Do you know that in 2011 Facebook issued Facebook Credits to streamline the payments for ads and games on the social media platform? The plan was inadvertently dropped in 2012.
Nevertheless, during that time the number of users on the platform grew from 1 billion to over 2.6 billion, with acquisitions of major platforms like WhatsApp and Instagram.
The vision that Facebook began back in 2011 of an independent payment system within the social media itself, finally looked promising with the launch of Libra.
According to an independent researcher, Ross Sandler with Barclays, the expected increase in annual revenue for Facebook with Libra by 2021 could be $19 billion. Facebook reported revenue of $70.7 billion in 2019; hence, projected to rise by 26.8%. Moreover, it has also invested quite a bit of resources to design and develop the cryptocurrency.
The New Way
The first Libra Association white paper was published in June 2019. The announcement created a lot of euphoria in the markets. Not only did Facebook’s stock prices soared but also the interest towards cryptocurrency grew massively.
Facebook equity prices surged 27.16%, the biggest monthly gain since July 2013. Bitcoin and crypto markets also soared BTC recorded early highs at $14,000 in the same month.
However, countries all around the world raised concerns around the project. It threatened the sovereignty of Central Banks, empowered Facebook to control monetary data, and threatened to create an imbalance in the price of FIAT currency. Furthermore, the idea of a multi-currency coin and the role played by Facebook in the governing council worried authorities because of the growing independent dominance of the social media giant.
The new Association white paper, published in April 2020, is the latest official update by the Association. Apart from this, there were two appearances made by Marcus David, the head of the Libra Association, and Mark Zuckerberg, the founder and CEO of Facebook to the issues of the U.S. Congress. In fact, both the senate meetings went on for long hours as the US House of Financial Service Committee grilled Facebook CEO and Libra Head for their premature announcements.
The new proposal emphasizes that Libra blockchain is supposed to operate independently from Facebook, while Novi is a Facebook-only project headed by David Marcus. It might also have been done to revamp the brand image of the wallet separate from that of the Libra Association. According to the company, Novi comes from the Latin words “novus” (new) and “via” (way). Marcus told the media,
“People were confusing Libra and Calibra all the time. In hindsight, it’s hard to blame them.”
27 Members, But New
The original Libra Association was declared, to begin with, 27 members which included the likes of MasterCard, PayPal, VISA, Uber, eBay and so on. Eventually, due to the opposition from world governments, the early members of the governing council backed out.
In the past nine months, the exit and entry of new members have restored the original number to 27. Moreover, one of which is NOVI by Facebook. Surprisingly, Facebook has taken itself off the council which may be due to the concerns around data privacy and breaches by Facebook in the past.
Noticeably, Coinbase is the leading cryptocurrency-focused business that continues to take active participation in the Association. Recently, it also acquired Tagomi, a prime brokerage platform which is a listed member of the Association as well. Coinbase seems to be taking an active interest in the stablecoin payment space. Xapo is another cryptocurrency exchange and wallet provider which joined the council.
Multi-Currency Plus Single FIAT Currency
Due to the concerns around the future dominance of a multi-currency coin, the team has decided to issue single-currency stablecoins (e.g., ≋USD, ≋EUR, ≋GBP, etc.) in addition to ≋LBR.
≋LBR raised concerns around derivatives laws (specifically Exchange Traded Fund/Product). The combination of FIAT currencies realistically represents a new fund which is exposed to the FX and commodities market like any other security, maybe even more. It resembles a monetary fund, rather than an independent currency.
However, the Libra Association views LBR differently. According to them, ≋LBR could operate as a settlement coin in cross-border transactions. While the US Dollar is the leading reserve currency, and it traded almost ubiquitously around the world, other FIAT currencies are not as liquid as the USD. Hence, cross-border payments would be associated with problems of conversion in the local markets. In such a situation, a global currency can act as a default settlement coin for all its global users.
