Facebook has promised us a new “global currency” with the goal of bringing financial services to billions of people for the first time. The currency, Libra, has support from a variety of other tech firms and partners such as Lyft, Spotify, and Stripe.
But beyond the initial hype, Libra has some crucial flaws that may disrupt or even halt its adoption.
To start, the Libra whitepaper cites that there are 1.7 billion adults who are still unbanked. And according to the same World Bank document it pulls from, nearly half of those adults live in seven developing countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria, and Pakistan.
Many of these countries sound perfect for adoption but it is unlikely at best that Libra ever gets off the ground. Facebook is banned in China and has been banned in Pakistan, Indonesia, and Bangladesh in the past. Libra may be technically independent of Facebook through the Libra Association, the independent organization overseeing the project, but in many of those countries Libra will always be guilty by association.
It will also be difficult for Libra to escape its connection to other cryptocurrencies such as bitcoin. Countries around the world have tried to ban or prevent the usage of bitcoin in favor of fiat money or government-issued digital currencies. India, the home to hundreds of millions of WhatsApp (owned by Facebook) users, has proposed a possible ban on cryptocurrencies. These laws will inevitably apply to Libra as well. From a regulatory standpoint, Libra faces an uphill battle in these developing countries, its stated initial target market.
In the U.S., Libra faces equal challenges. A group of more than 30 organizations including Public Citizen this week issued an open letter to Congress to ask for it to “impose a moratorium on Facebook’s Libra and related plans until the profound questions raised by the proposal are addressed.” This skepticism has been echoed by legislators. House Financial Services Committee Chairman Maxine Waters (D-CA) has promised to hold a hearing regarding Libra on July 17. This could be a crucial test for Libra’s viability.
Even if Libra can pass through these legal hurdles, it also greatly diverges from the vision of the blockchain due to its centralization. As the whitepaper concedes, “Libra will start as a permissioned blockchain.” This means that validator nodes are chosen by the Libra Association through a process which includes a rumored $10 million buy-in. Having this exclusivity means that Libra will be mined by an elite group of companies that have to be trusted by everyone else who uses the currency.
Bitcoin was meant to replace the necessary trust in central banks like the Federal Reserve with math. Libra, on the other hand, looks to replace those central banks with Facebook and its partners.
Furthermore, Libra claims to be stable in value over time to maintain its use as a medium of exchange. Though this could be important for a new global currency, Libra attempts this by backing the currency with “a reserve of real assets.”
The Libra Reserve will hold bank deposits and short-term government securities and will be maintained by the Libra Association. This does not eliminate the need for trust as other cryptocurrencies do but rather shifts the entity that must be trusted from the Federal Reserve and banks to the Libra Association. As a new single point-of-failure, purely backing a digital currency with a bank reserve eliminates any chance of real decentralization.
With centralization across the board and disregard for issues like privacy, Libra begins to resemble PayPal more than bitcoin.
PayPal allows for digital transactions from around the world and is focused on improving payments and financial infrastructure. This is exactly what Libra hopes to be: “Moving money around the world should be as easy and cheap as sending a text message,” reads its marketing message. “No matter where you live, what you do, or how much you earn.”
And just like Libra, PayPal does not aim to avoid centralization or return control of money to the people who use it. Bitcoin, on the other hand, is built on the basis of eliminating a single point-of-failure.
With centralization across the board and disregard for issues such as privacy, Libra begins to resemble PayPal more than bitcoin. Perhaps Facebook and its partners will make key changes prior to Libra’s public launch in 2020. But for now, Libra’s centralization and inescapable connections to Facebook and bitcoin make it hard to see a world where the new take on money earns and maintains significant traction.