Facebook's Libra was always destined to fail

By Colin Harper

When Facebook announced its Libra “cryptocurrency” initiative last year, the finance and technology world paid close attention. 

“Cryptocurrency” is a glamorous and even scandalous word. But judging by the market mania of the 2017 ICO bubble, it’s also one that is only vaguely understood by the mainstream public. Suddenly, it became attached to one of the largest corporations in the world.

A social media platform with billions of registered users was launching a cryptocurrency. But not just any cryptocurrency—Facebook, in essence, was attempting to charter its own digital bank for the 21st century.

It tried. And today we learned that Facebook has failed.

The Libra Association, so named because it included a couple dozen members from around the tech world—an attempt at “decentralization”—was supposed to manage a basket of international currencies, securities, and treasuries. This basket would collateralize the Libra coin, a cryptocurrency that could be transferred with the Calibra wallet and could be minted by any Association member according to certain criteria.

The Association, in effect, could act like a bank. A type of bank Americans haven’t seen since antebellum: a “wildcat bank” that could print its own currency against commodities and assets it holds. Libra offered a permissionless, global currency whose value would be stabilized by other currencies like the dollar. Facebook advertised developing communities as key target zones for adoption—Libra was going to bank the unbanked world.

When Facebook announced Libra last year, the whitepaper went to great pains to advertise the network as something that, though centralized now, would become much more distributed and permissionless in the future. That promise—always a longshot—is now gone.

David Marcus, the Facebook executive spearheading the Libra project, today announced that Libra would be pivoting its focus: instead of creating a global, digital currency payment network, it will now simply be a wallet for stablecoins.

The Libra coin will still exist, but it will be subject to foreign exchange controls and regulations.

This is not a pivot; it’s a capitulation. And it sinks the impossible expectations that Libra set forth in its original whitepaper.

Permissionless permission?

Libra was originally sold as a new digital currency that would be easy for the public to use, because Facebook wouldn’t control the infrastructure or the currency issuance. But if Libra will be subject to FOREX regulation, then how will it be permissionless? 

The source code for Calibra was going to be open-sourced so that anyone could build a wallet. This was Facebook’s attempt to decentralize the project; developers and entrepreneurs would offer infrastructure, and Libra Association members would mint the currency. Facebook would be just another participant.

Even from the outset, Libra said there would also be aspects of the platform that would be permissioned. “[T]he spirit of Libra [is] in both its permissioned and permissionless state,” the first draft of the Libra whitepaper read.

But that doublespeak is now rendered moot. And Libra has gone the way that many within the cryptocurrency industry thought that it eventually would.

“They admit they're giving up on being permissionless,” Udi Werthiemer, a prominent Bitcoin and cryptocurrency market commentator, told Decrypt. 

Werthiemer said he never believed Facebook’s talk of decentralization. But if that dream is dead, then what is Libra doing now?

"Forgoing the future transition to a permissionless system while maintaining its key economic properties,” according to its new whitepaper.

“Regulators raised thoughtful questions about the perimeter of control for the Libra network,” the whitepaper reads. “In particular, the need to guard against unknown participants taking control of the system and removing key compliance provisions.” 

So Libra is staying “open source” but so-called “unhosted wallets” (a third-party wallet) will be “will be subject to controls, among them transaction and address balance limits that, along with other controls, will be enforced by the protocol.”

In other words, you can build on Libra’s network—but only if you can first acquire the proper licensing, pass compliance screening, and be approved by the Libra Association.

Joining the stablecoin express

Without a permissionless Libra, a borderless currency doesn’t make much sense. So what then?

Stablecoins.

Libra is “augmenting” its network to include LibraUSD (≋USD), LibraEUR (≋EUR), LibraGBP (≋GBP), LibraSGD (≋SGD), and perhaps a few others. These will, the whitepaper claims, be backed 1-1 with the outstanding currency or government securities, which will be custodied in any number of financial institutions around the world.

Libra will still hold currencies and securities for its Libra coin, as well—but it’s very unclear what utility, if any, it may provide. The new whitepaper admits that “a key concern that was shared was the potential for the multi-currency Libra Coin (≋LBR) to interfere with monetary sovereignty and monetary policy if the network reaches significant scale in a country (i.e., ≋LBR becomes a substitute for domestic currency).”

The addition of stablecoins is presumably a remedy for this fear, and Libra hopes to work with as many central banks as it can to roll out as many of these coins as possible.

For populations whose currency isn’t added to Libra’s stablecoin keychain, they can default to the Libra coin as a “global settlement layer” to trade between currencies. 

The problem is Facebook isn’t building infrastructure; that’s up to third-party service providers. So if you live in a country lacking a Libra developer presence, or one which is sanctioned or in some other way restricted due to Libra’s compliance checks, you won’t be able to use this.

And you also won’t be able to use it if you can’t pass a KYC check because you lack identification, which is one of the principal reasons why unbanked populations lack banking relationships in the first place.

What does Libra offer now?

Cut through the corporate doublespeak in Libra’s second whitepaper and what are we left with? A glorified PayPal with tokenized currencies—and a Facebook coin that you might be able to use if you’re lucky.

Libra is stripped of what few features made it notable and interesting. The addition of stablecoins overshadows Libra coin’s utility and the strict adherence to capital controls and regulations will stymie any impactful development. 

The original vision for Libra—permissionless monetary system run by a corporate-consortium bank that would offer an alternative to national currency—is officially gone. If it ever existed in the first place.

So what is Libra good for now, if anything? It’s possible that Facebook’s crypto project could still bring greater visibility to cryptocurrencies from the general public, according to VanEck Digital Assets Director Gabor Gurbacs.

“Bitcoin has started the decentralized, non-sovereign electronic money revolution,” he told Decrypt. “Libra is bringing back the corporation-backed currency concept. Both intend to better money and payment railways. In many ways, I think Libra may foster further Bitcoin adoption and awareness,” said Gurbacs.

It’s also possible that Libra’s multiple currencies will be useful for something; maybe these stablecoins will open up avenues for remittances and currency conversions. But we have other tools for that. TransferWise, for example, has low fees and works fine. PayPal, Venmo and other platforms offer perfectly usable payment infrastructure.

What’s more, the market already has real cryptocurrencies like Bitcoin and Ethereum that offer actual censorship resistance and true permissionless value transfer. So what do we need Libra for, again?

“We believe it is possible to replicate the key economic properties of a permissionless system through an open, transparent, and competitive market for network services and governance, all while incorporating the robust due diligence of Members and validators that is inherent to a permissioned system,” Libra’s whitepaper reads.

Libra has been committed to striking this impossible balance from the very beginning. In truth, it can’t—and it never could. It was doomed from the start.

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