Libra, an entirely new monetary paradigm, is a potentially revolutionary project for the international payments system, not so much for its technology as for the scope of its users and its functionality.
Much of the success of the Facebook stablecoin will depend on how much it can act free of controls and how much trust it can gain. Libra cannot compete with bitcoin and other digital currencies – they are different entities – and it can only aim to seriously threaten the dollar and the euro in the absence of regulation.
If it is left uncontrolled by the rules of the monetary and political establishment, it could, thanks to its unique qualities, lead to a reduction in the use of fiat and cryptocurrencies and thus represent a serious threat to the global monetary order as it is known today.
To find out if Libra will represent a new Bretton Woods, The Cryptonomist interviewed three experts, from the financial, crypto and legal world.
Libra will be unable to compete with bitcoin
Libra, a cross between a token and a private currency, is not issued by the State. According to Facebook CEO and co-founder Mark Zuckerberg, this semi-independence will result in a reduction in the cost of transactions and allow 1.7 million people without a bank account (the so-called “unbanked”) to access the financial world.
However, to bring about a real revolution in the global financial world, Libra – the stablecoin linked to fiat currencies that Facebook intends to put into circulation within a year – will have to solve bitcoin’s big problem: the speed of executing transactions.
Stefano Gianti, a senior officer of the broker Swissquote, says that the other big problem, price volatility, was solved at the beginning, “since the idea is that it will be backed by a basket of low-risk and low-volatile financial assets”.
The lawyer Eugenio Bettella is optimistic, stating that “if Libra were to become the cornerstone of the global financial system as its promoters desire, sovereign currencies would find a serious contender in the global financial trading system“.
This is also because Libra has a significant competitive advantage: at the moment it is not subject to any form of regulation.
The link with Facebook
One of the leading experts in the crypto universe, Anatoliy Knyazev of Exante, believes that Libra will not be able to compete with bitcoin and the US dollar, at least at first. At most, if certain conditions are met, it can become a leader in the field of stablecoins.
The fact remains that Libra is still “just a project“, Gianti observes. “We are talking about a project that could potentially revolutionise the payment system, but we cannot actually talk about any reality yet“. The connection with Facebook could cause Libra both joy and pain.
On the lines of what happens with Bitcoin, a major obstacle, following the privacy scandals, is the degree of trust that users have towards Facebook and an unconventional payment system for the purchase and sale of goods and services.
“It can be said that Facebook has lost confidence with the case of Cambridge Analytica,” notes Gianti, “but the behaviour of users, companies and investors has made it clear that there is still a lot of faith in the company’s innovation”.
The Libra project is highly controversial also because of its hybrid nature and the ability of the social network – a platform with 2 billion and 410 million unique monthly users, more than any sovereign state in the world – to move hundreds of billions of dollars, as well as to involve large international companies.
In addition to the world-class user base, another major advantage of Libra is the database,” says Swissquote’s Senior Officer. “Indeed, even if Libra were to be only a system for settling payments within the Facebook Marketplace, it’s already a good place to start”.
Libra’s link with Facebook is its main advantage, but also its Achilles’ heel. “There’s a historic choice ahead: independence from the authorities or total assistance.”
Libra cannot be considered a virtual currency
There is no middle ground, according to the executive director of the Maltese FinTech group, who was the first to launch a cryptocurrency fund. The Bitcoin Fund, founded in 2012, is defined by Bloomberg as the most successful hedge fund ever, with a return of more than 70,000 % since its inception.
The stablecoin will not be managed by a single central authority, it will travel on a blockchain that will not be permissionless for at least five years. The ledger will be self-managed by the Libra association. It is composed of 28 members, including Facebook and Calibra, the division of the Californian social media that will act as a link between Libra’s operations and the database of the parent company.
This is another reason why it cannot be put on the same footing as a currency, whether digital or fiat. As Bettella, managing partner of Padua, points out, “Libra cannot be considered a virtual currency in its own right“, since the EU Directive of May 30th, 2018 no. 843 (5th Anti-Money Laundering Directive) defines virtual currency as “a representation of digital value not necessarily linked to a legally established currency” whereas Libra is specifically anchored to a basket of real currencies.
