Facebook's Libra coin: the truth behind the hype

Facebook's Libra coin: the truth behind the hype



Facebook has announced its
new Libra coin to much fanfare and media attention. But it's fair to say that we
at Alphaville remain sceptical. So we've started a series
called 'breaking the Zuck buck', in which we examine Mark
Zuckerberg's new baby and explain what we
think is wrong with it. Myth number one. A 'blockchain' is what will
allow Libra to function. Libra is meant to be
supported by what's been called the Libra
blockchain, which is described as a decentralised
programmable database. But we'd argue that the
Libra blockchain is not, in fact, a blockchain, as some
of the defining characteristics of a blockchain are missing. Whereas in a normal blockchain,
like the one underpinning Bitcoin, blocks of transactions
are hashed down and added to a chain of other blocks,
hence the word blockchain, Libra will use neither
blocks nor a chain. Instead, Libra will be a 'single
datA structure that records the history of transactions
and states over time'. Facebook says that because
it uses technology that's associated with blockchains,
such as Merkle trees, Byzantine consensus protocols,
and other complex cryptography, it should be called
the blockchain. But we don't think
Facebook should get to decide what
a blockchain means. And furthermore, it doesn't
need a blockchain for what it's trying to achieve. Myth number two. Libra is decentralised. So Libra says that it's
a decentralised system, but we think calling
it that is a stretch. Unlike cryptocurrencies
such as Bitcoin, Libra won't use the
proof of work mechanism that incentivises miners
to keep the network going. Instead Facebook, and the
other 27 founding partners of the Libra association,
will run their own nodes that validate Libra transactions. The partners include Uber,
PayPal, and MasterCard, and each one has paid
$10m for the privilege. Facebook says Libra will
move to a more decentralised permissionless
system in the future, but we don't have any details on
how and when that will happen. Myth number three. Libra can magically reduce
cross-border payment fees. These fees are high,
not just because of technological issues, but
political and regulatory ones associated with the
complicated process of moving money from one
jurisdiction to another. Although it's true
that many banks still charge extortionate rates
for cross-border transfers and remittance
payments, we already have many companies working
on making those fees lower, like TransferWise and Revolut. There's no reason
to believe Libra can lower those costs further. And as long as people still
use central bank money as their primary
means of payment, they'll still have to somehow
exchange that money into Libra, which will come with a cost. Myth number four. Libra is about
helping the unbanked. Facebook wants you to think that
the reason they're doing all of this is because they want
to increase financial inclusion and to bring in the 1.7bn around
the world who remain outside the banking system. But it's not clear how the
unbanked will be able to buy Libra if they have
no bank account, particularly if Labour wants to
keep regulators happy by doing proper checks on its users
to avoid money laundering. Libra is also unlikely
to help people in countries with rapidly
depreciating currencies, as those countries tend
to put in capital controls to prevent a run on their banks. Facebook has never shown
much interest in the unbanked before, and we're not sure why
it's suddenly so interested. Myth number five. Libra legitimises Bitcoin. Libra calls itself
a 'low-volatility cryptocurrency', but just as the
Libra blockchain isn't a real blockchain, Libra coin isn't
a real cryptocurrency either. That's because it's issued
by a centralised entity, doesn't run on a
real blockchain, and rather than being subject
to the whims of crypto markets, is pegged to a basket
of fiat currencies. So it's much more
akin to something like the Gemini
dollar, the stable coin issued by the Winklevoss
twins' exchange. And it's probably
not a coincidence that the twins'
longtime rival Mark Zuckerberg chose another star
sign for the name of his coin. Overall, we think that the
use of the words 'blockchain' and 'cryptocurrency'
is more about PR value than substance, like
many such projects. For Facebook, maybe it's
also about getting regulators to smile upon them.

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