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Why Bitcoin May Have Doomed Facebook's Libra Cryptocurrency
Unlike Bitcoin, Libra's blockchain will also be run by a corporate umbrella composed of payment processors, tech and telecommunication companies, venture capitalists, nonprofits and other cryptocurrency companies known as the "Libra Association."
In June, Facebook made waves when it confirmed it was planning to launch its own cryptocurrency in 2020. Called Libra, the system will be connected to Facebook's massive user base, granting it the immediate potential of rivaling such established systems as Google Pay and PayPal. Indeed, Libra hopes to become the world's most widely adopted digital currency — sparking the kind of economic revolution that cryptocurrency has long promised, but has so far largely failed to deliver. Unlike other digital coins, however, Libra's main barrier to success won't be its technology, but its image.
The privacy concerns associated with Facebook, along with the general skepticism associated with notoriously volatile cryptocurrencies like Bitcoin, are hardly relevant to Libra's platform and functionality. But that won't erase regulators' prejudices. Libra's ability to enamor and educate already highly skeptical and generally misinformed legislators around the world — and in particular, in the West — will mean the difference between joining the ranks of global currencies or sharing the same fate of other high-profile cryptocurrency busts that have come before it.
Libra vs. Bitcoin: A False Analogy
New cryptocurrencies are almost always compared to Bitcoin, the world's biggest and best-known cryptocurrency that launched in 2009. And Libra is no exception. Each coin, perhaps to both their detriment, will likely always be linked. In reality, however, Libra has an entirely different structure and thus requires different regulations. First, Libra will be an equity-backed asset. This paradigm is getting somewhat more popular in the cryptocurrency space, as evidenced by the growing number of coins backed by precious metals. By being backed by conventional goods, such coins — known commonly as "stablecoins" — minimize the volatility often seen in unbacked cryptocurrencies (which currently dominate the market).
Unlike Bitcoin, Libra's blockchain will also be run by a corporate umbrella composed of payment processors, tech and telecommunication companies, venture capitalists, nonprofits and other cryptocurrency companies known as the "Libra Association." These companies will not only manage Libra but will also receive payouts upon the initial coin offering (ICO) and earn interest on its equity basket. But perhaps most importantly, the association will govern who can and cannot interact with Libra's blockchain — creating what's called a "permissioned" network.
A centralized membership body lends tremendous credibility to Libra's ability to control who is using the currency and how within the present financial frameworks. Bitcoin's blockchain, by contrast, is considered "permissionless," which means there is no approval process to "mine" for the coin and manage its ledger. As a result, Bitcoin's public infrastructure is notoriously slow and inefficient because of the sheer number of people who are allowed to operate on its system at any given time, which increases the computational power needed to complete transactions. In essence, Libra is trading the conventional conception of cryptocurrencies for increased dependency, function and security, all of which on paper should create a far more accommodating regulatory environment.
The Rocky Road to Regulation
Libra has a strong interest in working with governing bodies, expressed both in its white papers and Facebook's decision to announce its currency without an actual product. Its success, hinges on ubiquitous acceptance. Ensuring that the proper systems are in place in key markets will thus be paramount to quickly secure the type of global traction needed upon its launch. While most punditry around the currency will be fixated on regulating privacy or its blockchain in general, Libra's exploitable points will be more standard financial measures. Simple regulations — namely, wallet or vendor restrictions, spending limits or international fees — could quickly sink the currency's hopes of joining and eventually disrupting the global economy.
Europe: Widespread adoption in Europe will be critical to Libra's long-term success there. To become a viable currency, the coins need to mimic the euro in that they cannot be immediately rendered useless upon entering another country.
Switzerland: Given their relatively small economic size and openness toward cryptocurrency, Switzerland is unlikely to restrict Libra's growth. The Libra Association will be headquartered in Geneva, which is fitting as Switzerland is one of the few countries that has passed coherent legislation for coin offerings. Under its current framework, Libra will most likely be regulated as both a payment token and a security token in Switzerland — placing it under the purview of the country's anti-money laundering and banking security requirements. Such regulations will not overly hamper Libra's use case and may, in fact, offer a regulatory blueprint for other countries. Thus, Switzerland will likely provide a welcome regulatory reprieve and home base in what is sure to be an otherwise tricky continent to navigate.
The EU: The European Union will certainly be involved in the political aspect of Libra because of its interest in setting standards for the Continent's emerging tech regulations. That said, the bloc has yet to pass any specific cryptocurrency legislation. Supervisory authorities have issued joint warnings, but have taken little concerted action beyond money laundering directives. This is most likely the result of cryptocurrency's clumsy fit within EU regulations. Resting somewhere between a currency, a commodity and a derivative, cryptocurrencies could fall within the confines of monetary policy at the EU level, or as fiscal and economic policy on the national level. An EU-wide decision on cryptocurrency would also require the approval of the bloc's 28 member states — an unlikely proposition on a generally low priority subject.
