The libra cryptocurrency, conceived by Facebook as a new way to connect the world’s unbanked to global finance, is well on its way to regulatory approval, having announced the formal beginning of its license application today. After all, Facebook’s CEO, and the seventh richest man in the world, swore under oath it wouldn’t go forward without permission from the world’s regulators. The problem is, a new version of those plans released today only vaguely resembles the original, controversial, effort. In fact, it looks more like the system we already have, but run by the non-profit Libra Association, with members including Facebook, Uber, and a hodgepodge of mostly U.S. tech companies and investors.
The gist of the changes are two-fold. First, in addition to a single basket of multiple currencies, including U.S. dollars and British pounds, whose fluctuating values could help off-set each other, there will be multiple coins powered by technology similar to bitcoin, but each backed by a single currency. Think libra-dollars, libra-pounds, etc. each exactly as stable as a dollar, or pound except spendable anywhere in the world. Second, instead of being a truly public blockchain that anyone can build on any way they see fit, companies will need to comply with global regulations or potentially be removed.
While the technical mechanisms by which this all comes together are still far from certain, and could in fact trigger some real change as central banks and the mints they use race to adopt blockchain, the result of the Libra initiative itself will likely be relatively few people on the periphery of global finance being connected to a faster, more transparent financial infrastructure—if their governments and others allow them. However, since many of the unbanked are already in countries outside the intergovernmental Financial Action Task Force (FATF) that largely decides who participates in global commerce, this would amount to a faster, less-private version of what we already have today.
Coming just days after the surveillance-happy Chinese government made available an early version of a similar central bank digital currency (CBDC) for testing, and on the same day another U.S. legislator added her voice to a rallying cry for the creation of a so-called “digital dollar,” the changes in Libra’s plans are also a warning that the new world order inspired by bitcoin, could end up being a bonanza for both law-abiding citizens and surveillance capitalists alike.
“No one wins in a world in which the payment system we’re trying to build erodes security, erodes compliance, and erodes standards and protections,” says Dante Disparte, vice chair and head of policy at the Libra Association, based in Geneva. “What we’re trying to aspire to here is a very, very high operating standard that demonstrates that including people in the perimeter of the formal economy doesn’t have to come at the expense of the rules that protect the formal economy.”
The previous version of libra, revealed in June 2019, was much more similar to other open source cryptocurrencies like bitcoin and ethereum, which anyone can build on to any specifications they deem fit. So, for example, while San Francisco-based Coinbase has opted for extreme regulatory compliance, requiring government IDs just to create an account, other exchanges, like Seychelles-based BitMEX, allow for much more privacy, and simply cordon off users from more stringent jurisdictions like the U.S. with easy to circumvent geofencing. To prevent such circumventing, the Association also announced today that it is building compliance requirements into the technology and setting up a Financial Intelligence Unit (FIU) being designed to help fulfill those often prohibitively expensive services on behalf of users.
For example, the FIU might help enforce sanctions controls that prevent citizens of blacklisted nations from using the network, and receive feedback from law-enforcement organizations helping ensure that sanctioned wallets cannot be circumvented. While building this compliance into the software will be seen as undesirable by many early bitcoin adopters and privacy advocates, it could also lower the barrier to entry for eager businesses willing to play by the rules, but unable to foot what Disparte calls a “non-trivial” bill. “The case for financial inclusion shouldn’t come at the expense of rules and the compliance regime,” he says. “We want to enshrine in code and at the protocol level of the Libra blockchain, certain automatic controls.”
“There is a perimeter,” says Libra co-creator and head economist of Facebook’s Calibra wallet, Christian Catalini, “but it’s pretty basic and it’s there to ensure that only good actors can enter and bad actors are kind of kept outside of the network.” While users will likely be limited to regulated virtual asset service providers (VASPs) and law-abiding individuals in FATF nations at first, he says the hopes are to open up access on a case by case basis to businesses and individuals outside the regulatory body.
Eventually, Catalini says, even central banks themselves could be given a degree of control over the assets behind the libra-currencies. “We wanted to give maximum flexibility and control to central banks,” he says. “Once we have the single currency stable coins available on the network, then creating a multi-currency Libra coin is extremely simple. You can think of it as stapling together a fixed amount of these underlying single currency stable coins.”
