It only seemed like a matter of time: Cryptocurrency Libra would never be able to launch in the original scope announced at its unveiling last summer. The concerns of central bankers and politicians were too profound and the pressure on Facebook and its project backers too great, forcing many to withdraw from the project altogether. Today, we’re taking a closer look at what’s new and asked 5 financial experts for their take on what the future holds for Libra 2.0.
Libra announced the revamp to its architecture last Thursday (and confirmed a scoop reported on by OMR’s FinanceForward in January), stating that it was removing the large mixed currency basket of international currencies and opting to aggregate several digital currencies on its platform—each of which would be backed by a host of national fiat currencies.
The second biggest change was to its mission statement. Originally intended to be an open and decentralized architecture that in the future would permit the “transition to a permissionless system” within the Libra network, Libra will now require that all participants submit to a robust due diligence inspection. For an in-depth look at all of the modifications, read the official Libra whitepaper here.
What are we to make of all of the changes? How valuable is the project in its current iteration? We spoke to five industry experts and got their take.
Mathias Ruch, founder and CEO of Swiss blockchain Investors CV VC: “Not much left of the decentralized power”
It seems as if Libra has finally come to grips with the harsh reality of the regulatory world and will not be able to delight the world with a global currency independent of a central bank. The idea of a Facebook-launched cryptocurrency, which would have been a very powerful cryptocurrency from the beginning due to its massive reach on social media, caused a great deal of concern among global regulators in many countries.
There is not much left of the decentralized power inherent in blockchain technologies or the crypto-based global currency, which was secured by a mix of various currencies, like the dollar and the euro. Furthermore, the concept no longer boasts a permissionless approach and is now a network of centralized actors who can validate transactions, meaning it is no longer a completely open architecture, rather a payment-system controlled by Facebook and the Libra partners. This approach therefore no longer coincides with the open and decentralized concept fundamental to blockchains, like Bitcoin, a fact that has led to additional concerns being raised that Libra is neither a true blockchain, nor a cryptocurrency.
Can Libra remain an exciting and transformational project in spite of it all? Absolutely! The initiatives by central banks for digital currencies and private projects continue to drive innovation in the core of blockchain technologies: security, immutability, anonymization of transactions, user-friendliness when using wallets and other aspects that could enable widespread adoption.
Markus Ferber, German politician (CSU), Member of the European Parliament and member of the powerful Committee on Economic and Monetary Affairs: “Easier to regulate”
I think the fact that the Libra association is now focussing on currency-specific coins will make Libra easier to control from a regulatory approval perspective. At the same time, Libra has lost a great deal of its luster. It remains to be seen if this new setup can enable fast, convenient and cost-effect transborder payments or can make such payments attractive.
It is encouraging that Libra is attempting to address the concerns related to money laundering. The solutions it has proposed, however, have not yet assuaged my fears entirely. It seems that a significant portion of the user base would access the system via unhosted wallets. Unfortunately, Libra is very vague on how compliance with the standards for anti-money laundering can be guaranteed.
From a European perspective, I still do not see the necessity for Libra given that we have a fast, cost-effective and efficient payment system in place that will only gain in attractiveness once instant payments become more widespread. For countries with less developed payment systems or unstable currencies, the system could be an attractive one—but I don’t see it for the EU.
Philipp Sandner, Director of the Blockchain Center at the Frankfurt School of Finance and Management “They took the criticism seriously”
The whitepaper shows that Libra took the criticism it received seriously and is trying to accommodate regulators. By doing so, I think that Libra could launch in late 2020 or early 2021 and that a digitally programmable euro will come too—and do so based on Libra initially. Libra is lobbying heavily with the European Commission in Brussels. In addition, the new strategic focus has very clear regulations that can be met exactly. That’s something Libra will do and could follow Paypal’s lead and obtain the required licence (in theory, Libra could also buy up a small European or German bank that already has such a licence).
Technically speaking, it is no longer a blockchain, but it wasn’t last summer either. Then it was a DLT (distributed ledger) system, a form of a blockchain. I still refer to it as a blockchain, however, because its core (hashes and decentralized systems) have been retained.
Jascha Samadi, co-founder and partner of Berlin crypto-VC Greenfield One: “Not equipped for extreme scenarios”
Stablecoins are a key component in the blockchain ecosystem and of a crypto stack and not because of their ability to operate completely decentralized and independent of existing financial systems or because of their ability to integrate seamlessly in them, but rather because of what they enable. Stablecoin users are often looking for two things. On the one hand, they would like to natively use an internet-based payment system and on the other hand have a secure and stable investment as a hedge against the monetary policies in their own countries, the primary place of relevance being in countries where historically there is a higher rate of inflation like in Argentina.