Germany: Specific regulation toward Libra is thus much more apt to occur on a state-by-state basis, which will likely make Germany the most important European market to win over. Home to Europe's largest economy, Germany wields tremendous influence in Brussels and often speaks on behalf of the entire European Union. But Berlin is also a staunch skeptic of U.S. tech companies — including Facebook — which may not bode well for Libra's adoption in the country and thus other EU members.
The U.K.: The United Kingdom has been at the forefront of cryptocurrency-related technology, and was the earliest European adopter of PayPal's online payment system (which, at the time, was revolutionary in its own right). The government's relatively new cryptocurrency taskforce has named digital coins as a potentially disruptive field, but one still far too small to regulate. Until the U.K. cryptocurrency market grows to a size London deems worthy of oversight, the Financial Conduct Authority (the country's regulatory body) has been tasked with simply promoting general safety and prudence over cryptocurrencies, instead of imposing strict rules.
Such a lax regulatory environment could make the United Kingdom Libra's biggest ally. However, the country's past three years of political crisis surrounding Brexit has largely diminished its trendsetting influence. Libra's success in the country would nonetheless be considered a victory. But London's adoption of the technology is less likely to prompt its neighbors to follow suit — making it much less strategically important market to secure for the coin's European longevity.
Developing Countries: One of Libra's key use cases is providing a new and stable currency in under-banked areas of the world. Thus, while less influential in deciphering the global regulatory environment, developing countries will still be critical in securing the currency's long-term adoption.
India: India currently has the highest proportion of Facebook users in the world. And indeed, securing high usage rates and normative backing in such a massive market could catapult Libra's proliferation elsewhere. But capturing the imagination of the hundreds of millions of Indian users needed to do so will be easier said than done. In addition to having some of the most active measures against illicit use of virtual currency, India's central bank has banned regulated banks from trading in cryptocurrency. On top of New Delhi's cryptocurrency-adverse regulatory environment, the country's limited tech infrastructure further limits its prospects as a launching ground for Libra. According to a 2017 World Bank survey, the vast majority (70 percent) of Indians still don't own smartphones — meaning only 30 percent of the country even has access to the mobile payment technology needed to use Libra. In other words, before Libra can revolutionize India's currency system, a similar revolution in mobile finance would need to take shape first.
Brazil: When it comes to other emerging markets, Brazil is likely the next best bet for Libra's widespread adoption. Yet compared with New Delhi, the South American country offers roughly one billion fewer potential users.
The United States: But while Libra is not explicitly billed for the Western world, it cannot exist without its approval. Like any other commodity, the coin stands no chance of survival if it can't be traded for dollars or euros. Given the mix of legislative weakness and cryptocurrency-animosity in emerging markets like Brazil and India, Libra's future will largely hinge on its ability to win over the West — and in particular, the United States.
Although the European Union may be equally loud in terms of its political messaging around digital coins, the United States is far more equipped to deal with cryptocurrencies on a legal level. Washington is armed with arguably the world's most comprehensive regulatory framework, which revolves around the U.S. Treasury's Financial Crimes Enforcement Network (FinCen), the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodities Future Trading Commission (CFTC). But the overlap in authority among these three entities has led to more incoherence than coordination, evidenced by the fact that only one coin has so far jumped through all the hoops needed to register with the SEC.
According to statements released by the legislative and executive branches, Libra actually satisfies the majority of U.S. concerns. Its consortium construction limits security and identification issues, while privacy will naturally be less of a concern within a blockchain than with Facebook's social media platform. Libra's ability to communicate these intricacies, however, will be its true test.
The spate of controversies that have shrouded the social media company in recent years has tainted its reputation among Americans and U.S. legislators alike. Shortly after the Libra announcement, U.S. Sen. Sherrod Brown declared it "delusional" that users would trust Facebook with their money. It is thus reasonable to assume that this scrutiny over Libra's parent company — compounded by a general misunderstanding of its differences from Bitcoin — will create a hostile environment. And thanks to Facebook's entrance, the cryptocurrencies that have so far benefitted from the relative lack of oversight may also now face undue attention. Indeed, at this point, Libra may be just as likely to carry the cryptocurrency market as it is to destroy it.
For Facebook’s Cryptocurrency, the Well May Already Be Poisoned is republished with the permission of Stratfor Worldview, a geopolitical intelligence and advisory firm.