On 18 June 2019, Facebook unveiled ‘Libra’, the highly anticipated cryptocurrency project that has been under development for over a year. Libra is billed as a global digital currency and financial infrastructure that will bring traditional financial services to 1.7 billion adults who have no access to a traditional bank – essentially, to “bank the unbanked”.[1] This article provides an overview of the Libra ecosystem and surveys some of the initial reactions to the announcement by lawmakers in Europe and the United States.

What is Libra?

Libra consists of three main parts: the Libra Blockchain, the Libra Currency and the Libra Association. The Libra Blockchain is an open source, proprietary blockchain developed by Calibra, a subsidiary of Facebook. At the outset, the Libra Blockchain will be a permissioned network, which means that Facebook will decide who will be allowed to run a so-called ‘validator node’. The initial group of validator nodes will consist of payment service providers such as Mastercard, PayPal and Visa, technology companies like eBay, Lyft, Spotify and Uber, as well as venture capital firms such as Andreessen Horowitz, among others. The cost of becoming a validator node is reported to be $10 million plus operating expenses of approximately $280,000 to run the node.[2]

The Libra Currency (≋) is designed to be a stable coin that is fully backed by a reserve of low-risk assets. Unlike other stable coins such as Tether, USD Coin or Paxos Standard, the Libra Currency is not intended to be “pegged” to any single currency; rather, the price will be determined by the value of the assets in the reserve, which will be selected with a view toward minimizing volatility and maintaining confidence in the currency. Interest on the assets in the reserve will accrue to the members of the Libra Association.

The Libra ecosystem will be governed by the Libra Association, a nonprofit organization headquartered in Geneva, Switzerland. The Association will consist of the network’s validator nodes, who will vote on both technical and financial matters. Technical decisions will include for example activating new features via smart contract or making a recommendation that the network should undergo a hard fork. On the financial side, the Libra Association will have functions similar to a central bank such as the ability to create and destroy Libra Currency and will be responsible for managing the assets in the reserve.

Government reception

Regulators in Europe and the United States generally reacted to Facebook’s announcement with skepticism. Mike Carney, governor of the Bank of England, said that if Libra was successful, “it would instantly become systemic and will have to be subject to the highest standards of regulation”.[3] French Finance Minister Bruno Le Maire expressed concern that Libra could compete with or replace fiat currencies, stating that the possibility of Libra becoming a sovereign currency “can’t and must not happen”.[4] In addition, Markus Ferber, a German member of the European Parliament, warned that Facebook could become a “shadow bank”. Across Europe, there is also a general concern about the potential ability to use Libra to facilitate money laundering or terrorism financing.

Conclusion

Facebook may face an uphill battle in Europe and the United States as it seeks to make Libra one of the most widely used currencies in the world. The Libra project signals a potential shift in monetary power from central banks to private entities, which lawmakers have already identified as adding systemic risk to the global financial system. Facebook, still facing criticism for its handling of personal data, should expect a heavy handed regulatory approach from lawmakers, who may perceive Libra as a further encroachment into people’s personal lives. A central question lawmakers will ask is, even if Libra solves a real-world problem, what are the costs?

[1] Libra Whitepaper, page 1.

[2] https://www.theblockcrypto.com/2019/06/18/how-to-become-a-founding-member-of-the-libra-association/.

[3] https://www.ft.com/content/189c1c66-91dd-11e9-aea1-2b1d33ac3271.

[4] https://www.bloomberg.com/news/articles/2019-06-18/france-calls-for-central-bank-review-of-facebook-cryptocurrency.