One More Time About Libra: Future Money or Another Unsuccessful Project?

Five years ago, crypto enthusiasts were the object of ridicule. Nowadays, only the announcement of the launch of another coin makes politicians nervous. Below are reflections on whether Facebook’s payment tool can affect the future position of credit institutions and payment systems.

If you are somehow unaware: what is Libra project

Libra is Facebook’s internal currency, which is currently planned for launch and will be used for transfers and payments in Facebook and Whatsapp instant messengers. The development team says that the next product updates will allow users to make payments without the participation of instant messengers. Essentially Libra is most similar to a payment system. In addition to Facebook, 27 companies participate in the project, including Visa, Mastercard, eBay, Vodafone, Spotify, and others. All of them were united in a Swiss-based Libra Association, which has the following objectives:

• control over the Libra blockchain;
• control over Libra tokens
• the attraction of new members to the Association;
• management of the reserve, which will supply Libra.

A reserve is needed because Libra is a stablecoin based on a basket of four currencies:

• Dollar (USD);
• Euro (EUR)
• Pound Sterling (GBP);
• Yen (JPY).

The money will be kept in safe depositories around the world. The main purpose of the reserve is to maintain stability and price. The plan is to expand the basket with fiat currencies with a negative correlation in the future. So the fall of one currency does not drag another. In the case of crises, such a set of currencies will serve as a protective tool for investors and users. A close analog of Libra in terms of collateral is SDR, an artificial reserve and means of payment issued by the International Monetary Fund. Now the SDR basket consists of five currencies:

• Dollar (USD);
• Euro (EUR)
• Pound Sterling (GBP);
• Yen (JPY);
• Yuan (CNY).

Technically, the Libra will be hosted on its own blockchain, and the number of nodes will be equal to the number of participants in the Association. In the future, the number of nodes will reach one hundred, and precisely this number of companies is planned to be working on the project.

Libra: Pros and Cons

Libra's peculiarity is that it can hardly be called a cryptocurrency. It does not correspond to the ideology of cryptocurrencies in many key parameters. That’s why Libra is considered the first coin criticized by politicians and crypto enthusiasts.

Sidharth SOGANI, CEO of CREBACO Global Inc, described the differences between Libra and many other currencies:

“Libra is a centralised currency. The most important thing for a crypto currency like bitcoin is to be Peer to peer, Decentralised and Borderless. Libra won't be for use to people who are living in countries like China and India where cryptos are banned or have regulatory issues. Bitcoin on the other hand is borderless and anyone can use it from anywhere. Libra would also keep a track of KYC and IP addresses unlike Bitcoin which is pseudonymous. Libra is more of a centralized bank, which will start off with a user base of 1.7 Billion users on the first day itself. It is clearly a bank killer. But it is not a border less crypto currency which works on fundamentals of decentralisation.”

Facebook has a huge audience, and the company itself has repeatedly proved the inability to store user data properly and prevent leaks. When millions of people make payments through the local system, there is a high probability that the information on transfers and wallets will be used for the needs of the Association or its members. Emily STORK, finance attorney at Holland & Hart LLP comments:

“Facebook wants everyone to start making payments through Libra so that it can get even more data about people than it already has that it can then monetize even more efficiently. The dangers of huge tech companies having access to all manner of data about us are very clear.”

A lot of people have already commented on Libra. One of the most famous authorities on cryptocurrencies Andreas ANTONOPOULOS wrote on his Twitter that Libra is not even a real blockchain. All for the same reason, the lack of decentralization. The next controversial moment is the Association partners. Visa, Mastercard, Paypal are among them. And it is not very clear how to deal with the banking system being surrounded by partners whose profits depend on banks.

Another controversial feature of Libra is that it is backed with a basket of currencies, including the US dollar. A cryptocurrency that is about to become an alternative to the dollar cannot have it as collateral. For example, there are many stablecoins already, based on gold, which is stored in bullion in the safes of the cryptocurrency issuer. In the case of Libra, it is theoretically possible to block depositories where the reserve will be stored. This will negatively affect its value and the viability of the project. So, Libra has enough weaknesses, and all of them can affect the future position of the cryptocurrency.

Nevertheless, Zuckerberg’s currency has many advantages. Perhaps the most important of them is the fact that it is going to be an alternative to state money. Everyone should have the right to pay in the currency they want. Of course, if counterparties are willing to accept it. It can be anything: gold, shells, glasses of coffee. The most absurd means of trade must have a right to exist if the seller is ready to accept them as payment. Several major crises over the past 90 years have shown the weakness of the money that different states have imposed on their citizens. Therefore, the alternative is always better than its absence.

On whether there is a chance for Libra to compete with public money, weighs in Eugene ROMANENKO, an economist of the Austrian School of Economics, YouTube and crypto events host:

“Money is a medium of exchange, which is a purely market phenomenon. It is impossible to “assign” something to money in a market sense. It will be coercion, which is noticeable in the case of fiat. Sound money is always competitive and private, like any other goods and services. The restriction of competition, up to its prohibition, always leads to a drop in the quality of the goods. And this is exactly what we have been witnessing since 1913 in the case of any fiat devaluation.

Fiat money of any state is the greatest fraud in history. The price of this fraud is very high, the damage is enormous, and there is no way out of it, apart from destroying this system and returning to sound money, and ideally to the gold standard.

Libra is a phenomenon that, in theory, could be tested by the market for the role of money. But this experiment could be carried out only if money competition existed. Since the latter is prohibited by states and their governments, Libra simply will not be allowed to appear, because this is a direct threat to the power that states have over people through money. It is obvious who will win this unequal struggle in the short term. In the long-term, of course, millions of conditional Libras 10.0 will defeat fiat. And there will finally be competition for private money in full accordance with the economic theory and laws of praxeology, which the Austrian school of economics relies on.”

Libra is one of those projects that was massively discussed even before the release of the final product. It is often compared to TON by Telegram, the hype around which has recently subsided. Perhaps that’s why the developers of TON do not make announcements about their work so that the cryptocurrency does not encounter the obstacles that Libra is dealing with now. But one thing is for sure, over the past 5 years, attempts are increasingly being made to intervene in the usual banks' and states' way of life and make money competitive. Whether Libra will be able to implement at least one of the plans, will be seen in about a year. So far, even the creators themselves are not sure that it will exist at all.

Image courtesy of: Interesting Engineering