Facebook’s cryptocurrency and blockchain Libra continues to generate headlines and commentary from politicians and experts alike.
The latest one involves the European Central Bank’s legal official Yves Mersch who described the social media network’s plans for its cryptocurrency as “beguiling but treacherous.”
Mersch joins a chorus of voices and officials from Europe’s governing authority who have criticized Facebook’s plan to launch a blockchain and cryptocurrency for its network. The project is also reportedly being probed by EU officials.
The social media behemoth has also formed an association consisting of notable companies, such as MasterCard and Visa, that is headquartered to Switzerland to push through its plans for a coin.
Mersch’s contention is that private cryptocurrencies, such as the one planned by Facebook, cannot establish themselves as alternatives to central bank-backed currencies.
“I sincerely hope that the people of Europe will not be tempted to leave behind the safety and soundness of established payment solutions and channels in favor of the beguiling but treacherous promises of Facebook’s siren call,” he told audiences at the ECB’s legal conference in Munich yesterday.
But he did not discount the role of technology in evolving banking systems. “The stance of central banks toward modern forms of money is bound to evolve with time,” he said. “Central bankers have embraced technological developments in the field of money and will continue to explore helpful new innovations.”
The Known Unknowns in Libra
Meanwhile, an economics and political science professor from UC Berkeley has listed the known unknowns in the Libra project. Barry Eichengreen was a senior policy advisor to the IMF and has created the list based on available documentation about Libra. His post, which discusses the knowns and unknowns of Libra, can be condensed into the following questions:
- Who are the authorized resellers of Libra?
The Libra documentation states that the cryptocurrency will only be available to consumers via authorized resellers. But it does not specify identity or nature of those resellers. As a parallel, a central bank disburses money through commercial banks.
- What percentage of Libra is backed by fiat currencies and what percentage is not?
According to Eichengreen, Libra’s documentation does not specify whether the “incentives” paid out to Libra Association members to promote the cryptocurrency are fiduciary issues or not. “If these payments are in exchange for deposits of fiat currencies by the Founding Members, then this is just an exchange of fiat for Libra like any other – it is not an “incentive” to develop anything. If it is a transfer not made in exchange for fiat, then a portion of the outstanding Libra is not backed,” he writes.
- How will interest earned from the Libra Reserve be handled?
The Libra Reserve amounting to $1 billion will earn interest that will be used to fund operational expenses and ensure growth and development of the ecosystem. But Eichengreen has raised several questions pertaining to the spending of its interest.
For example, he questions the order in which the interest will be spent. Will the Libra Reserve be used to fund operational expenses first and then to grow its ecosystem? If yes, then this would mean that members would receive payouts first before funds are allocated towards growth measures.
- How will Libra scale its system in a decentralized fashion?
This is a question that has become a sticking point in criticism of Libra. The blockchain will be spread out across validator nodes run by the Association’s members. As such, it is wrong to call Libra a cryptocurrency or a decentralized network. Spokespersons from the blockchain have promised that the network will become decentralized in approximately five years.
- How will Libra balance privacy demands with AML and KYC regulations that require identification of customer details?
Eichengreen states that Libra’s designers are conflicted about maintaining this balance because they have made contradictory statements in the documentation.
For example, the Libra blockchain is supposed to be permission-less and transparent, allowing third-party users to detect fraud. But it also does not contain links to the real-world identity of its users. To be fair, however, the principle of pseudonymous transactions (as they are referred to in blockchain parlance) is fairly common and is supposedly one of the attractions of such networks.