open blockchains such as the Bitcoin and Ethereum blockchains. Therefore, it is a win for proponents of decentralization..
Why? For two main reasons.
The first and important reason is that unlike what has been circulating in the press this is not a Facebook coin although Facebook obviously believes it would benefit from such an approach in the long-term. The Libra coin by design is governed by a separate entity from Facebook and includes 28 members (including Facebook) at present to most likely reach 100 members upon launch. Other members include corporate giants such as Uber, Visa and venture capital firms Andreessen Horowitz and Union Square Ventures as well as NGOs like Kiva and Mercy Corps. That this is not a Facebook coin is a crucial difference between what Facebook is trying to achieve and that of existing projects such as WeChat in China.
The second reason is that Facebook will, in parallel to Libra, be launching a digital wallet called Calibra. Calibra is likely to become an easy to use application that will potentially introduce billions of people to digital assets including bitcoin and will allow them to send libra and other cryptoassets seamlessly to one another.
Let’s look at each of those two reasons on why Libra is a win for the crypto world in more detail.
First, why is Libra structured the way it is structured? And why is it important?
As is well known by now Facebook has struggled with the issue of privacy and for good reason. Therefore, a coin controlled by Facebook would likely not have had good chances of success. But importantly, even if Facebook had had a good track record on privacy a coin controlled by a single corporation would not have been good for the world because users could have always been abused at a later date. Therefore, in a sense, it’s good that Libra came about partially because of Facebook’s failures on privacy.
Here, in my view comes a rarely mentioned but important and consequential principle of Libra’s design as written in its whitepaper.
“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 Libra 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. This is foundational to the goal of building more inclusive financial options for the world.”
A relatively open structure for Libra suggests a very important difference to closed platforms like WeChat. The Libra blockchain is calling for open innovation on top of it and innovators can have more certainty that an association of 100 members with differing interests will not collude in the future in order to change the rules and/or censor as any single corporation could do and historically has done so on its platform (see Twitter, Apple etc.). Therefore, innovation around Libra should flourish given significantly reduced platform risk. Furthermore, libra coins will not only be used inside Facebook but outside of it as well.
Second, how is Calibra going to potentially introduce billions of people to digital assets broadly?
Currently it is estimated that there are only around 50–100 million people worldwide holding digital assets and an estimated less than 10 million people who own at least $100 worth of digital assets. The upside for crypto asset adoption is therefore massive given the close to 2.5 billion Facebook users. Calibra will both be a standalone application and also built into Facebook Messenger and WhatsApp. In addition, Calibra should be able to hold other digital assets including bitcoin and it is likely that Facebook, for regulatory reasons, will have to accept outside wallet providers into its system as well.
For these reasons, I believe Libra is a major win for the long-term goals of a decentralized internet and of the wide adoption and use of internet native digital assets and the numerous new exciting business models that these can support in the future. Yes, Facebook stands to gain if Libra succeeds but likely so does everyone else. It now remains to be seen whether Libra will work. The most important risk it faces is regulatory risk. The US congress already sent Facebook a letter to halt the Libra project. Despite appearances, the optimist in me suggests that this is also a good thing. It is about time that regulators, politicians and the public get educated about the serious side of crypto, the internet of value. So far, the narrative has been hijacked by all the low-quality projects, bad actors and frauds surrounding this otherwise highly innovative space. Maybe this is about to change. And this would be a good thing.