We have lots of questions about Facebook's new digital currency. What did Facebook just do? Officially, it launched a test network for its own digital currency, called Libra coin. But nobody—not even Facebook—seems to be sure what that fully means.
In a new white paper (PDF) describing the project, Facebook tells us that the goal is to build a "financial infrastructure that can foster innovation, lower barriers to entry, and improve access to financial services." Beyond that, however, the situation is quite unsettled.
What we know is that the new currency will be designed to maintain a stable value, and will be backed by a "basket" of fiat currencies. We know that Facebook has designed its own distributed ledger technology, which it calls a blockchain (even though others, most prominently Bitcoin developer and Casa CTO Jameson Lopp, have argued that the ledger is not technically a blockchain.) The blockchain (let's assume they aren't calling it that in bad faith) will be run by a permissioned network made up of dozens of financial and technology firms including PayPal, Visa, Uber, and Spotify. A nonprofit called the Libra Association, made up of all these companies, will be in charge of developing the network.
Libra's developers claim that they eventually want it to be a public, "permissionless"— and thus fully decentralized—network that allows anyone to validate transactions, similar to Bitcoin and Ethereum. They say they want to do this by transitioning to a more technically complicated mechanism for reaching agreements between the network's nodes.
David Marcus, the former PayPal president who has overseen Facebook's blockchain project thus far, took to Twitter to declare that developing the project into its final form will be a lengthy, group effort. "We have much work to do with all of you to get the prototype we're unveiling today to production." Marcus said. "What we are presenting is only the beginning, and there is a lot to improve."
In that light, it makes sense that there are still so many important unanswered questions about Libra coin. I picked three to delve into in a piece we published Tuesday.
To start: is this even a real cryptocurrency we're talking about? That depends on how you define the term. Some purists argue that coins running on permissioned blockchains aren't genuinely cryptocurrencies. But even if it's arguable that it's not a real cryptocurrency now because it's not fully decentralized, the plan is to change that.
Does the Libra team have a big blockchain breakthrough or two up its sleeve? Libra's researchers say that making the network permissionless will entail a future transition to proof of stake, the consensus mechanism that Ethereum's researchers have been struggling for years to figure out. Might Libra be better equipped to crack this problem, given all the technology companies on its roster with experience in developing new software products?
Putting aside the considerable technology-related obstacles to converting the network to a permissionless one, though, there are big questions about governance. Most importantly: how will the Libra Association, which has been charged with managing the "reserve" of fiat money that is supposed to back all the digital tokens, ever make that process decentralized? According to an explainer Facebook published this week, the plan is to "explore ways" to do so, specifically by automating key processes.
But even if they figure out how to do this technically, legal factors could get in the way of decentralization, Jerry Brito of Coin Center, the DC-based blockchain policy advocacy group, argued on Twitter. For starters, the reserve will need to be in a bank account, and someone's name will have to be on it. Lopp agrees: "In order for the stablecoin peg/basket to be maintained, some set of entities must keep a bridge open to the traditional financial system," he wrote. "This will be a persistent point of centralized control via the Libra Association."
For crypto enthusiasts, one particularly compelling area of murkiness surrounds the question of whether it will be possible to acquire Libra coins without showing a government ID, like you can with Bitcoin and other cryptocurrencies using various third parties. It's also not clear which banking laws the Libra Association may be subject to, and what that might mean for the currency, as both Brito and economics writer Tyler Cowen have pointed out.
One of the biggest questions still lingering might also be the simplest: What's in it for Facebook and the other participating organizations? Facebook already has a shoddy track record around protecting user data privacy; is this some kind of a ploy to get even more valuable data about its users? Marcus has knocked down speculation that the $10 million each of the "founding members" have ponied up bought them access to the transactional data. He has also stated firmly that the financial data would be kept separate from Facebook's social data. Users will be able to keep their digital wallets separate from their Facebook accounts, he says. Okay, but how will money be made? Facebook and other network node operators may be able to collect some sort of transaction fees. And if the currency catches on, theoretically there will be opportunities to build new applications and services on the platform. That's a big if.
Finally, the most serious question: Is what Facebook doing with Libra a good thing for the world? Sure, it may increase access to financial services, but might it also affect the global economy negatively? Lawmakers and policy advocates around the world are already calling for more scrutiny. Matt Stoller, a fellow at the Open Markets Institute, argued in the New York Times that all private currency systems are risks to the stability of the economy because their leaders aren't hired and fired by elected officials. "The way we structure money and payments is a question for democratic institutions," he wrote. "Any company big enough to start its own currency is just too big."
Whatever is happening, it's safe to say the game has changed. Buckle up.
Loose Change (Libra special edition):
US Congresswoman Maxine Waters, chair of the House Financial Services Committee, has called on Facebook to halt the development of Libra coin until Congress and regulators can have a closer look at the project. (Reuters)
Meanwhile, the US Senate Banking committee has scheduled a hearing for next month to scrutinize Libra. (Reuters)
Mark Carney, governor of the Bank of England, said he has an "open mind" about Libra but that it will face the "highest standards" of regulation. (FT)
France's finance minister Bruno Le Maire says the project "only increases our determination to regulate internet giants." (Bloomberg)
Jerome Powell, chair of the US Federal Reserve, confirmed that Facebook has met with the Fed about Libra. When asked about its implications for global monetary policy, he said: "We're a long way from that." (CoinDesk)
From our daily newsletter, The Download, today: You can't fix a social problem with a purely technical solution. (FT)
+ M-Pesa has been serving this need for people in developing countries since 2007. (The Guardian)
+ Regulators in the US and EU are already scrutinizing Facebook's plans. (The Verge)
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Loose Change
Fill your pockets with these newsy tidbits.
- 100 Japanese manufacturers will share production data with each other using a blockchain. (Nikkei)
- The US Food and Drug Administration has chosen IBM, Merck and Walmart to participate in a pilot project to explore using a blockchain to track prescription drugs. (Reuters)
- Algorand, a next-generation smart contract platform developed by renowned MIT cryptographer Silvio Micali, has raised $60 million via a token sale. (CoinDesk)
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Google has announced a partnership with Chainlink, a startup developing "decentralized oracle networks" for securely drawing real world data into blockchain smart contracts. (Decrypt)
+Blockchain smart contracts are finally good for something in the real world (TR)
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Cloudflare has introduced an "Ethereum Gateway" that will let users interact with the Ethereum blockchain without needing to install any software, for free. (CoinDesk)
+A big tech company is working to free the internet from big tech companies. (TR)