Basically, it will be more of a hybrid between a stablecoin and a cryptocurrency, a cross between a token and a currency. The system will not be decentralised, the participation in the network will be authorised only to certain entities and transactions will be handled by a single central validation node.
“This clearly raises obvious problems of transparency and cybersecurity of the Libra blockchain, as opposed to permissionless blockchains, such as that of Bitcoin, where access is public and the execution of transactions is open“.
As the Libra Association is based in Geneva, it will one day have to comply with FINMA’s Swiss regulatory framework. However, this is not yet the case. According to Swiss law, the Libra Association – the organisation of Libra investors – is under no obligation to publish financial statements or to provide financial information to the markets.
At the moment, says Bettella, “Libra escapes any type of regulation, and there is, therefore, a real risk that it could take advantage of the dollar and the euro, which are instead subject to the strict constraints of monetary policy established by the ECB and the Fed”.
Libra: leader among stablecoins or a mere e-payment service?
Libra could become an ideal stablecoin because it does not have the same flaws as other similar tokens, In the case of Tether, for example, the capitalisation is equal to billions of dollars but there are known issues related to transparency and security.
In the case of Libra, these issues could be resolved. It is guaranteed by real money and will be able to overcome volatility in any situation, even the most critical. The absence of volatility is ensured by the fact that the stablecoin will be backed by a basket of low-risk financial assets.
At the same time, the willingness to interact with the authorities and central banks raises some doubts, as it could lead to the publication of personal data, the freezing of current accounts and even the blocking of payments. If Facebook accepts the conditions of the authorities, says Knyazev, “Libra could become another e-payment service like many others, which would have nothing to do with cryptocurrencies“.
“It is important to understand one thing: Mark Zuckerberg cannot have everything“, he will have to evaluate all the pros and cons of the situation and make a choice. The feeling is that it will take some time for the project to see the light of day. Zuckerberg has only begun to promote the project and David Marcus‘ team still has to physically settle into the co-working offices in Geneva. The idea is to start gathering consensus not only around the project, but also involve participants, including developers.
Gianti: “The great revolution lies in functionality”.
When the project comes to fruition, we will find out how revolutionary it is. It might turn out to be less than expected at the time of the big announcement.
“We’ve known for a long time that the blockchain offers very important opportunities for technological development for the immediate future and from this point of view I do not see Libra as a revolutionary project,” points out Gianti.
“The great revolution” lies in its functionality, “in being accepted everywhere with fewer complications and very low costs“. In particular, with regard to remittance flows to low and middle-income countries.
However, political authorities and central banks are concerned and even sceptical about the Libra model. In fact, “what may worry is the size of the companies belonging to the project. Central banks can’t do anything for the moment but stand by and watch, so there are concerns”.
When asked about the project during the last ECB press conference, Mario Draghi said that Libra was not discussed at the last meeting of the European Central Bank, but was widely discussed during the G7. What the world’s major political leaders fear most are cases of cybersecurity, money laundering, terrorist financing and its possible use for criminal purposes. In other words, all that can be done in anonymity.
On the other hand, David Marcus himself, the former founder of PayPal responsible for implementing Libra’s plans from the Geneva offices, recently told the US Congress that the Libra Association will establish rules to combat money laundering, terrorist financing and other financial crimes while giving priority to consumer privacy and consumer protection.
Libra: regulatory issues to be resolved
“This illustrates why there’s a need to define a lot of aspects first”. From a regulatory point of view, much of the success of the Libra model will depend on the attitude of the various regulators at the national level.
To move forward, in the US both the Republicans led by Donald Trump and the Democrats initially spoke out against it, nurturing a lot of scepticism. “For this reason – says Gianti – the Libra Association must act with great caution: it will be advisable to devote more time both for the development and especially for the legal details so as not to create problems“.
It should not be forgotten that the association includes the biggest players in the payment world such as Visa, MasterCard and Paypal. These financial giants, according to Bettella, “could certainly channel the flow of transactions only through Libra, completely excluding the other cryptocurrencies“.
System stability, technological development and Open Source features will be key to the global acceptance of the project by users. If Libra manages to solve its main problems – of trust, dependence, privacy, money laundering and tax evasion – “the use of cryptocurrencies could be heavily reduced“.
