Facebook's Libra: The new generation of cryptocurrencies?

Facebook has provided much material for discussion in the global financial world with its planned cryptocurrency Libra and the Libra Association, the not-for-profit membership organisation that is officially behind Libra.

Recently asked questions include:

1. What is the goal of Libra?
2. What is the Libra Association?
3. How does Libra work and who will supervise it?

We took a closer look:

What is the goal of Libra?

According to the White Paper from the Libra Association[1], Libra's mission is to enable a simple global currency and financial infrastructure that empowers billions of people.

Libra will constitute a stable currency that is built on a secure and stable open-source blockchain, backed by a reserve of real assets, and governed by an independent association – the Libra Association.

What is the Libra Association?

Facebook is not the only one behind Libra. Facebook founded the Libra Association with 27 other partners on 15 October 2019. As part of a consortium, they jointly monitor the welfare and development of the currency. Among the partners are (i) venture capital fonds such as Thrive Capital, payment service providers such as PayU, blockchain companies such as coinbase, non-profit and multilateral organisations and academic institutions as well as tech companies such as Facebook, Uber and Vodafone.[2] In the first half of 2020, the number of members in the consortium is expected to rise to around 100. However, according to several sources, the first founding members have already decided to withdraw from the Libra Association for several reasons.[3]

How does Libra work and who will supervise it?

The idea is that people exchange their FIAT currencies into Libra. This should even work directly on a smartphone if the user links Libra to their bank account. Like Bitcoin, Libra coins can be stored in digital wallets. Facebook offers its own wallet solution called "Calibra", but other providers' wallets are also allowed. Users can then send Libra coins, for example, via Facebook services such as Messenger or WhatsApp to friends and suppliers. Facebook users will also use the Libra coin for payments within the network and in online shops.

Libra will consist of three parts that will work together to create a more inclusive financial system:

1. it will be built on a secure, scalable and reliable blockchain;
2. it will be backed by a reserve of assets designed to give it intrinsic value; and
3. it will be governed by the independent Libra Association.

Libra and the technologies to use it will therefore be built upon a blockchain platform[4] called the "Libra Network". While many cryptocurrency networks allow any server to connect to the chain, the Libra network is a "permissioned" blockchain, i.e. only certain servers can connect to the chain and validate transactions. The Libra Association believes that the network can run faster than other cryptocurrencies, which is supposed to make Libra practical for everyday use, such as online purchases.

Since it is a permissioned blockchain, i.e. a distributed network, someone must validate the transaction made on the blockchain. The validation is supposed to be done by the members of the Libra Association, at least in the initial phase of Libra.

Legal notes

Like any other cryptocurrency on the market, Libra will face many legal hurdles, for example in relation to data protection and financial services / currency regulation. The Austrian Financial Market Authority, as the competent supervisory body in Austria, will likely take a close look at Libra as soon as it is available on the Austrian market. It remains to be seen how regulators around the world will react to Facebook's new cryptocurrency.
 

[1]     An Introduction to Libra: White Paper from the Libra Association

[2]     libra.org/en-US/association/

[3]     https://www.theguardian.com/technology/2019/oct/07/paypal-pulls-out-facebook-libra-cryptocurrency; https://www.theverge.com/2019/10/11/20910330/mastercard-stripe-ebay-facebook-libra-association-withdrawal-cryptocurrency

[4]    What is Blockchain?

authors: Thomas Kulnigg and Maximilian Nutz