An Insight Into Libra (A 3-part Blog Series): The Pros and Cons

The Libra project is a very ambitious one. Since the project’s announcement, it has received varied reactions and reviews from the public and governmental organisations due to its pros and cons and the implications which will all be explored more in this series. This is the 2nd part of the Hatch Quarter’s Libra blog series. Read Part 1 here.
 

The Pros

 

1. Helping the Unbanked

The white paper emphasises the importance of helping those who are “unbanked”. Nearly 50% of adults in developing countries do not hold a bank account or an account with an online financial service which makes them vulnerable to theft, this is due to the lack of access, travel distance and amount of paperwork involved (source1, source2). Governments and corporations have a “pivotal” role to play in increasing financial inclusion which can ultimately improve economic growth and opportunity for the world’s vulnerable (source1, source2). This positions Libra Association—an association to be made up of 100 diverse organisations—to lead in creating and building a currency which can be utilised on a global scale.

There are already existing apps that are helping people of developing nations to adopt mobile payments. Since 2007, tens of millions of people in Africa, India, and Eastern Europe have been sending money to each other on mobile phones using M-Pesa, and nearly 900 million are using Alipay and WeChat in China (source1, source2); this shows how technology is increasingly enabling financial inclusion and Libra can act as an additional force for improvement with their potential to reach billions of users via Facebook Messenger and WhatsApp.

 

2. Driving Mass Adoption of Cryptocurrencies

The implementation and daily usage of Libra could lead to the usage of other cryptocurrencies and ultimately lead to the mass adoption of cryptocurrencies. There are currently 1.3 billion users on Facebook Messenger and 1.6 billion users on WhatsApp (source), which means implementing a currency that can be used by these existing users can lead to encouraging other demographics to adopt the Libra currency. 

Libra is usable for day-to-day transactions due to its proposed low volatility and fast processing speed of 1,000 transactions per second (and should be able to scale beyond 1,000 in the future if Libra remains centralised) (source). Members of the public can trust that the value of tomorrow’s Libra will be approximately worth the same as today’s, and thus, be comfortable with using Libra for daily transactions. There will also be low transaction fees that are necessary to deter denial-of-service attacks (source). 

With increased accessibility to Libra, Libra can potentially improve awareness and familiarity towards blockchain technology and cryptocurrencies which can ease market penetration and simplify the learning curve of cryptocurrencies. This can lead to driving mass adoption of existing cryptocurrencies.

 

The Cons

 

1. Non-Decentralised

Libra is scheduled to be launched in 2020 as a permissioned blockchain. This implies that only certain entities are admitted to (1) run a node, (2) define the consensus and, essentially, (3) control the governance of the blockchain (source). The problem with this structure is that it makes the ledger private and vulnerable to censorship. 

The Libra Association was established to ensure equal control and power amongst each entity over what is intended to be a global currency and has expressed plans to move to decentralisation within 5 years of release, although the details on the process are not finalised. As of yet, the plan to move to a permissionless and decentralised system is to change to a Proof of Stake consensus, distributing control away from the founding members to a more decentralised network of Libra holders. (source). 

 

2. National Sovereignty

If it is to become mainstream and be adopted by the combined users of Facebook Messenger and WhatsApp, then this may potentially make the current financial system unstable and reduce government’s economic sovereignty due to Libra’s non-decentralised model (source).

The risk is that Libra is effectively controlled by a majority of for-profit organisations. If Libra is to become a quasi-sovereign currency for countries like Venezuela, Argentina, South Africa, Turkey or Greece (who are ranked highly on the Bloomberg Misery Index which sums inflation and unemployment rates (source)) and become the main medium of exchange, then this can be problematic since a country’s transactions are effectively controlled and viewable by a majority of for-profit companies which will be difficult for them to comply with various countries’ monetary policies. The Libra Association would have too much power and if they were to change the rules overnight, then it may affect many people on a global scale and a whole country’s economy (source). It’s not in Libra Association’s interest to defy regulators since the intrinsic value of Libra currency is backed by the value of sovereign currencies (source), therefore, Libra will most likely adapt and change so that they comply with regulations imposed governments.

The potential threat to national sovereignty might be the reason for the cautious and sceptical reactions of members from government bodies. The US Financial Services Chairwoman, Maxine Waters, has requested for Facebook executives to halt their operations (source). French Finance Minister, Bruno Le Maire, opposes Libra and said that Libra cannot and must not become a sovereign currency (source). Libra won’t be able to be used in China (due to the cryptocurrency trading ban) and India (due to an upcoming bill which involves banning cryptocurrencies) which has a combined population of 2.75 billion people meaning nearly one-third of the world’s population won’t be able to use and trade Libra (source1, source2, source3). German member of the European Parliament said that regulators should be on “high alert” of Libra (source). The Bank of England Governor, Mark Carney, believes that Libra needs to be under a high standard of regulation and scrutiny if it were to operate in this world (source).

 

Watch this space for Part 3, as we conclude our research on Libra.

 

By Vivienca Luong - vivienca@hatchquarter.com.au