This morning, Facebook released details regarding Libra – its proposed cryptocurrency. The details and Facebook’s move have predictably generated much debate and discussion. While cryptocurrency enthusiasts and investors have applauded the move, regulators have alternated between adopting a wait-and-see approach and criticism of the social media company’s move.
Expectations have been sky high for Facebook’s entry into cryptocurrencies. The social media behemoth is arguably the first mainstream company to detail extensive plans for a cryptocurrency and to implement the fundamentals of blockchain into its system. Others, such as retail king Amazon, have mostly restricted themselves to accepting Bitcoin on their platforms. But that move did not really translate into substantial traction either for Bitcoin or Amazon.
Facebook’s plans are different and involve releasing its own coin for use as a payment mechanism in its massive network of 2.4 billion users. If it is successful, Facebook’s crypto venture could open the floodgates for other businesses with similar scale to develop new business models. For the select venture capital firms that dominate the cryptocurrency ecosystem, a successful Facebook implementation means more interest by other investors and bigger returns for their investment.
A Win for Investors and Entrepreneurs
Not surprisingly then, cryptocurrency investors are among the biggest champions of Facebook’s crypto move. Galaxy Capital’s Mike Novogratz, who has invested over a third of his billion-dollar fortune into cryptocurrencies, told Bloomberg that Facebook’s crypto move “credentializes crypto.” “It is now a matter of time before crypto and blockchain are part of both the consumer and financial infrastructure of the world. This is extremely bullish for Bitcoin and the whole ecosystem,’’ he said.
Jeremy Allaire, CEO of Circle Internet Financial – which has its own stablecoin, USDC, backed by Goldman Sachs, told the same publication that Facebook’s move was “an inflection point” for cryptocurrencies. “It is the transition point where people start to realize that crypto and this infrastructure is going to help change the way the international economic system functions,’’ he said.
That might be a bit much, given that Facebook’s supposed blockchain is mostly a centralized and permissioned entity controlled by members of the Libra Association, a Switzerland-based nonprofit foundation. The foundation’s constituents include important companies from the existing economic system, such as MasterCard and Visa. Membership to the association for businesses and nonprofits is exclusive and expensive. At $10 million, the costs to run a node on Facebook’s blockchain are also pretty steep.
To that extent, Joseph Lubin, cofounder of Ethereum, has a more measured take on Libra’s ambitions. “Even if the system turns out to be operated in a centralized or federated model — which seems nearly certain at this point — it would be a good stepping stone for people towards taking further control of their assets and identity and getting more comfortable with peer-to-peer payments managed from their own wallet,” he stated to Bloomberg.
Deconstructing Facebook’s Whitepaper
The Financial Times’ Alphaville blog has done a critical deep dive into Facebook’s whitepaper and, as usual, it is excellent. Of note are Facebook’s attempts to differentiate the Libra blockchain from other blockchains.
In its whitepaper, the company describes the Libra blockchain as a “single data structure that records the history of transactions and states over time.” In case you didn’t already know it, this definition of a simple database has been around for ages. Further down, Libra’s consensus mechanism is described as being governed by LibraBFT (BFT stands for Byzantine Fault Tolerance, a method for ensuring that systems in a peer-to-peer network display the same data.) Most consensus systems in major cryptocurrencies are based on BFT.
One of the biggest question marks over Facebook’s crypto move pertains to regulation. The company’s operations span multiple countries and jurisdictions.
Finance chiefs in Europe have already sounded out a warning gong. France’s finance minister Bruno Le Maire said Libra cannot become a “sovereign currency” and called on the Group of Seven ministers to prepare a report detailing their concerns for their July meeting. Markus Ferber, German politician and member of the European Parliament, said Facebook’s crypto outfit could become a shadow bank and regulators should be “on alert.” The Bank of England’s chief Mark Carney said Facebook’s venture should be “subject to the highest standards of regulation.”
As a reminder, the company has already held high-level talks with regulators in the United States and the UK regarding its cryptocurrency. Within the US, it has already obtained money services business (MSB) license to operate in 50 states. It is also offering Libra tokens to accredited investors and members of the Libra Association through a security token offering, in compliance with existing regulation. Calibra, the subsidiary responsible for developing Facebook’s ecosystem, is registered with FinCEN, which means that it has comply with anti-money laundering regulation.