Internet of Money: Bitcoin and Facebook's Libra

Ben Ng June 21, 2019 12:03

Facebook finally unveiled this week the details of its digital currency, Libra, which will roll out for use in 2020, allowing the group's billions of users across the world to buy things or send money to people with nearly zero fees and friction.

The social media giant says Libra is a “simple, global currency and financial infrastructure that empowers billions of people,” moving in response to the world’s demand for a digital currency that can deliver on the promise of “internet of money”, an ambition that prompts some observers to draw comparisons to the launch of bitcoin in 2009. 

However, there are differences between Facebook’s Libra and bitcoin, mainly in terms of their volatility, use case, and governance, among other features.

What is Libra?

In its latest effort to expand beyond social networking and move into e-commerce and global payments, Facebook is creating a new kind of digital currency built on the foundation of blockchain technology, with an aim to “enable the lowering of barriers to access and cost of capital for everyone, and facilitate payments for more people.”

Libra will be used for money transfers over Facebook’s messaging infrastructure – WhatsApp and Facebook Messenger. To be launched next year, Facebook has created a subsidiary called Calibra, which will offer digital wallets to save, send and spend Libras.

In a white paper, Libra outlined the goal of the digital currency: “Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as – and even more safe and secure than – sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn.”

Volatility

Bitcoin was designed to have a finite supply of 21 million bitcoins, a number that is expected to be reached around the year 2140. Although it has grabbed massive attention from traders and investors, plenty of people question whether bitcoin has any “intrinsic” value, as the cryptocurrency is not backed by any real assets, which makes it vulnerable to price swings.

In contrast, Facebook’s Libra is backed by a reserve of real assets, to prevent it from being volatile. A basket of low-volatility assets, such as bank deposits and short-term government securities “in currencies from stable and reputable central banks”, will be held in the Libra Reserve, for every Libra that is created.

As the value of the underlying assets move, the value of one Libra in any local currency may fluctuate, but Libra offers confidence to its users that any Libra coin they hold can be sold for fiat currency at a narrow spread above or below the value of the underlying reserve.

Libra said it will work like currency boards, for example, that of Hong Kong, acting as a “buyer of last resort”. Each time someone cashes in a dollar or their respective local currency, that money goes into the Libra Reserve and an equivalent value of Libra is minted and doled out to that person. If someone cashes out with Libra, the Libra they give back are destroyed/burned, and they receive the equivalent value in their local currency back.

There will be “authorized resellers” to integrate with exchanges and other institutions that buy from and sell the digital currency to users. The company is discussing ongoing relationships with cryptocurrency trading firms and top banking institutions as its authorized resellers, to allow people to exchange their local currencies for Libra.

Use case

Hindered by its volatility and lack of scalability, bitcoin, the largest cryptocurrency by market cap, as well as other major cryptocurrencies in the market, has yet to reach mainstream adoption. Other than trading and investment, bitcoin has also been used as a transfer mechanism in overseas money transfers, to circumvent banks’ transaction fees.

This May, the cryptocurrency sector was excited about a retail initiative launched by payments startup Flex and Winklevoss-owned digital currency company Gemini, which will see Whole Foods and other US-based big-name retailers accept bitcoin for payment, as a major move to bring cryptocurrencies into mainstream commerce.

Alternatively, aiming to be a reliable digital currency to facilitate frictionless payments for billions of people, Facebook’s Libra has partnered with powerful merchants and brands, including Mastercard, Visa, Spotify Technology, PayPal Holdings, eBay, Uber Technologies, Booking Holdings and Vodafone Group, a move that could help Libra gain widespread adoption in the retail and e-commerce sectors during its infancy.

In addition, leveraging Facebook’s messaging infrastructure and giant user base, Libra’s low cost and instant transaction feature is expected to attract users around the globe to use the digital currency to transmit funds across borders.

As Libra put it in its white paper, its success will mean that “a person working abroad has a fast and simple way to send money to family back home, and a college student can pay their rent as easily as they can buy a coffee.”

Governance

Underpinned by blockchain technology, bitcoin runs on a decentralized network of shared trust without any third-party verification of transactions.

No one person or entity is in charge of bitcoin; the Bitcoin Blockchain network is open to anyone, and members are anonymous. Trades are handled by thousands of “mining” computers around the world, which validates blocks of transactions by competing to solve mathematical puzzles every 10 minutes.

Libra Blockchain is designed from the ground up, using a new programming language called “Move”, with the focus on ensuring the security, performance, and scalability of the protocol. Unlike bitcoin and other existing blockchains which view the blockchain as a collection of blocks of transactions, Libra Blockchain is a single data structure that records the history of transactions and status over time.

Most blockchains (including Bitcoin and Ethereum) use “Proof-of-Work” mechanism to facilitate agreement among nodes on the transactions to be executed, which miners must solve hard computational problems to add new blocks of transactions to the chain. In contrasts, Libra Blockchain adopted a Byzantine Fault Tolerant (BFT) consensus approach, which, it claims, enables high throughput, low latency, and a more energy-efficient approach.

Transactions on Libra Blockchain itself are irreversible. Yet, Facebook’s own wallet app Calibra will be a custodial digital wallet for the digital currency, which will refund users in case they are hacked, scammed or lose access to their account, through 24/7 chat support.

But, outside of custodial wallets like Calibra, there is no getting your stolen or mis-sent money back.

On the governance mechanism, Libra will start as a “permissioned” blockchain, where access is granted to run a “validator node”. Facebook has linked with 28 partners, including the merchants and brands mentioned above, which become the “Founding Members” in a Geneva-based entity called the Libra Association that will govern the new digital currency.

Third-party organizations, contributing as much as US$10 million each, will obtain the privilege to act as nodes on the payment network, with the computing power necessary to validate transactions.

Activities of the association are governed and constrained by the reserve management policy. Libra has not revealed the composition of the basket of the underlying reserve; however, it notes that the association may occasionally change the composition, in response to significant changes in market conditions, such as an economic crisis in one of the represented regions.

Facebook is expected to maintain a leadership role in the association through 2019. Once the Libra network launches, which is targeted in the first half of 2020, Facebook claims it will have the same commitments, privileges and financial obligations as any other founding member of the association.

It also adds that Libra’s ambition is for the network to become “permissionless”, which will mean that anyone who meets the technical requirements can run a validator node. Transition will start within five years of the public launch of the Libra Blockchain, and that will gradually reduce the reliance on the founding members.

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Ben Ng

EJ Insight writer