Facebook has recently announced its own cryptocurrency currency called Libra. They have also announced a wallet to keep that cryptocurrency safe, called Calibra. Every bank, business regulators, and privacy advocates are very concerned about this project.
Let’s dig in to know what exactly Facebook Cryptocurrency Libra is and why it is so controversial. It’s easiest to describe Libra by contemplating what it would be like for you to use Libra and then explaining What happens in the background as we go. Let’s say in a year or two from now when Libra is out; you want to get some. How do you do it?
How to buy Libra?
You have two options: One – you buy from a random person who already has some Libra, that is just a currency that anyone can trade with. The second option is – you go to an appointed Libra exchange of which Facebook says there will be many around the world. If you pay them standard money, let’s say US Dollars, and then this exchange processes first, they will create new Libra that they will give to you. They are the only ones who are authorized to do that.
Trading Libra would work in the same way as well you could either sell it to someone or go to an exchange which Facebook guarantees will give you real money for it. They will take your Libra and end it, and they will receive a part of their money and give it back to you in the form of regular cash like Dollars. So that’s how you buy and sell Libra.
Implications and Controversies
Now notice three important implications – One: the Libra Association has complete control over how much Libra there is, unlike with Bitcoin where Bitcoins have to be created by mining. The Libra Association is basically like a central bank that can print and destroy Libras whenever it wants to. The Association controls how much Libra’s worth; they will use their exchanges to set a buying and selling price for it worldwide literally.
Thirdly, the Association will have a stock to make certain that they have sufficient money to pay back anyone who wants to take their money out of the system – providing the currency a sort of trust and stability that most cryptocurrencies don’t have. Now given that you know how to buy Libra, you probably want to store it somewhere, and that is what a Libra account is for. A comment of Libra is just a public and a private key which are only two very long strings of characters. Think of them as a login and a password. Facebook says that these accounts will not directly bind to your name or where you live.
You can have probably as many Libras as you want, so that’s an account. Now that you have one with Libras on it, it is time for the next step – which is starting to pay for stuff with it. Your transactions, of course, have to go through the system, and somebody has to process and approve them. Unlike in so-called permissionless systems like with Bitcoin, where every minor in the order so theoretically anyone in the world with a computer can validate transactions, that’s what mining is.
In a permissionless system like Libra, for example, sales are authorized by trusted jurisdictions only who are, of course, the members of the Libra Association. Facebook says that they ultimately want to move to permissionless morale as well-meaning that anyone can join the network and do validations as well. However, they don’t know how to do that at scale yet efficiently and swiftly enough. So at least for the next five years, they say that the big guys will have to do all of the validations. Maybe they don’t want to move to the permissionless model, and it’s just a fake commitment, but at least for now.
At its core, Facebook Cryptocurrency Libra works by you having a simple account, and then the Libra association takes care of everything else, including creating and destroying Libras as well as processing all of the transactions. It’s a hybrid between cryptocurrencies like Bitcoin and regular so-called fiat currencies Euros or the US dollar. As it uses cryptographic technologies similar to Bitcoin, but it’s currently managed much like regular money with a persuasive central authority calling all of the shots.
Advantages of Libra over other cryptocurrencies
I want to focus on the implications of Facebook Cryptocurrency Libra, and I’ll start with the positive stuff. If Libra comes to the market as envisioned, it is going to be enormous. There’s no guarantee that government regulators will let it pass or that Facebook will even be able to build all the things that it says. But if it happens, Libra could make payments go across borders instantly at little cost, surely and securely for anyone who has access to the internet without a need for a bank.
Just imagine a worker from the Philippines, earning money in Europe and being able to send it back home from their phone safely without any significant fees. Facebook estimates the average cost of remittances at 7% globally, and they disproportionately hurt poor people. To the most, Libra could necessarily get rid off that. Libra could also be a reliable way for people to store money in countries where walking around with a lot of cash is serious. It is also useful where the local currency is going through hyperinflation, for example, like what’s happening in Venezuela right now. People could put their savings into Libra freely and not have to worry about it losing much value or getting stolen.