The changes amount to a shift in focus from providing open source software that anyone can build on as they see fit, to a much more controlled system. So, for example, if a marijuana vendor in Amsterdam wants to accept libra (LBR) as payment for goods deemed illegal in other jurisdictions, or any number of services out of line with what a nation deems permissible, they could face removal. Instead of focusing on the freedom of developers to build what they want, the new version of libra focuses on individuals’ ability to own their own keys. Unlike banks, which hold money on behalf of users, making the funds much easier to freeze or seize, libra will seemingly give owners the option to hold their own private keys, an important feature to many cryptocurrency hardliners whose mantra is “not your keys, not your bitcoin.”
The changes are part of what Disparte describes as a balancing act between creating a more accessible global financial infrastructure, and not upsetting the powers that be too much. As part of that push, Libra today announced it is continuing its work with the U.S. Financial Crimes Enforcement Network (FinCEN) to register as a money services business, and has formally begun its application for a payment system license from the Swiss Financial Market Supervisory Authority (Finma). “The formal process now starts,” says Finma spokesperson Tobias Lux. “They need to have this kind of license in order to start with their product and launch their coin.”
In spite of the compromises, libra could still change global finance. As the U.S. grappled with the best way to disperse $2 trillion in aid to citizens and businesses following the COVID-19 pandemic, a rising tide of U.S. legislators is calling for the creation of a digital dollar that would give the Federal Reserve more control over how money is created, and more importantly, disseminated. Just today, Democratic Congresswoman Rashida Tlaib introduced a bill calling for the creation of a digital dollar by 2021, following a similar bill proposed by Democratic chairwoman Maxine Waters of the House Financial Services Committee. Ironically, the libra changes could end up making the Facebook initiative the new best friend to Sherrod Brown, the Democratic Senator from Ohio who once said it was “crazy” to trust Facebook and its fellow Libra Association members with financial infrastructure, but who has since become one of the digital dollar’s biggest champions.
In fact, Catalini says the decision to break down the basket of currencies into a series of stablecoins backed by national currencies was a response to similar concerns also voiced by policy makers at the European and German parliament. If the multi currency basket of Libra coins saw “extremely widespread” adoption, Catalina says people might “start substituting away from using their domestic currency and start using Libra because it’s more convenient and lower cost and lower friction.” By breaking down the basket into a number of independent stable coins exchanged instantly by regulated authorities around the world Catalini believes they can overcome those concerns.
“The vision for the Libra network has always been one to complement and extend the functionality of fiat currencies, not to compete with them,” he says. While Catalini’s claim that this was always part of the plan is dubious to say the least it isn’t unprecedented. Since the late 1960s the International Monetary Fund has been using a basket of five currencies called special drawing rights (SDRs) for international settlement of large transactions.
“This approach,” says Catalini, “gives not only the assurance that every multi-currency Libra coin will be fully backed, because the underlying single currency stable coins are fully backed, but also allows us to achieve additional goals like giving oversight, for example, over the composition of the weights of this basket, either to the central banks involved in that multi-currency Libra, or over time you could imagine an international organization like the IMF.” But it also goes a long way to making libra look an awful lot like what already exists, but with Facebook and the other Libra Association members at the helm.
The timing of the announcement isn’t likely a coincidence. Earlier this week China’s Ministry of Industry and Information Technology formally announced the formation of the National Blockchain and Distributed Accounting Technology Standardization Technical Committee, whose members include the People’s Bank of China, Facebook’s biggest messaging competitor Tencent (the makers of WeChat) and Huawei, whose CEO has called for a competitor to libra.
While the latest incarnation of libra is officially being developed for the unbanked, it will likely end up competing to be the software of choice for any number of national efforts. In addition to the People’s Bank of China initiative, IBM has claimed as far back as May 2018 that it was working with 20 central banks to explore creating a new kind of digital currency. More recently, New York-based R3 is working with the European Central Bank, the Swiss National Bank, the Bank of Thailand, and Sweden’s Riksbank; and a recent report from the Bank of International Settlements found that 70% of central banks were exploring updates to their currencies utilizing a shared, distributed edger.
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