Libra Updates Its White Paper in Hopes of Regulatory Approval
Recently, Facebook’s (FB) Libra project has revamped its white paper in an attempt to alleviate the concerns that many regulatory bodies have expressed. Some of these concerns include fears that the new currency could threaten the United States Dollars’ global supremacy, the privacy of Libra’s users, and whether or not Libra should be considered a security.
Though the crypto project has seen an overhaul in certain aspects, policymakers skepticism remains. Democrat Rep. Sylvia Garcia from Texas, a member of the House Financial Services Committee, believes that these changes enacted by the Libra association are not significant enough and that Libra’s digitized currencies and its users would still be subject to the Libra Associations decisions, an independent organization that has control over Libra’s private and permissioned blockchain. The Association comprises large companies across a number of different industries including Facebook, Andreessen Horowitz, Coinbase, Lyft (LYFT), and Shopify (SHOP). Garcia thinks that Libra’s nature makes it fall under the SEC’s jurisdiction.
Libra’s initial release aimed to build a single cryptocurrency along with a wallet that could be used alongside or entirely integrated into, social media platforms, like the ones Facebook owns. Facebook, and the Libra Association as a whole, looked to facilitate a way for the unbanked people of the world, which there are nearly 2 billion of, to be able to participate in the world’s economy and be able to transfer value without the use of middlemen like banks. This would eliminate fees from banks, making it significantly cheaper than the banking system, and it would also eliminate the time it takes to transfer money under the current banking systems in place. The idea behind the plan, and many other crypto initiatives, is to make financial security and autonomy possible with even the cheapest smartphone on the market.
Policymakers did not take kindly to the plan for a number of reasons. According to Statista, a provider of market and consumer data, Facebook has nearly 2.5 billion users. Facebook also owns other massive social apps including WhatsApp with 2 billion users, Facebook Messenger with 1.3 billion users, and Instagram with 1 billion users. We can assume that some of these numbers may overlap with each other, as many people may use more than one of these apps. We may also be able to assume that much of the unbanked world likely do not use these apps as access to technology is limited in certain areas.
The creation of Libra and its wallet Calibra, which was planned to be integrated and usable within each of Facebook’s apps, could theoretically introduce up to 2 billion more people onto Facebook’s user base if Libra were to see mass adoption as smartphones become cheaper and internet access becomes more widespread. There is an obvious cause for concern when this system is being created and built by a company whose privacy of its users has not been a priority in the past, which was made evident by the Cambridge Analytica scandal of 2018 as well a numerous lawsuits regarding misuse of user data.
This fear of data harvesting and privacy, the uncertainty of the level of centralization Libra’s permissioned blockchain and its association will have, and how it will affect the current banking system are all things that need to be carefully considered before allowing Facebook to continue with the project. With something like Bitcoin, you can at least make the argument that no sole entity has control, and therefore the direction of Bitcoins network and its rules, is entirely at the will of all of Bitcoins users.
How Libra’s White Paper Was Changed
To mitigate these concerns, Libra changed four key areas of its system. First, it has now added several stablecoins of leading fiat currencies, in addition to its Libra multi-currency coin. This addition is an attempt to address regulatory concerns over Libra’s potential to disrupt local monetary policies and take supremacy away from those local fiat currencies.
The white paper reads: “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 a significant scale in a country (i.e., ≋LBR becomes a substitute for domestic currency). While we believe this is unlikely because ≋LBR introduces foreign exchange exposure for coin holders in domestic transactions and the use of ≋LBR may be subject to restrictions, such as foreign exchange controls, we take this concern seriously.”
Libra hopes that the addition of several stablecoins, and the ongoing incorporation of more stablecoins for more local currencies over time, will help to alleviate some concerns.
Second, the creation of a compliance network to enhance the system’s safety. Libra says it will create it will increase its safety in a variety of ways. The Association aims to create a “comprehensive Compliance Program.” This will include “building Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT), sanctions compliance mechanisms, and mechanisms for the prevention of illicit activities to effectively address threats and risks”
Third, a move away from its initial plan to have a permissionless blockchain, a system that is open and public to anyone or anything that wants to join, and instead, moving towards a permissioned system. Libra’s new white paper explains this decision:
“Regulators raised thoughtful questions about the perimeter of control for the Libra network — in particular, the need to guard against unknown participants taking control of the system and removing key compliance provisions. 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.”
Fourth, the “building of strong protections into the design of the Libra Reserve.” The addition of further protections of the system’s users was highlighted by regulators. Much of this fourth segment ties into Libra’s attempt to avoid uprooting existing fiat and sovereign financial systems. The Association hopes that by adding in stablecoins, people will default to the single-currency stablecoin for their domestic currency and that its multi-coin currency, Libra, will be used as an intermediary and utility between two transactions of different stablecoins.
While it’s good that Libra is trying to take regulators’ concerns seriously, there are some questions on whether or not it missed the mark. A major concern is the systems move toward a permissioned blockchain rather than a permissionless system.
Is Libra Actually Better Now?
Permissioned blockchains are private and only allow those who fit the system’s set criteria to join the network. Libra’s new white paper says that it has gone this direction due to regulatory concern over Libra’s ability to defend against bad actors or those who may try to attack the system. While a permissioned system will allow nations and the companies involved to have more control, it is inherently more prone to attack as there is one single entity that has control over who is allowed to join this system and how the system runs. That one entity’s collapse would be the demise of the whole network. In a permissionless system, there is no central authority to decide who can and cannot join the network. It is entirely indifferent to the user’s opinions, ethnicity, creed, religion, or whether or not the user is of good moral principle. For better or worse. This means there is no single point of failure that could take the whole network down.
Permissioned blockchains also come with ethical and moral concerns. We know that the Association is made up of large corporations with a variety of interests. For example, should certain activist groups such as Wikileaks be allowed to make transactions on the Libra network? Should gay rights activists the United Arab Emirates be allowed to have accounts and make transactions? With the direction of Libra being in the hands of the association and regulators, the real implications about who can use the system and who cannot are still unclear.
Another concern, and potentially equally or even more threatening than this centralized system it is proposing, are the privacy ramifications. As addressed prior, Facebook has its hands on billions of people’s private data. As we know already, Facebook has mistreated its user data in the past. Other members of Libra’s Association have been subject to massive data breaches of customer information as well. Association member Uber was ordered to pay $148 million dollars after it was revealed that Uber tried to cover up a breach of 57 million of its user’s data in 2016.
Libra’s attempts to appease regulators with these changes may be enough to allow them to continue its project. The permissioned system is one that nations and regulators will be able to control and for that reason, it is far more tolerable for governments, but it may come at a price for the individual in terms of privacy and financial autonomy. At the end of the day the products that dominate the market, whether it is the best car or the best way to store value and make transactions, are decided by the consumer. The consumer must decide if the Libra Associations’ new proposal is truly the best way of storing money and making transactions.