Submitted by Taps Coogan on the 19th of June 2019 to The Sounding Line.
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Facebook recently announced its new ‘cryptocurrency,’ the Libra. The Libra is aimed at facilitating low-cost global currency transactions through Facebook’s family of apps, as well as other third party apps.
The official ‘white paper’ detailing the Libra can be read here. Despite the various problems detailed below, I think Libra will prove to be very popular.
Yes, Facebook is the least trusted tech company in America. Yes, Facebook continues to insult its users’ intelligence by maintaining that it doesn’t sell their data.
However, based on the continued growth of Facebook’s products, it’s clear that most people don’t care that much about the unrepentant abuse of their privacy. The same will likely be true for Libra, especially because it will be targeted at the people still using Facebook’s products.
Facebook is quick to point out that Libra will not be operated by Facebook alone, but by a group of tech and financial companies. Of course, many of those partner companies are known in their own right for poor ethics (Uber), de-platforming people they don’t like (Mastercard, PayPal), and centralized and costly payment systems that sell your financial data (Visa, Mastercard).
How Libra Works
Let’s say you buy $5 of Libra. Libra’s operators will take that $5 and invest it in “low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks.” In turn, you will get a quantity of Libra that represents a proportional share of those assets. When you convert your share of those assets back to dollars, a portion of the assets will be sold to fund your $5.
Conceptually, Libra is similar to an ETF that holds low-risk global assets. Presumably, the exchange rate between Libra and your local currency, let’s say US dollars, will be a reflection of the changes in relative valuation of the US dollar assets and the non-US dollar assets held in reserve by Libra. The whitepaper says very little about the equation that will be used to determine the proportionality between the underlying currencies of Libra’s assets. Whatever the equation is, nothing stops Libra from changing it in the future.
How Facebook Makes Money on Libra
According to the Libra white paper:
“Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions.”
The income generated by the assets held by Libra will not be used to support the ongoing value of Libra, or used to pay interest to Libra holders, or used to compensate for the declining real value of fiat currencies. Instead, returns will be used to pay the people that operate Libra and fund their pet projects. To Facebook and its partners, Libra is like a free sovereign wealth fund, whose proceeds they keep and who’s investments they direct. Will they invest some of Libra’s assets in their own shares and corporate bonds? Probably not initially, but down the road who knows? The rules of Libra are whatever the operators of Libra say they are.
Will Libra Be a Store of Value?
All fiat currencies depreciate over time. Most ‘low risk’ investments have negative real yields and many have negative nominal yields. During a recession, financial panic, or sovereign default crisis, even ‘safe’ investment funds occasionally have a down quarter or a down year. If the returns on Libra’s assets are constantly being funneled off to pay Libra’s operators, and Libra’s operators don’t repay Libra in the case of investment losses, Libra could depreciate against fiat currencies in the long run. All other things being equal, the value of Libra should be fairly stable relative to other global fiat currencies.
Is Libra Anonymous?
The Libra whitepaper says strikingly little about anonymity beyond: “The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity.” In other words, Libra will be anonymous in the sense that PayPal or Facebook is anonymous because you can create an account with a fake name. That is an extremely, extremely low bar for anonymity.
The Libra whitepaper makes absolutely no explicit claim to not sell or share your financial data. In fact, the word privacy only appears once in the entire document:
” (Libra) will continue to evaluate new techniques that enhance privacy in the blockchain while considering concerns of practicality, scalability, and regulatory impact”
Facebook insists that they will not mix your Libra data with all of the other data they have about you. That doesn’t mean that they won’t look at your Libra data. That doesn’t mean that Libra won’t sell your financial data. That doesn’t mean that they won’t sell your financial data to the same people that Facebook sells all your other data. That also doesn’t mean that they won’t give all your data away for ‘free,’ the way Facebook already does. That doesn’t mean that they won’t lie. That doesn’t mean that they won’t change the rules later.
Is Libra Encrypted?
Libra will be encrypted. As a point of reference, Facebook’s website is also encrypted. Being ‘encrypted’ is a meaningless statement that guarantees nothing except that the data will not be in complete public view.
Libra will be based on a blockchain. The processing of Libra’s blockchain will be ‘decentralized’ to the extent that a small group of big tech and financial companies will operate it. Anonymous decentralization is the entire point of the blockchain. Libra is neither meaningfully decentralized, nor meaningfully anonymous.
As stated in the white paper, Libra ‘wallets’ will have to comply with all regulatory and legal requirements in whatever jurisdiction their owners reside in. Accounts could be suspended, frozen, or confiscated by local authorities. Libra’s operators could decide to deny services to you because they don’t like you. The operators of Libra (Facebook, PayPal, Mastercard etc…) are notorious for denying services to people they don’t like. They may promise not to do that, but nothing stops Libra’s operators from changing their minds in the future.
Why Libra Will Be a Success
If you are one of the billions of people living in a country that doesn’t have reliable banks and money, Libra will be a better, cheaper, safer, and no-less-private alternative to your current banking options. Libra may be similarly superior compared to payment systems like PayPal, Venmo, and perhaps even debit cards.
If you care about ‘decentralization,’ anonymity, the threat of de-platforming, privacy, the fickle governance of Facebook and its partners, the authorities, the stability of major global currencies, and the health of the global financial system, Libra is not for you. If you are among the 95% of people who don’t care about those things when splitting a bill with friends, Libra is for you. It will be easy to use, relatively stable in value, and available for free on the apps that you and all of your friends already use.
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