Facebook has officially announced its own digital currency - Libra. Utilising blockchain technology, Libra is set to disrupt the financial services landscape by allowing its users to make financial transactions, and has already received a great deal of publicity.
What is Libra?
Facebook boasts nearly 2.4bn monthly users, many of whom live in politically and economically volatile jurisdictions. Libra is being hailed as a means by which such users might transact without requiring access to traditional banking platforms.
Libra coins will be stored and transferred using the Libra Blockchain, a cryptographically authenticated database maintained using the Libra protocol. Libra coins will be able to be purchased (and sold) pseudonymously online or at designated local exchanges, and spent using either Facebook's own Calibra wallet (which will be integrated into WhatsApp, Messenger and the Facebook app), or a third-party wallet. This makes possible a world in which a business page on Facebook can also serve as its operational e-commerce shop front.
Libra is a form of 'stable coin', which means that its value is pegged to supposedly stable 'real-world' asset in a bid to maintain a stable value. This is important in order for it to be a well functioning medium of exchange – merchants need to be reasonably confident that the Libra coin they accept today will hold its value tomorrow. In the case of Libra coin, this 'real-world' asset will be pegged a 'basket' of established fiat currencies and government-backed securities.
How will Libra work?
Details of how Libra will work are still trickling out, but Facebook's launch announcement and subsequent whitepapers released by Calibri (a wholly-owned subsidiary of Facebook, Inc.), has revealed a few key things, including:
- Move. The Libra protocol will use Move, Calibri's new programming language. Notably, Move is a bytecode language which can be used to implement custom transactions, enabling developers to not only implement safe digital assets but also to write correct business logic for wrapping assets and enforcing access control policies.
- Governance. The Libra blockchain will be governed by the Libra Association, which will initially have 28 members, including Mastercard, Visa and Coinbase. The whitepaper clearly states that "Libra will start as a permissioned blockchain", with access to validator nodes determined by the Libra Association. In this sense, Libra is heavily permissioned and therefore very different to permissionless blockchains like Ethereum or Bitcoin. The whitepaper states that one of the objectives of the Libra Association is "to move towards decentralization over time." It is likely that this transition and the governance of the Libra blockchain will come under significant public and regulatory scrutiny over the coming months.
- Pseudonymity. Libra allows accounts to be created without being tied to a traditional bank account, but given Facebook's business is predicated on developing a rich and accurate picture of its users' data, it is likely that a link to a user could be established. In many respects, this flies in the face of one of the central tenants of most popular cryptocurrencies – privacy by design – which has seen the development of sophisticated privacy protection mechanisms to as zero-knowledge proofs.
What predictions can we make, following the Libra announcement?
While the Libra announcement made the headlines, it was no surprise to those close to the blockchain sector. In February 2019, Facebook acquired Chainspace, a London-based start-up which utilised blockchain technology to develop a decentralised payment facility. More importantly, this acquisition brought the founding team behind Chainspace, a group of researchers from UCL, in- house. This acqui-hire model is an increasing trend in the technology space, and we would expect to see it continue as Facebook seems to consolidate its advantage and other vendors battle to catch up.
From a regulatory perspective, it will be interesting to see how regulators respond to Libra. The announcement came fresh off the back of announcement from US Congress that it will launch a bipartisan investigation into digital markets and the technology industry, in what was widely reported to be targeting technology giants such as Facebook, Google and Amazon. How Libra will be received will likely be dictated by its governance model, especially if and when it transitions to a more permissionless model.
Regulators will also want to understand how Libra fits into Facebook's broader commercial model which, at its heart, is a data business. This will impact the manner in which such currencies will be regulated in the future, not just in a bid to avoid laundering of criminal proceeds, but also with a view of protecting investors in and buyers and users of such digital currencies.
Technologically, it is interesting to note that the whitepaper confirms that the Libra Association's plan is "to gradually transition to a proof-of-stake system where validators are assigned voting rights proportional to the number of Libra coins they hold." This tells us two things: (1) that large enterprise blockchain solutions see proof-of-stake as an ideologically and logistically compatible confirmation mechanism; and (2) that, at present, proof-of-stake is not yet technologically robust enough to be adopted in its current state. It will be interesting to see how enterprise blockchains shape and embrace the development of proof-of-stake in the coming months.
The Libra announcement marks a significant step towards the mainstream adoption of distributed ledger technologies such as blockchain. We are excited by their potential and continue to work with forward thinking corporates and governments on their distributed ledger, blockchain and emerging technology projects.
If you have any questions on this article or are interested in how a blockchain solution might be integrated into your business, please contact Tom Grogan or your usual Mishcon contact.