By Ronnie Ninan*
The publication of Satoshi Nakamoto’s paper “A Peer-to-Peer Electronic Cash System” in October 2008, as part of his effort to invent a digital cash system without an intermediary such as a central bank, had led to the development of Bitcoin, which today is one of the leading cryptocurrencies in circulation. Prior to it, in the 1990s, a series of attempts to create a decentralised digital cash system, proposed later by Satoshi in his 2008 paper, was made by the Cypherpunks – an activist group advocating the adoption of secure encryption algorithms and privacy-enhancing tools for safe and private value transactions, without any authority exercising control over it. Satoshi’s paper subsequently led to a proliferation of cryptocurrencies such as Bitcoin, Ethereum, Ripple, Monero, Litecoin, and even a meme in the form of Dogecoin.
Libra – The New Cryptocurrency
The co-founder and chief executive officer of Facebook, Mark Zuckerberg, in his 2018 New Year post on Facebook, spoke about his ambition to develop counter-trends in the form of encryption and cryptocurrency that will facilitate its transition from a centralised system to a decentralising force.
The alacrity in the announcement of Libra Coin, a Facebook-based cryptocurrency that is likely to be unveiled in 2020, however, took everyone by surprise especially as it is likely to have a centralised system, to begin with. Libra is expected to be the new stable global currency which will allow the 2.38 billion Facebook users to shop and transfer money overseas while paying negligible transaction fees. The coin is expected to work in tandem with a new Facebook-centric blockchain system. Notably, Libra can set the standards of a stable coin by virtue of being pegged to a basket of sovereign currencies like the dollar, pound, euro, swiss franc and yen. This is likely to insulate it from high volatility in the exchange rates of the coin. In comparison, Bitcoin’s extreme volatility can be attributed to it not being anchored to any sovereign currency.
Facebook’s Libra announcement came with a 29-page white paper describing their new global currency. However, there are a few key points to be examined when discussing Libra’s potential.
- The Libra blockchain will be pseudonymous and not an anonymous system. It allows users to interact and transact with each other, but not with their real-life accounts. However, the system will be public such that the transactions, when required, can be scrutinised by international regulators and law enforcement agencies.
- The Libra coin will be launched within a permissioned blockchain, because of the governance structure under the authority of Libra Association. Nevertheless, the white paper explains the transition towards decentralisation over time.
- The Libra Association currently constitutes 28 members but anticipates around 100 members to be part of the association before the launch of the Libra coin in the second quarter of 2020. These members will hold Libra Investment Tokens that would give them voting rights on the network, where they can make decisions about managing the Libra coin and letting new validators join the Libra ecosystem.
- The Libra blockchain, unlike the previous iterations of other cryptocurrencies, will differ in its framework. While others see blockchain as a chain of blocks of transactions, the Libra blockchain will be a single data structure documenting the history of transactions over time. It will make it simpler for applications accessing the blockchain to examine and validate any data from any time using a unified framework.
A Unique Cryptocurrency
Underpinned by a permissioned blockchain, with control in the hands of the Libra Association and government regulators, Facebook’s Libra is a unique coin that is not entirely decentralised as opposed to other cryptocurrencies which are generally decentralised without a hierarchical authority possessing control over the cryptocurrency.
What primarily differentiates Libra from Bitcoin and other cryptocurrencies is its emphasis on Proof-of-Stake consensus in its blockchain network vis-à-vis the latter’s Proof-of-Work consensus. In Proof-of-Stake consensus, validators of every single new block in the blockchain network would verify their legitimacy depending on their stake in the system (ownership of coins), whereas in Proof-of-Work consensus, validators verify each new block based on their computational power.
The announcement of Libra has once again put the focus back on cryptocurrencies vis-à-vis the fiat currencies, and its potential to financially incorporate the 1.7 billion unbanked population of the world. Multiple non-governmental organisations (NGOs) have been co-opted into the Libra Association as its founding partners with the objective of aiding small businesses, especially in the developing markets where 70 per cent of the micro, small and medium enterprises (MSMEs) lack access to credit. This can propel the establishment of a more inclusive and accessible financial ecosystem. These NGOs can also help Libra reach out to a wider audience by virtue of its lower costs. In doing so, millions of hitherto unbanked customers would likely get a verifiable identity and credit history.
