With summer literally upon us, things are heating up in the crypto world. Late in June, Facebook announced it was taking cryptos into the world of banking by publishing its white paper for Libra – a new cryptocurrency that will run on its social media sites and apps – Facebook, Messenger and WhatsApp.
It could have said quite simply that it was jumping head-first into a much messier world – that of politics, since the company we’ve all grown to love to hate is not merely going to begin offering financial services; it’s publishing its own personal currency.
And when you can boast nearly 2½ bn citizens in your own virtual universe, providing them with a currency is akin to declaring cosmic independence.
In response, legislators are up in arms – many who have been trying to break up the company following its acquisition of Instagram!
The Political Flinch
In the US alone, the House Financial Services Committee members, Maxine Waters and Patrick McHenry have called on Facebook to reconsider their Libra rollout – a threat to data privacy and security, they say – at least until Congress and regulators can review it.
Senate Banking Committee member Sherrod Brown stated that “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
Should we take their objections at face value?
Waters gives away some of her true fears when she goes on to tout Facebook’s “unchecked expansion and extending its reach into the lives of its users… Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data,” quote Reuters.
The company is facing a $5bn fine for its sale of user data to Cambridge Analytica; and in response to its flaunting of European regulation, France’s central bank governor, Francois Villeroy de Galhau, German MEP Markus Ferber and other continental politicians are also raising the bulwarks. “It cannot and must not happen,” said French Finance Minister Bruno Le Maire on Europe 1 radio.
Why so wary?
The basic tenet of cryptocurrencies places the world’s banking industry at peril. Following the financial meltdown of 2008, Bitcoin creator Satoshi Nakamoto (whoever he may be) published his white paper in which he states the basic tenets of an open-source, publicly administered distributed ledger (a database of transactions) that would supplant our trust in the inherent value of fiat currencies – a trust that, many claim, the banks (in cahoots with the governments that reign under them) abused.
Instead of a central bank regulating the creation and flow of money based on a governments fiscal requirements and its own monetary policies, Nakamato proposed a system whereby nobody could spend more than they had and in which everybody would approve and administer who had what and to whom they could transfer it.
This is done through the above-mentioned shared ledger that is constantly updated across the entire network with each new transaction, what he called a “blockchain”, since it is – in effect – a chain of data blocks, each recording a number of transactions executed over a certain amount of time.
The success was immediate. Bitcoin soon rose from being valued against pizzas (5000 bitcoins = 1 pizza) and towards the $20K mark in 2017. A slough of imitations soon emerged – different ledger types, different technologies; and today the global financial system is seeking ways of joining the trend.
Unfortunately, the number of cryptocurrencies continues to promulgate and the ability to control and manage value is sporadic. With no single country to “back” the currency, trust comes with difficulty.
Facing the Blast
Although Libra’s stated purpose is to provide financial access to people without a bank account, Facebook’s history certainly points to more sovereign directions.
From a quasi-dating application developed by a group of unpopular university nerds, Facebook has become a microcosm of the entire internet. Over 2 billion users, companies, groups and other entities, each with his/her own page, interact directly in almost every manner known to human society – social and commercial.
The only thing missing to boost the platform into the realm of the body-politique is a government, a legislature and a currency – the latter which would enable the commercial aspect of Facebook to announce its complete independence from its geographical hosts.
Here, in the place of a central bank, ministry for finance/economy/commerce/etc. we find the Libra Association – a not-for-profit collective of companies based in Switzerland and tasked with the job of validating the blockchain (the ledger of transactions) and “managing the reserve Libra is tied to”.
To be a founding member of the Association, a company must contribute at least $10 mn; PayPal, eBay, Spotify, Uber and Lyft, Visa and Mastercard have already done so, as have several venture capital firms.
What Makes Libra So Special?
The two most important aspects that differentiate Libra from its less well-connected brethren is value and supervision. Most cryptocurrencies are not pegged to anything other than the market perception of their own worth.
Some are distributed through Initial Coin Offerings (like shares in a new company); some are created in return for work (the upkeep of the blockchain by “miners”).
When Bitcoin was launched, its White Paper stated that the total number of Bitcoins would never exceed 21 million. Thus, the higher the demand, the higher the price; and Bitcoin’s price has been uncharacteristically volatile for an asset that purports to represent value.
Libra, says its maker, will be tied to a basket of global assets – other fiat currencies, major commodities and so forth – to provide it with a more stable value.
The idea of a stablecoin is not new; the whitepaper on Tether (the first stablecoin offered) was first published in 2012, stating that each coin would have a token value of one US dollar.
The entity behind the coin was supposed to hold $1 in reserve for each Tether issued, but in April 2019, Tether Limited’s lawyer admitted that the reserve had fallen to $0.75…
At present, backed stablecoins are backed by some form of commodity, while Unbacked ones are backed by either fiat currencies or other cryptocurrencies.
As for the Blockchain ledger, with most other cryptos, this is an open source network that can be accessed by anyone with a computer. Libra’s blockchain – at least initially – will be administered by a closed group, most probably representing the Association companies.
As for other aspects of its operation, here too, users will need to avail themselves of a digital wallet (called Calibra, in this case).
Several months ago, Bloomberg reported that Facebook was hiring former PayPal employees, and the result is a rather-well planned complex of verification, anti-fraud and hack-prevention protocols.
Privacy, however, will always remain a primary concern.
Meanwhile, the immediate effect of Libra can already be seen – long before its circulation.
Facebook shares, which have been in a news-cycle inspired freefall since April 2018, suddenly begin rising at the start of this year, as have most of the above-mentioned companies. Certainly, this could be ascribed to the proposed easing of monetary policy by the Federal Reserve.
However, there is little doubt that when Libra takes off, it will have little choice but to be a success – even if just a fraction of Facebook users avails themselves of its value. Moreover, it will also signal the official entrance of cryptocurrencies into the world of legitimate finance.
Potentially, anyone getting in on the ground floor may be in for the ride of the millennium.
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