Well, it has finally happened. The much anticipated stablecoin from Facebook has been revealed. The coin itself has not yet been issued despite rumors that Facebook planned to launch it by the end of this month (June 2019). However, the white paper behind it has been released. And unfortunately for Facebook, their new coin was trashed right out of the gate.
Before we get to the criticisms, there are a few other things to discuss first. We begin with the name of the coin. Originally anticipated to be released as 'GlobalCoin', Facebook's white paper offers the name 'Libra' instead. This is no big deal except for the fact that Facebook might be trying to be a bit more subtle about its plans.
The white paper makes it clear that they intend Libra to become a global currency that eventually begins to replace fiat. Perhaps the GlobalCoin moniker made those plans too obvious. Maybe going with Libra makes what should be obvious less so.
Also worth noting is that Libra will not be backed solely by the U.S. dollar as was previously rumored. Instead, it will be tied to a number of fiat currencies, bank deposits, and central bank treasuries - at least for the time being. One has to wonder where that will go if Facebook's ultimate goal is to replace fiat. But let's not get ahead of ourselves.
What Libra actually is
Facebook used the white paper to explain what Libra is from top to bottom. Anyone who has read it now knows that Libra is way more than just a cryptocurrency. It is a platform for all sorts of computing propositions relying on smart contracts. Moreover, it is built on the Ethereum blockchain.
One of the things that makes Ethereum different from Bitcoin is that its blockchain is not limited only to cryptocurrency or financial transactions. Ethereum is a blockchain that can be adapted to any kind of application that requires ledger-style tracking. It is not a coincidence that Facebook chose Ethereum as its foundation.
One particular line in the white paper specifically mentions 'resources' that are owned by different accounts assigned to the developers of those resources. If Libra were nothing more than a stablecoin, there would be no need to include other resources in the white paper. This suggests Facebook has plans that go way beyond the coin.
As far as the coin's utility is concerned, that also remains up in the air. It could be that Libra will eventually be accepted by those same Bitcoin casinos you now visit to play slots. But it is also quite possible that Libra's utility will be limited to only those activities Facebook condones.
Government criticisms of Libra
Moving on to what the critics are saying, we start with the U.S. government. Members of the House of Representatives wasted no time trashing the Facebook white paper on the very day it was released. Given their reputation for not looking at legislation they are voting on, it is highly unlikely any of those legislators actually read it. It is more likely they reacted in whatever way their aides told them to react.
Be that as it may, lawmakers in the U.S. do have legitimate concerns. At the top of their list is Facebook's history of protecting user privacy. Keep in mind that Facebook is used by billions of people around the world. All of the information they collect is up for sale regardless of any claims Facebook might make to the contrary.
Facebook officials have admitted on multiple occasions in the past that they have had trouble protecting data from hacking. They have admitted to allowing foreign powers to use their platform for nefarious purposes. The list goes on and on.
U.S. lawmakers are also concerned about:
- Lack of Regulation - Cryptocurrency exists in a wide-open universe largely free of regulation. Even if you and I agree that this is a good thing, lawmakers do not see it that way. At least in the U.S., members of both the House and Senate want to see more regulation put in place.
- Consumer Protections - Many of those lawmakers are married to the idea that there can be no adequate consumer protections without strict regulation. They are concerned that too many Facebook users could be setting themselves up for a world of hurt if lawmakers do not protect them somehow.
- National Security Risks - Although she did not explain why, House Financial Services Committee chairperson Maxine Waters seems to believe that Facebook's stablecoin poses some sort of national security risk that has not yet been addressed.
- Trading Risks - Cryptocurrencies, in general, are viewed by U.S. lawmakers as risky investments. Some believe that Libra represents an unreasonable trading risk that could mean significant losses to a lot of people.
U.S. lawmakers are asking Facebook to voluntarily agree to a moratorium on Libra until they have had a chance to look into it and decide what action they should take, if any. Will Facebook agree to such a moratorium? It's not likely, but anything is possible in politics. Lawmakers may very well offer Facebook a deal they cannot refuse. We will have to wait and see.
Libra not truly decentralized
Members of the U.S. House of Representatives were not the only ones to criticize the Libra white paper upon its release. Plenty of others, including experts in blockchain and cryptocurrency technologies, have started to weigh in. One of the chief criticisms is that Libra is not truly decentralized despite Facebook creating what they claim is an independent foundation to manage the technology.1
The white paper calls for "different authorities to jointly maintain a database of programmable resources," indicating that the blockchain will be controlled from the top down. Combined with the statement this post previously quoted from the white paper, it is clear that Libra will be controlled by a small number of individuals who own and control the resources they contribute to the platform.
Rumors prior to Libra's launch seemed to indicate that it would be decentralized by spreading out controlling authority among foundation members, developers, network minors, and coin holders. That does not appear to be the case. The white paper's language also raises the question of whether decentralization could even be maintained should Libra ever go on to be a globally accepted coin.
Decentralization is still possible in theory. But practically speaking, it would be hard to pull off in a global scenario. No country in the world is going to give up its fiat without some say in how a global digital currency is controlled. We will just leave it at that.
In fairness, Facebook has said that tight control over Libra will only be temporary. The white paper claims that within five years control will be shifted from developers and resource owners to coin holders themselves. The amount of weight each person will carry within the foundation will be determined by the value of his or her holdings.
This sounds like a good plan on the surface. But dig a little deeper and you discover a slight problem: the only logical way to achieve this goal is to utilize proof-of-stake mining over proof-of-work. Proof-of-stake has already proved itself problematic as a means of verifying transactions.
In a proof-of-work scenario, coin minors must solve a complicated mathematical equation correctly in order to value the transaction. Only when all nodes on the network come up with the right solution can the transaction be entered into the blockchain and made permanent. This sort of system requires tremendous resources of energy and time, but it works.
A proof-of-stake scenario requires computer nodes to continually compute hash functions, looking for prime numbers until they find the desired result. The system requires exponentially fewer resources. It is also faster.
The problem is that proof-of-stake does not allow for consensus without some outside reference point. Furthermore, transactions cannot be entered into the blockchain until a minimum amount of effort is invested in hash computations. As a result, the node that puts in the most effort is most likely to be awarded that particular block. This creates an ecosystem that makes it too easy for a single entity to take control.
Concentration of financial power
Finally, many critics of Libra are concerned that Facebook reaching its desired goals for the project would mean concentrating too much financial power in a social media company that already dominates more of daily life than many people would like. There are concerns that allowing Libra to become a global currency could mean more harm than good.
In its defense, Facebook believes Libra could benefit developing countries by giving them a stable currency through which they could conduct cross-border transactions. Such an idea is noble indeed. But is creating such a currency a task best suited to a corporate giant like Facebook?
Facebook is a business whose primary function is to make money. They have not introduced Libra out of the kindness of their hearts. So expecting them to apply altruism to the goal of helping developing countries stabilize their currencies is a bit naive.
Now that Libra is out in the open, there are a lot more unanswered questions than there were even a month ago. That is the way these things usually work. Fortunately, time will eventually address all of those questions with answers we may or may not like.
1) Medium. How Will Facebook’s Libra "Blockchain" Really Work?