Privacy Concerns and Operations
Since the Cambridge-Analytica scandal of 2018, the spotlight has been on Facebook for guarantee of user-privacy and data-security. Anticipating a backlash due to its poor track record, it has established a subsidiary called Calibra – a digital wallet to manage the Libra coin – under the authority of Libra Association which is an independent consortium based in Switzerland. The Association will be the repository of all transactions within the network, separate from the individual’s social data, and will oversee the currency’s development and network maintenance. In order to increase its presence in the e-commerce arena, Facebook has also introduced a new programming language – Move – which the company expects would be used on a larger scale to create smart contracts for goods and services to be sold on its platform.
Being end-to-end encrypted, Libra can facilitate transactions anonymously to the outside world, but within the Facebook platform. Libra will be a closed-loop system where the consumer can only buy and sell products that are available on the Facebook marketplace (introduced in late 2016) and its associated apps. This would prevent dangerous transactions including illegal trade in drugs and weapons, thereby overcoming the tainted reputation of other cryptocurrencies which have minimal checks and balances to prevent such transactions from being carried out.
Besides Facebook, there are 27 other founding members in the Libra Association – each having invested at least US$ 10 million – sharing control of the Libra coin. They include Mastercard, PayPal, Visa, Uber Technologies, Vodafone Group, and eBay among others. Each member gets a single vote on the Libra Association Council, making it extremely difficult for Facebook to monopolise the coin’s governance. The Libra Association will also have the authority to determine the value of a Libra coin.
Several global financial regulators have expressed concerns about the proposed cryptocurrency. The United States Federal Reserve along with the United Kingdom’s Financial Conduct Authority (FCA) have expressed apprehensions about consumer protection and privacy. Meanwhile, Japan and France have set up a working group and a task force, respectively, to discuss its impact on the global monetary and financial system. Similarly, the G7 Finance Chiefs recently discussed its potential ramifications at their meeting held in France on July 17-18, 2019.
India and the Cryptocurrency
According to recent reports, Libra will not be launched in India due to the current Indian regulation of not endorsing private cryptocurrencies. A draft bill, proposing a 10-year jail term for holding, selling or dealing in cryptocurrencies, has muddied the waters for crypto-traders in India. Termed as the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019”, the proposed draft bill could halt the future of cryptocurrencies in India. After India’s central bank, the Reserve Bank of India (RBI), issued a circular in April 2018 instructing banks to withdraw support in dealing with any cryptocurrency transactions, the Supreme Court of India too refused to put a stay on the circular after a public interest litigation (PIL) was filed against the RBI’s decision.
The size of the Indian market, however, offers enormous business opportunities for Libra. Given the growing proliferation of digital technology in India, it is estimated that more than 61 million new internet users will come online by the end of 2019, which means 627 million active internet users by the end of this year. Today, an estimated 270 million active users of Facebook are from India, and this number is growing.
While Libra is likely to have a massive impact on global e-commerce, it is in the money transfer space where it could be a potential game-changer. The World Bank Brief of 2018 highlights India’s position as the world’s largest recipient of remittances, worth US$ 78.6 billion. However, the transaction charges of seven per cent and above through formal channels make these remittances expensive. The cheaper informal alternatives such as the hawala networks are illegal. Libra on its part can practically reduce the transaction charges to negligible or even zero.
Facebook seeks an opportunity to grow through the accretion of Libra in India, but the onset of government regulations on cryptocurrencies could impact the future of the coin. For Libra to gain credence, it would need to ensure secure and efficient person-to-person fund transfer on the Facebook platform. It would also need to address India’s regulatory concerns by assuring the legitimacy of the project and working in tandem with the government to bring about changes in the cryptocurrency trading laws of the country.
The Libra Association aims to gradually decentralise their permissioned blockchain over time, thereby ensuring lower barriers of entry into the Libra ecosystem. While Libra has a tremendous potential to connect the global market within the Facebook’s social media platform, it is likely to run into multiple headwinds in the form of government regulators and privacy advocacy groups. The Libra white paper paints a rosy picture, but the implications both positive and negative can only be known after the release of the coin in 2020. Consequently, only time will tell whether Facebook’s cryptocurrency plan would go ahead or the Libra would die in its infancy.
Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.
*About the author: Ronnie Ninan is a Research Intern in the Strategic Technologies Centre of IDSA, New Delhi. He is also pursuing his Master’s degree from the Symbiosis School of International Studies, Pune.
Source: This article was published by IDSA