Finally, Libra will be built into every conceivable Facebook product, ever supporting for smooth peer-to-peer transactions. eBay, Uber, Lyft will accept it, and all of these are Libra Association members. Many other vendors and users will be able to convert Libra to local currency at an exchange only without having to worry about getting ripped off. In other words, if everything goes according to plan, Libra could theoretically become functionally far better to our current payments. While all that is true, I think everything else about Libra is incredibly worrisome.
Disadvantages of Libra over other cryptocurrencies
For a start, the management structure of Facebook Cryptocurrency Libra, in my opinion, is pretty insane. One of the core promises of cryptocurrency like Bitcoin is that there is no management. There is no governance; anyone can join the network and make payments in Bitcoin. Anyone can verify every transaction on the Bitcoin. It’s real personal freedom that generates new problems like how do you block people from paying for nasty things like guns, drugs, and all that kind of stuff? Libra does not provide that.
Facebook Cryptocurrency Libra is very much a managed and centralized currency. But unlike traditional currencies, the authority managing it is not a central bank, which is a government agency that citizens have some level of control over. It is instead an association of self-appointed big private companies that regulate themselves. This Association has its headquarters in Switzerland, which makes it additional tricky for any national law enforcement to target it. The Association is more potent than a typical central bank. It cannot only create and destroy currency at will as well as manipulate its value, but it’s also the sole payment processor in the system. In other words, an organization that has zero accountability to anyone has absolute control over all vital functions of the currency.
So since I’ve been talking about it so much let’s search this Association a bit. Its current twenty-eight members are mostly large US-based private companies handpicked by Facebook. It’s an invite-only system, so Facebook and its friends decide who gets to join later and the entry criteria appear to be that members, for the most part, have to be abundant and prosperous companies. Facebook ironically calls this a “diverse set of organizations” because they’ve thrown in a token charity or two to look good.
Unanswered questions about Libra and other issues
Currently, there are no clear answers given to many of the most important questions, like why these companies are uniquely well-suited to run the world economy in the first place? What happens to these companies if one of them misbehaves? Or how the public can hold them accountable if anything wrong happens?
Now there are two more aspects that experts seem to worry about how much control Facebook has over the system. The default assumption would be that Facebook wants to have all of the control. It is surprising that according to the currently released plans, Facebook seems to relinquish the control over Libra voluntarily. They could have made all of the payment processing themselves, but they chose to share that responsibility with other companies, and they chose to make Libra relatively private by using pseudonymous keys for accounts. Of course, they do have a plan for regulating the system and for collecting as much data as possible, but to know how that would work we have to take a glimpse at Calibra, their newly proclaimed wallet.
What is Calibra?
A crypto wallet is an app that lets users access cryptocurrencies. Think of it like a specialized banking app showing users balance and enabling transactions. Developers can play around with Libra using the command-line interface, but 99% of the population will use a wallet. While Libra is technically an open system that anyone could build, competing wallets on Facebook is betting big as Calibra is becoming the dominant one.
Calibra has a head start of at least one or two years, so it will likely be more feature-rich than competitors. They are probably making it the default solution for peer-to-peer transactions over Whatsapp and Messenger as well as purchases over Instagram. Almost all of us know how big tech companies can use and kind of abuse their dominance with one product to create a market dominance for another product.
Long story short, Facebook is perfectly positioned to make Calibra the default way most users around the world access their Libra. That’s all Facebook needs because, with Calibra, everything is but private. They have openly declared that they will follow standard banking procedures, including confirming the identity of every Calibra user with identity checks as well as learning where they live. Such information will be compulsory for banks to collect, to avoid money laundering and stuff. You can bet that Calibra will also closely monitor your payments to learn about your habits, to offer you loans and insurance.
In other words, Calibra, a company that is owned 100% by Facebook, can have all of the payment data. Facebook has assured that they are not going to mix Calibra payment information with Facebook, Whatsapp, and Instagram. But then again they’ve made similar guarantees like that in the past, before and they broke them. So should you care about that promise, probably no? They promised that they would never mix Whatsapp and Facebook data after the acquisition. But then they changed their minds and started merging the two and even brought Instagram into the mix as well.
Notwithstanding regulators suing them multiple times for it. Whatsapp founders left the company over it. Affirmations are easy to make, but typically don’t last very long. Within Facebook, breaking them appears to make them massive amounts of money.