The main topic/theme/analyses that dominates the space is the regulators’ and governments’ stance against this project. ‘Libra would hand over much of the control of monetary policy from central banks to these private companies’ or ’ how Libra will comply with privacy laws and expectations in multiple jurisdictions around the world’ are just a few of the arguments against it.
Focusing more on the payments part, some experts are trying to analyse the financial infrastructure Facebook aims to achieve. Some conclusions suggest that Facebook’s new cryptocurrency Libra is not merely about transactions; it’s also about trust to a certain extent, and mainly about world dominance. In today’s post, we will try to explore these perspectives. For an introduction on Facebook’s Libra, you can read our 7 things you need to know about Facebook Libra.
Libra (and cryptocurrencies) with a payments angle
Daniel Chatelain, Founder and CEO at PayKademy
Virtual currencies disrupted - A virtual currency is a digital asset designed to work as a medium of exchange; and even if the term is relatively new, the concept behind it has been here forever, taking different forms (e.g. with gift cards like iTunes or Starbucks cards, or if you fly around the country your miles are a virtual currency, or how in many countries your pre-paid minutes on your cellular carrier act as a virtual currency, etc.).
Sometimes virtual currencies are associated with Bitcoin. However, the creation of Bitcoin is a bit different, as it is not managed only by one/a group of companies, it is used worldwide, in a transparent way, and it is anonymous. Bitcoin was the beginning of a new wave that we call cryptocurrencies and there are many of them. For instance, by mid-2015 there were 650 similar cryptocurrencies, whereas today there are over 2,380. Still, only a few have significant value with some community traction.
There is more than just Bitcoin: introducing Libra. Libra is a new upcoming global currency developed by Facebook to solve the many frictions of an underdeveloped or antiquated payments system worldwide. Libra is not Bitcoin- or proof of work-based; it is a permissioned-based network, a little like Ripple, and to some extent Stellar. The Libra coin is based on hard assets, such as a basket of fiat currencies. If you believe what has been said on the Senate Hearing on July 17, 2019, the basket will be 50% US dollars, with euros, British pounds, Japanese yen also included in the collateral. This is important to limit the speculations in the future. The price won’t vary based on offer and demand but on the value of the currency which is part of the basket, previously mentioned.
Let’s compare Libra with Bitcoin. Bitcoin from the get-go has been a fully decentralized network. Anyone around the world can not only buy and sell Bitcoins, but also be part of the network running it and processing the transactions. Libra is permission-based with a USD 10 million-entry ticket. This will allow reversing transactions if necessary in case of problems.
The proof of work and proof of stake is another major difference. We know that the energy requirements and the delay associated with proof of work are not compatible without an additional layer like Lightning that is necessary to render Bitcoin usable for mass payments. No need for proof of stake in the case of Libra, as the network is managed a little like Visa, by entities that make the decision.
Bitcoin started as - and it is still - not regulated, as it is difficult to do it realistically. Some countries have banned the exchange of the currency, but most countries prefer to control the entities involved in the transactions, like Coinbase, Robin Hood, and so many others. With Libra, the case is different because it is managed by one/group of entities collaborating. Each regulator can talk to representatives at the companies and due to the large pockets of the companies involved, there is a lot to lose if they ignore the rules.
I don’t consider Bitcoin a consumer payment system. It could be a payment rail for B2B payments, but the technology is not ready for consumers; it is too slow, too complicated for most people and there is too much speculation around it. Libra, on the other hand, is more adapted to payments and should be very bad for speculators, as the chance of having all the fiat currencies in the basket going down or up at the same time is limited. The coin is created for payment transactions. When looking at the list of participants like Visa, Mastercard, Stripe, PayPal, PayU, etc. we cannot help but notice that these companies know how payments work worldwide.
Overall, the currency is not ready for prime time, and a lot remains to be done to develop and find the operating rules of the new currency and scale the platform to do the vision. There are always many obstacles in creating and deploying operating payment systems. Nevertheless, Facebook is one of those rare companies that could make it happen.
Libra and the transactional internet
Douwe Lycklama, Innopay, co-author of ‘Everything Transaction’
What is the transactional internet? Basically, it is the internet where trust is less dependent of todays ‘middle man’ (platform) who lives of collecting and combining data to exert its market position and create trust to deliver great services. As an example of traditional platforms, PayPal manages the risk of chargebacks and fraudulent transaction based on data while, Airbnb enables homeowners to welcome strangers in their property. Data creates trust for parties who do not know each other, but the platform does know each of them. The transactional internet is coined in the 2019 management book ‘Everything Transaction’.
Transactional internet comes with data sovereignty. In this new environment created, the data is under the control of people and companies through an omnipresent identity and consent infrastructure. This infrastructure follows rules such as: (1) the data is not by default the property of the platform, but users and platforms use the same data and trust infrastructure; (2) it is valid only if the person or entities have agreed to this (consent); and (3) in this next-generation Internet a platform asks on a regular basis permission to use your data and rewards you for this. As a result, the transactional internet gives the actors on the platforms a more ‘even’ position vis-à-vis the platform, so that the benefits of the data become more evenly distributed.
By the announcement and publication of Libra, we can imagine this world of the transactional internet in a functional way. On one side, we have individuals and entities having data assets (including money) as tokens living in the Libra infrastructure. On the other, we have the economic actors (e.g. banks, advertisers, insurance, telco’s, energy) that use this infrastructure to offer transactional services to their customers. Libra could enable these actors to enter in a transactional relationship with their customers based on the control and usage of their data. Data owners could then restore the often mentioned ‘data benefit balance’ with the Libra infrastructure.
Then there is the governance aspect of Libra. The Libra Association in Geneva is the central governing body. As such, you could state that this is the new ‘middle man’, but there is a nuance to this. Being an association, the decision-making can be evenly distributed over its members. It seems that the Libra Association bylaws stipulate this ‘democracy’. In addition, the membership is open to parties who fulfil certain criteria. By its launch date, there are 28 parties published, we can expect more to come.
So is Libra the transactional internet? Not quite yet, but the foundation is there. It depends fully on how the Libra initiative develops further through the ambitions and vision of the association members. Not to mention the regulators, as the financial aspect of Libra immediately triggered large numbers of regulators worldwide.
The announcement of Libra can also be seen in the light of the increasing pressure on centralised data structures. Politicians and regulators clearly think more about ‘breaking up data monopolies’ and giving users back the control on their data. The European GDPR regulation is an example of this, next to Open Banking regulations, which we see all over the world. However, data owners today lack an infrastructure to exercise their rights, which starts with ‘data sovereignty’. The Libra infrastructure could evolve into the infrastructure for ‘data sovereignty’: a distributed global infrastructure for data assets (including financial assets) with a sound governance, balancing all the interests of the various stakeholders: public, private and individual.
About Mirela Ciobanu
Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in covering digital payments and related topics, especially in the cryptocurrency, online security and fraud prevention space. She is passionate about finding the latest news on data breaches, machine learning, digital identity, blockchain, and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor degree in English language and holds a Master’s degree in Marketing.
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