Facebook’s Libra will make cryptocurrency mainstream (but not as intended)

Truly decentralised cryptocurrencies, such as Bitcoin, reimagine the trust relationship between parties. Up to now, transactions or interactions operated in one of the following environments:

• Peer-to-peer
• Leviathan
• Intermediary (e.g. Facebook)

Enter a fourth interaction paradigm, blockchain, a technology where, on a ‘permission-less’ network, the relationship between parties becomes a ‘trustless trust’, as explained by Reid Hoffman.

This is where Facebook’s incentive for introducing a blockchain-based cryptocurrency becomes clear, to regain trust. Facebook’s privacy concerns and perceived abuse of dominant position have greatly eroded the trust in it, even within its community. While profits remain strong and user numbers steady, the lack of trust will eventually affect the company’s growth, income and competitiveness. So the next logical step was to find new ways and technologies to reestablish trust. Unsurprisingly, the solution, Libra, has been met with a blend of widespread interest, scepticism and even fear, as put forward by Facebook co-founder Chris Hughes.

With blockchain, which Libra is ‘allegedly’ based on, rather than having to place trust in the counter-party, or an intermediary, trust lies with the code. Add decentralisation, elements of game theory and cryptography, and one can securely transfer data with complete strangers, on a distributed machine operated by unknown participants (i.e. the miners). 

With this in mind, and with the cacophony surrounding Facebook’s announcement, I think there are two clear conclusions:

• (i) Facebook’s Libra is hardly a cryptocurrency in the traditional sense i.e. with a preset money policy, open, borderless, fixed supply, and susceptible to speculation;
• (ii) It will have the unintended consequence of promoting more honest ledgers, such as Bitcoin.

(i) Not a cryptocurrency

What makes current blockchains so popular, and one could argue even trustworthy, are properties that Facebook’s Libra does not share. It’s all there in the white paper.

Not open, nor public — Facebook says it will cede control of the blockchain to a neutral 'Libra Association'. It will consist at first of up to 100 founding members, including Facebook, each of which will invest at least $10 million. This will fund the association’s operations as well as allow the members to operate as nodes, have a voice in amending the code and managing the reserve. This is otherwise known as a ‘permissioned’ blockchain i.e. only chosen participants may access and contribute to the network. 

Libra or Facebook coin? — The main purpose of the Libra, as discussed, is for Facebook to regain trust. Ceding control to a neutral association is a way for the tech giant to appear to distance itself from the project, and offload the regulatory and security concerns. However, upon closer inspection, Libra is much more Facebook-centralised than perhaps advertised:

• Facebook’s engineers are the ones doing the technical development, and will continue to do so. They have even created a dedicated programming language - MOVE;
• Facebook wrote the white paper and supporting documents, not the association members; 
• Facebook has already developed its own product to run on Libra, the wallet application Calibra. Calibra will store your Libra coins and hold the cryptographic keys required to access them. With this, Facebook can move money between its wallet’s users without relying on the blockchain itself. This will allow it to gather data on which people or businesses users transact with (Facebook promises to only do so with the users’ permission).

Rather than a public, open and truly decentralised blockchain, Libra will operate on what looks to be a more conventional database, with a number of administrators (Libra Association members) instead of one. Giving exclusive access of the Libra network to wealthy incumbents (Visa, Mastercard, PayPal etc) seems contradictory to the general cryptocurrency tenet of allowing anyone to participate in the network.

(ii) So why not Bitcoin?

Libra is Facebook’s way of arguing that while cryptocurrency is a trustworthy and efficient way to store and transfer value, the underlying infrastructure should be provided by established incumbents, such as them.

This is where I believe Facebook will inadvertently accelerate truly decentralised cryptocurrency adoption. Facebook’s announcement has been all over the news and has shed new light on the cryptocurrency phenomenon. As the general population becomes more aware of the technology, it will turn to more honest ledgers for storing their wealth, and that is not Facebook. This has already been experienced in countries, such as Greece and Venezuela, where the monetary systems collapsed and Bitcoin adoption skyrocketed. 

Traditional banks and governments should be wary of a tech giant acquiring monetary and banking capabilities with a business model that provides everything for free while profiting from consumer data. The better solution should be a collaborative open technology, a ‘permission-less' blockchain. Governments, businesses and the general population are likely to come to the same conclusion.