The Libra project 1/3
On the 23rd of October 2019, Facebook’s CEO, Mark Zuckerberg, came before the Committee of Financial Services. The talking points of the 6-hour long hearing before the congressmen and congresswomen of the committee were the “Examination of Facebook and its impacts on the Financial Services and Housing sectors.” The reason for the hearing was the announcement of Facebook’s plans to launch a global payment system coinciding with the launch of a digital stablecoin, the Libra. The following weeks we will discuss the Libra project, Libra Association, regulations surround Libra and the Association, and the controversy that comes with being associated with Facebook.
Currently, the World Bank estimates that 1.7 billion adults globally remain outside of the financial system without access to a traditional bank. At the same time, one billion of these adults have a mobile phone, and nearly half a billion of them have internet access. All over the world, people with the least money pay relatively the most for financial services. According to the World Bank’s data on Migration and Remittances, Haiti’s GDP exists for 34% of remittances. For reference, Haiti’s GDP in 2018 was almost $10 billion. The average transaction fee for these remittances is around 7%. So a father that lives apart from his family, trying to earn money outside of his nation, has to pay a 7% fee, and his family has to wait between 3-5 days (can take a lot longer) before it arrives. The current process of transactions falls short in a situation where there is an immediate need for money. This is the reason why Facebook started the Libra Foundation.
What is Libra?
Facebook believes that the world truly needs a reliable digital currency and an infrastructure that together can deliver on the promise of “the internet of money.” Facebook’s mission statement for Libra is that it will be a simple global currency and a financial infrastructure that empowers billions of people. Libra is a digital currency that is made up of three parts.
1. It is built on a secure, scalable, and reliable blockchain.
2. It is backed by a reserve of assets designed to give it intrinsic value.
3. It is governed by the independent Libra Association, tasked with evolving the ecosystem.
Libra is built on the Libra blockchain with a new programming language “Move” and is fully open-sourced, which can be found here. The idea behind open-sourcing the code is that anyone can build on it and that the code entirely transparent. Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets. It consists of baskets of currencies and short-term government securities stored with custodians in a decentralized manner. The underlying assets give Libra the ability to hold intrinsic value.
Libra is built with an ecosystem in mind. It is not meant to be just a global currency. A global currency without external services will not be adopted. That is why the Libra Association has planned to create different services on top of the Libra Blockchain, namely financial services applications and digital assets wallets. Facebook created a subsidiary for this purpose, Calibra an interoperable wallet, which will spearhead the Libra project for Facebook.
With Facebook’s history of violating users’ privacy and personal data, the company wanted to show the public that it will not hold the “power” to do that with financial data as well. That is why Facebook created the subsidiary Calibra, with an ex Facebook executive as its CEO, David Marcus. Before joining Facebook David operated as the CEO of PayPal after his company Zong got acquired by PayPal. Similar to Paypal, Zong is also a payment provider. It enabled seamless payments for over 1.5 billion users in the gaming and social networking sector. Companies like Facebook, Sony Online Entertainment, Ubisoft and Konami used its services.
Calibra is cryptocurrency wallet designed for Libra, but will also work with other cryptocurrencies. The wallet will be embedded in the Facebook ecosystem; starting with Whatsapp and Facebook Messenger. The idea for Facebook to create a subsidiary is to split the financial data with the user data. By splitting the two data streams Facebook claims that the financial data will not be monetized.
– Payments: PayU
– Technology and marketplaces: Facebook/Calibra, Farfetch, Lyft, Spotify, Uber
– Telecommunications: Illiad, Vodafone
– Blockchain: Anchorage, Bison Tails, Coinbase, Xapo Holdings limited
– Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
– Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
Some companies have decided to leave the Libra project because of the growing controversy and regulatory scrutiny. Namely, eBay, Stripe, Paypal, Mastercard, Visa, Mercado pago, and Booking holdings. Set on by letters from two senators, urging them to proceed with caution. The departure of these companies could be problematic for the project, namely because they all are a combination of tech and payment system companies. The exact industry Libra wants to penetrate/revolutionize.
Next week we will go more in-depth on regulations and the different jurisdictions.