Facebook unveiled a cryptocurrency called Libra yesterday, as well as the Libra Association, a not-for-profit that will oversee all things Libra. While Libra’s white paper draws a lot of inspiration from other cryptocurrencies, the current governance model and blockchain implementation remind me of banks more than bitcoin.
Permissioned blockchain
The Libra Blockchain is designed like a true blockchain, with a Byzantine Fault Tolerance approach, the use of Merkle trees to guarantee the integrity and a network of nodes.
And yet, unlike popular blockchains, such as the bitcoin blockchain or the Ethereum blockchain, you won’t be able to run a node in your backyard. Only founding members of the Libra Association will be able to run a node. There are currently 28 members, such as Vodafone, Mastercard, Visa, Stripe, Uber and Spotify.
In other words, it looks like a blockchain, but it’s not a real blockchain. It’s not truly decentralized. It’s not truly open, as the ledger of transactions will be accessible to Libra Association founding members exclusively — unless Facebook or another founding member builds a public-facing API of some sort.
Facebook is well aware of that, as the company says it plans to let anyone run a node at some point over the next five years:
To ensure that Libra is truly open and always operates in the best interest of its users, our ambition is for the Libra network to become permissionless. The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.
Authorized resellers
The Libra cryptocurrency is a stablecoin, as it is tied to a basket of fiat currencies and securities. So it requires a lot of oversight to make sure that every time the Libra Association mints a Libra, they buy and store the equivalent in fiat currencies and securities in a bank account.
Similarly, every time someone converts Libra into, say, USD, the Libra Association has to issue a selling order on the equivalent in fiat currencies and securities.
That’s why the Libra Association will work with a list of authorized resellers. It creates a barrier to entry and transforms the Libra Association into a regulatory body for the Libra ecosystem.
Once again, this works against decentralization as only trustworthy partners will get a license to operate as an authorized reseller. Small financial institutions will have no choice but to work with an authorized reseller if their clients want to get paid back in Libra, for instance. All the founding members become a sort of Visa or Mastercard for the 21st century.
Other stablecoins, such as USDC, work in a similar fashion. If you want to support USDC on your exchange or payment service, you have to become a member of the CENTRE Consortium.
But anybody can look at the USDC ledger, as USDC is an ERC-20 token built on top of the Ethereum blockchain. If you run an Ethereum node, you indirectly contribute to USDC transactions. And there are a ton of partner exchanges that open up a lot of opportunities.
Shadow bank
There’s a reason why French Finance Minister Bruno Le Maire told Europe 1 that Libra can’t “become a sovereign currency.” In some countries with high inflation rates, Libra could become an instant hit and power many of the peer-to-peer and even business-to-customer transactions.
But central banks that issue currencies and conduct monetary policies are members of the International Monetary Funds. They also have different objectives compared to private entities.
Given the current nature of the Libra Association, there’s a chance that Libra becomes a quasi-sovereign currency in Venezuela, Argentina, Turkey or South Africa — but it would be controlled by private companies that don’t care about monetary policies.
There’s a reason why the European Union is moving toward a single market but can’t agree at all on budget, tax harmonization and debt. Similarly, China cracked down on the shadow banking system because it caused systemic risks.
Governments will want strict oversight on the Libra Association because the association could change its goals overnight. What if they remove a fiat currency from the basket of fiat currencies and securities? What if they start issuing credit?
Essentially, the Libra Association is now in charge of a quasi-fiat currency and will face a ton of challenges on the regulatory front. It comes down from its governance structure and technical implementation.