An Introduction to Libra – Facebook’s Foray into Cryptocurrency and its Regulatory Hurdles

Matt Stankiewicz, Senior Associate at the Volkov Law Group, rejoins us for an interesting posting on Facebook’s cryptocurrency plans. Matt can be reached at mstankiewicz@volkovlaw.com.

It was inevitable.  With the continuing growth of the cryptocurrency industry, major corporations were surely going to begin to figure out how best to profit from it.  Facebook has entered the game in a massive way with the announcement of its Libra cryptocurrency.  Libra is certainly an interesting project, to put it mildly.  I won’t delve too deep into the underlying technical aspects of it, but I would recommend this Medium article for those that are interested. 

While spearheaded by Facebook, the project is ultimately maintained under a larger consortium of prominent companies representing a range of industries such as payments, technology, marketplaces, telecommunications, blockchain, venture capital, academic institutions, and nonprofits.  The Libra Association – the governing body overseeing the Libra coin– will include several recognizable names, including Visa, PayPal, Spotify, Uber, eBay, Coinbase, and more.  Several of these companies were initial members of the Libra Association, and are seeking to add up to a total of 100 members in the future.  Interestingly, there are no major banks involved at this time. 

The Libra Association, and the resulting Libra Association Council, will make decisions on network governance and oversee the Libra Reserve.  Initially, the project will rely heavily on its founding members, especially with regards to its design and implementation.  The first obvious need from these members is the initial capital required to jumpstart such an ambitious project, and each member will be required to provide a minimum initial investment of $10 million.  Yet the Libra Association won’t accept just anyone with the necessary funds.  Instead, they have a set of requirements for different bodies to ensure they only bring on the best of the best.  While nonprofits, academic institutions, and crypto-based companies have their own thresholds, for most general corporations, the following requirements apply:

  • Market value/customer balances:
    • Measure — More than $1 billion USD in market value or greater than $500 million USD customer balances.
  • Scale
    • Measure — Reach greater than 20 million people a year, multinationally.
  • Brand sustainability
    • Measure — Recognized as a top-100 industry leader by a third-party sector-specific association or media company. Examples of lists used to reference potential founding members include the Interbrand Global 100, the Fortune 500, the S&P Global 1200, the FTSE Eurotop 300, and other regional and country-specific lists that identify established brands.

As you can tell, contrary to the design of most cryptocurrencies, this project will be heavily centralized early on.  However, the goal is to move towards increased decentralization over time.  Libra’s whitepaper lays down the objective to begin this transition within five years.  That said, there really isn’t a plan on how to accomplish that.  Color me skeptical, but without a more definitive plan in place, I have to wonder if these companies will be willing to give up their control should the project prove wildly successful.  It’s hard to imagine that these companies will willingly place the fate of the project in the hands of its users, as other cryptos do.  This reminds me of Lord of the Rings, where no one could resist the power of the One Ring.

In addition to control of the project governance, the Libra Association will also be tasked with managing the Libra Reserve.  As discussed in the whitepaper, “Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets – the Libra Reserve.”  Thus, far different from most cryptocurrencies, Libra will actually have underlying and intrinsic value as it will be pegged against these assets.  This reserve will consist of a variety of stable assets, such as a collection of various national currencies, bonds, and other similar securities. 

The goal is to maintain a very stable value to ensure that it can actually be used like a currency in practice.  While “stablecoins” exist in the industry, the existing versions are used primarily to facilitate trading other cryptos on exchanges.  One major problem plaguing the adoption of cryptocurrencies at the moment is that values can swing wildly – and I mean wildly – in short time frames.  Libra is instead adopting a sort of “gold standard” where Libra can be redeemed for a backing asset.  As for the reserve itself, the interest generated by these assets will be returned to the Libra Association members in the form of dividends.  Does this sound familiar? It should – it’s something of a corporate-run Federal Reserve.

So here we are, at a very critical and defining moment for cryptocurrency.  Bitcoin has become a household name, but it has yet to cross the threshold to mass adoption for a variety of reasons.  Despite this, the industry continues to grow and gain momentum, with a litany of impressive projects coming down the pipe.  It was inevitable that a major company would step in to try and capitalize on this market.  And here we go, Facebook is the first out of the gate.  For better or for worse, the fate of the industry may be riding on this company’s shoulders.

If Facebook can pull this off, it could be an incredible boon for the industry.  As most cryptocurrencies struggle to find relevancy, Facebook has several billion users with which it can push towards adoption.  The company may even be able to simply and seamlessly implement it into their current payment and marketplace systems, without anyone really having to figure out wallet setups and the like.  Further, the remaining Association members can provide functionality and use cases right off the bat. 

On the other hand, Facebook doesn’t exactly have the best reputation.  Unsurprisingly, the Facebook’s announcement of Libra was met with strong reactions, including heavy amounts of skepticism, with a dash of dismay.  Facebook obviously has a very poor record with regards to data privacy, and they haven’t won many fans with regulators recently.  To that latter point, Congress has already demanded the company put the project on hold and have multiple hearings scheduled with Libra’s creators.  Other countries have issued similar warnings.

These hearings will be incredibly interesting, as the initial Libra whitepaper is too vague at points and leaves open several questions.  For example, the whitepaper claims that the “Libra protocol does not link accounts to a real-world identity,” which would suggest a high degree of privacy.  However – and regulators will assuredly require this – it sounds like Facebook’s Libra wallet – Calibra – will have KYC/AML controls in place.  So then just how private is it?  Or are these controls just for show?  Further, from a technical standpoint, the whitepaper suggests a possible move to proof-of-stake, though does not use that name specifically, despite the fact that all the current cryptocurrencies are struggling mightily figuring out just how to accomplish that.  Despite its resources, there’s really no reason to think Facebook has any sort of edge in figuring it out.

Learning just how Facebook intends to address these problems will be enlightening, and I expect some additional clarity from these Congressional hearings.  Maybe it’s the law nerd in me, but I’m also especially excited to see the response from regulators.  For the time being, lawmakers have tolerated Bitcoin and its counterparts to some extent, though have certainly not embraced them.  They represent a potential threat to the current financial structure, yet never appeared strong enough to worry about just yet.  Yet Libra – a project clearly deadset on taking on the banking system and spearheaded by a disingenuous – now has their full attention.

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