Sometime this year, the social media giant Facebook will launch its own cryptocurrency, named ‘Libra’.
Facebook is not without its backings. In fact, the ‘Libra Association’ as it is known, has the public support of Calibra (a subsidiary group of Facebook), Visa, MasterCard, Lyft, Uber, the Vodaphone Group, and PayPal. This is to say nothing of the other venture capital firms across blockchain and telecommunications, and non-profits.
Despite the ambitiousness and the perceived complexity of the project, the goal of Libra can be summed up in a single sentence: to create a simple global currency and financial infrastructure to serve those who are still ‘underbanked’ in the developing world.
What Libra is intended to do, and how it works
Libra’s intention is to connect everyone with a mobile phone to the financial infrastructure of the world and give them the ability to transfer funds across the world in an instant, at a low cost and on a secure network. Millions of people in the developing world still do not have bank accounts — they are the ‘unbanked’. Libra, therefore, is a type of leapfrog technology, allowing the unbanked to move past the obstacle that they don’t have access to the banking system.
Not everyone is convinced the new cryptocurrency will work, though the Libra Association does have a strong consortium of businesses backing it — which, together, should have the might and the expertise to make Libra a success.
The current proposals are that Libra will run on a blockchain network that spans 100 distributed computer servers. Without getting too technical, the blockchain algorithms will work as a command-line program that will enable scripting and interactive use, with a toolkit of familiar and consistent options and file formats. To make things even more secure, Libra will be what’s known as “Byzantine fault-tolerant”, meaning if one of the servers is disturbed, then it will not compromise the rest of the blockchain.
The most secure, efficient cryptocurrency yet?
In theory, it should be almost impossible for a cyberattack on the Libra blockchain, as at least 33 of the servers would have to be compromised before such an attack could be considered.
Furthermore, each of the Libra association partners will have their own server to support and secure. The blockchain is designed to have a consensus-based algorithm, meaning that any and all transactions will have to be approved by at least two-thirds of the servers before going through and being recorded. This consensus-based algorithm should, in theory, make transactions more efficient and scalable. It is reckoned that Libra will be able to process 1,000 payments per second, a vast improvement over Bitcoin, which currently can only manage two per second.
And these are only the launch predictions. With the might and the money backing Libra, there is no reason not to expect vast improvements to usability and further refinements not long after launch.
Fears of revenue and regulation
Despite the ambitious proposals, Libra has not been warmly received by national regulators such as the US and EU government — who do not like the popularity and strength of cryptocurrencies. (And China and India have outright prohibited them.)
In order to get around this, the Libra Association has tried to market its currency as regulatory-friendly by design. The most important thing Libra can do to win over regulator support is to satisfy that it has stable reserves. As a coin that is widely used, but inherently unstable, could have massive implications on monetary policy. But there are fears that, if it works well, the Libra Reserve could grow so big that it could become “Too Big To Fail”, a systemic risk issue that many do not want to risk repeating. This is mainly because Libra is intended to be collateralised by various currencies along with short-term debt obligations. If there is ever a run on Libra it would be very serious, as there would be no central bank in place to stop it.
From a government viewpoint, there is concern about how Libra will affect the national currency and monetary policies as it won’t be a single currency, specific to that nation, but a global one, and so will fluctuate differently in comparison to any one currency. It will resemble something more like an index in terms of its volatility, and it will be influenced by how its underlying assets are considered.
A paper released by the Association of German Banks has suggested one way to address the fears of Libra collapse: that it be used for making payments only. If loans are given out in the Libra system, then it would be a money creation system, that would not have any solid backing. Restricting it to making payments only would prohibit this.
Finally, another fear is that the little-to-no transaction costs that cryptocurrencies have cross-borders has governments and traditional banks worried that fees and tax revenues could also be lost.
Investing in Libra
Cryptocurrencies have enjoyed success as investible assets till now, and are actually forecast to keep growing; at least until 2022. The blockchain investments in Libra should be seen as a hedge against a fall in other, more traditional investments. But right now the Facebook currency is not yet an investible asset. Libra’s time also seems to have come round during a period of decline for Bitcoin, which has seen a big drop in its market share since 2015 (though that could be due to more crypto competitors hindering its growth).
When eventually Libra does come online though, investors should be able to use SmartBotCoin, a trading platform specifically engineered for cryptocurrency investors that can process both manual and automated trading.
A glimpse of the future market
The Bank of England, in its ‘Future of Finance’ report, has already acknowledged that both traditional “hard infrastructure” and the right “soft infrastructure” can work together to usher in a new era of thriving innovative conditions. What the BofE stresses, though, is that a “well-respected legal and judicial system” along with rules, regulations and standards are in place to “empower [the] competition and ensure safety and soundness”.
So we can predict that the future market will adapt and make room for the new currencies, and especially Libra with all its backing. The Facebook currency itself is likely to spark more innovation on a global scale, and especially within payments.
As of now, it seems there is something missing in the international market, but whether Libra is the answer is still an open question. It certainly has the ambition, but it will need to win over the regulators and satisfy with its stability.
By Jack Darbyshire of Oakmount Partners Ltd, an investment consultancy firm based in Essex, UK.