The Association is offering full cooperation with Central Banks and institutions like the International Monetary Fund (IMF) to regulate the composition of ≋LBR (for e.g. 0.5 USD + 0.11 EUR + 0.39 JPY), custody and operational regime.
Association Charter and Reserve
The initial announcement stirred up the entire world. Governments lost their ease, equity markets for Facebook soared on the future prospects of increased earning and dominance, the cryptocurrency markets (especially Bitcoin) enjoyed a bull run and institutions (and even the Chinese Government) expedited their research and development around Blockchain.
On October 14, 2019, the initial Association Members signed on to the Association Charter. This marked the formalization of the Association Council, which is made up of one representative per Member organization.
The Libra Reserve is an important component of the system, the liquidity and capital of the reserve could become a threat to the total reserves of nations. Hence, to eliminate those concerns, the reserve will include assets made up of cash or cash equivalents and very short-term government securities. Instead of backing it with actual dollars, it will be backed by a U.S. Government issued security, which protects the interests of both parties.
After discussing with a number of regulators all over the world, the Association has planned to incorporate all the guidelines for virtual assets laid down by the FATF, IMF, and other national government agencies.
Moreover, the sovereignty of the organization will be checked by the implementation of ‘Designated Dealers.’ These entities will act as a link between the Association and Exchanges, OTC desks and other regulated trading platforms. VASPs (or Virtual Asset Service Providers) will allow trading with retail customers and users. Hence, the central banks and dealers will get precedence over the members for trading, minting and burning the coins.
An Open Network or Not?
The governing council of Libra is formed to primarily act as validators on the network and also vote on issues of development. In Bitcoin, this duty is performed by the miners. Any individual with enough hash and electricity can join the Bitcoin network as a miner. This is what makes it a permissionless network, where the barriers to entry for new participants are imposed by the network itself, and not predetermined bylaws.
Initially, Libra planned to shift to a permissionless network where any entity would be free to join the Association. This was also contested by the regulators as they questioned compliance issues in a permissionless network. The new plans include a Chief Compliance Officer and the Financial Intelligence Function (FIU-function) which is to monitor the entry of new members and renew membership of existing members.
Currently, it is looking to procure the payment systems license with the Swiss Financial Market Supervisory Authority (FINMA), and comply completely with the G7 and FATF rules on stablecoins.
The technical design of the stablecoin is open-source as well. Like EIP (Ethereum Improvement Protocols) and BIP (Bitcoin Improvement Protocols), LIPs (Libra) can be published on platforms for open discussion and approval from the council. The whitepaper allows for the inclusion of independent researchers and developers on the test net.
If you are a researcher or protocol developer, a preview of the Libra testnet is available under the Apache 2.0 Open Source License, with accompanying documentation. The testnet is still a prototype under development, but you can read, build, and provide feedback right away.
The Association is also planning to develop and promote an open identity standard, which will integrate with the payment system. It also removes concerns around the exploitation of user’s financial and personal data, which Facebook was accused of during the 2016 U.S. Presidential Elections.
The Actual Payment Cryptocurrency
Until now, stablecoins have been primarily used for trading on cryptocurrency exchanges. Moreover, in the last couple of months, the unprecedented rise in the supply of stablecoins is starting to reflect upon the immense Quantitative Easing from the U.S. Government. People around the world, including the U.S., have increased the demand for the blockchain-based stablecoins. Libra is expected to unleash the first mainstream use of the digital dollar on a blockchain.
Earlier, the Association planned to launch the cryptocurrency in the market by the first half of 2020. However, due to the regulatory concerns and cold feet from early members, the plans have been postponed for now. However, it’s head, David Marcus still intends to release the stablecoin in 2020.
Talking about the lack of improvement in the global payment systems, despite the growth of technology and the internet, Mark Zuckerberg recently noted that it will certainly boost the ads business for Facebook and also,
“I think that, that’s going to be great for people around the world. I think it will be helpful for the economy overall,”
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