EU regulators and U.S. legislators are pushing back against Facebook’s new Libra project. They worry that Facebook, whom they already don’t trust, will have too much control over a new global currency.
Regulatory concerns – are they justified?
Lawmaker concerns would be much easier to dismiss if Facebook had started Libra on a public blockchain network rather than a permissioned one. (Facebook claims they will evolve the platform to a public blockchain).
Libra’s permissioned blockchain network simply replaces central bank authority with a consortium of permissioned corporate players, with Facebook playing a major role because it directly manages the user interface to a mega 2.4 billion person network. This is cause for regulatory concern, but regulators are not likely to move fast enough to do anything meaningful to stop the initiative, mainly because they are by nature slow, and also because blockchain is an opaque subject.
Under most country rules, Libra’s network will nonetheless be likely regulated in several key areas: onboarding customers (KYC), maintaining currency reserves (backing Libra), and for money laundering and terrorist financing (AML). In addition, regulators will probably come up with new regulatory reporting requirements for Libra’s network. They may eventually discover that the Libra network is very similar to PayPal’s but is built on a blockchain and is managed by a consortium instead of just one company.
Global regulators should really be questioning Libra’s status as a permissioned blockchain crypto-currency rather than a public blockchain one, but I doubt they will do that explicitly.
Public vs. Permissioned Blockchain
It would have been much more palatable and appealing had Facebook initially launched this cryptocurrency on a public blockchain. Yes, they claim public blockchain is their future but we have no idea when that will happen.
A public blockchain would have ensured that control over the cryptocurrency is entirely democratized. A permissioned blockchain is cause for concern because it is controlled by the blockchain members who set the rules and manage the platform.
The entire revolution of blockchain – only manifest in a public blockchain — is that it solves the previously computer-unsolvable Byzantine Generals Problem (see Figures 1 and 2) and therefore:
- Enables parties that don’t trust each other to work together off of a single version of shared truth
- Democratizes control because anyone can be a participant on the blockchain and anyone can run a miner or validator node.
- Embraces a peer-to-peer decentralized design that eliminates central authority
The Facebook Libra network falls short on all three counts. This is true of all permissioned blockchain networks as they are characterized by membership rules and governance where central authority is replaced by authority held by the group’s members. See Blockchain Unraveled: Determine its Suitability for your Organization
Impact on Financial Services Industry
Facebook’s new project and the Libra cryptocurrency should have a major impact on the financial services industry if it gains significant adoption by Facebook users, as expected. It is backed by a basket of fiat-currency-denominated assets that is similar to the World Bank/IMF SDR currency which proved very useful as a stable currency for making loans to developing poorer economies. (In a previous life, I managed the World Bank’s lending systems and the SDR-denominated loans for the IDA program was a major portion of our portfolio at the time).
Libra is the first digital global currency that will potentially be used by billions of users around the world. If successful, the Libra system will likely take significant amounts of payment transactions out of the banking systems into the Libra network, and will also be home to significant fund movements that banks and governments have no visibility into.
Libra should be readily available to some 40% of the global population that doesn’t actively use or have a bank account but owns – or has easy access to – a mobile phone. This will allow Facebook to grow its business in those parts of the world not serviced by traditional banks. The Libra network can also serve as a key path to financial inclusion for almost half the world’s population and that is great news for global development and prosperity.
But all this means that banks will earn much less revenue on bank and payment fees, interest income, and more. It also means they will lose substantial control over where and how payments are made.
Nonetheless, despite the numerous positives of the Libra network, there are reasons to be cautious. Unless Facebook moves forward with its stated plan to move Libra to a public blockchain network, this effort represents a trend towards more control by powerful tech companies rather than a move to a non-sovereign democratized currency system.
All told, this could make Bitcoin shine brighter than Gold — at least so say the public cryptocurrency enthusiasts.