Especially with regard to the last point, it’s all about trust. And the question remains if users will have enough faith in a small group of Libra Association members, who are closely aligned with Facebook after Facebook has not exactly proven to be a trustworthy partner when it comes to handling the sensitive data of its users.
In contrast, the advantage of truly decentralized and permissionless systems is that they do not exclude anyone, as well as the fact that the rules with which they operate are clear and transparent for all participants and can thus be anticipated. A good example of this is MakerDAO, a (nearly) completely decentralized stablecoin platform on the Ethereum blockchain—and completely follows the ‘Code is Law’ ethos as open-source software that determines the monetary political rules within the system and not some small group of members with their untransparent and likely difficult to decipher decision-making processes.
The second biggest change to Libra is the switch to a single-collateral structure—and is one that carries some risk. The most recent Black Thursday showed that stablecoin systems are based in large part on a collateral asset (in this case Ether) and are not equipped to handle extreme scenarios. Therefore, the MakerDAO community determined via decentralized voting to continue to diversify the collateral basis.
Finally, there is the very important question of regulating these systems. Regulation is per se nothing terrible—as is also true with centralized system—a complete ban on regulation as proposed is a mistake in my view. First off, implementing it would be incredibly difficult—something like Tether could surely be effectively broken up via a ban, but on more decentralized systems, like MakerDAO, it would be very difficult indeed. My opinion is that regulations should try to find a way of incorporating these new, innovative systems and not to criminalize them before they end up driving users to completely anonymous, decentralized stablecoin concepts like Lien.
Alexander Bechtel, Doctoral Student at the Swiss Banking and Financial Institute in St. Gallen: “Cosying up to regulatory authorities”
How much blockchain remains in Libra?
The technology itself has hardly been changed, meaning the same amount of blockchain that previously had is still all there. However, it is now a fact that Libra will never be an open, public, neutral, barrierless and censorship-resistant blockchain like the Bitcoin blockchain. That is an impossibility if you would like to conform to regulations. Whether or not it is a blockchain technology or not is a semantic discussion. Technologies typical for blockchains are in use in Libra.
The Libra blockchain is much more centralized than the Bitcoin blockchain, but there is a host of good reasons for deciding to move forward with this design: scalability, larger transaction volume, agility to comply with regulatory demands, stability (of currency) and so on, none of which would have been possible with a blockchain similar to the Bitcoin blockchain.
What’s the point of single-currency stablecoins? What is the role of the mixed currency basket?
That depends on the specific use case. For someone who only makes transactions in euros or dollars, it’s advantageous since there is no longer an exchange rate risk. The mixed currency basket has not gone anywhere. It’s still there and comes into use on transborder payments for countries and users transacting in currencies not yet available as a Libra stablecoin. The Libra use case was and still is financial inclusion and transborder payment, meaning that Libra was never intended to supplant payments in the eurozone. We already have a digitalized and extremely effective payment system here.
A primary reason for introducing single-currency stablecoins was to counteract fears that Libra could threaten countries’ monetary sovereignty. In my view, Libra was never going to become a competitor to domestic payments made in euro or dollars. In contrast, however, Libra very well could become a competitor with weaker currencies in developing countries. This threat still exists, as no Rupie-Libra or Baht-Rupie are being rolled out. What will be interesting to keep an eye on moving forward is if Libra is only able to gain traction as a transborder settlement coin or if it is able to be used for everyday purchases as well. If the latter happens, then it could end up supplanting the domestic currency.
What should we make of the changes?
The first thing you notice when reading the new whitepaper is that Libra is cozying up to regulators. The whitepaper is a cookbook or a general handbook for fulfilling the regulatory demands. The main objective of Libra was and is financial inclusion and to enable more efficient and more cost-effective transborder payments.
Evaluating the changes has to be done with respect to how Libra 2.0 has made these objectives more attainable. Libra 1.0 was 100 percent designed to reach these objectives, with Libra 2.0 I have the impression that they are trying to relinquish as few of these objectives as possible while complying with the regulatory authorities to the best of its abilities.
A big factor in whether or not Libra succeeds will be how easy and inexpensive it is to exchange the various currencies within the Libra network, primarily how uncomplicated and expensive it is to exchange the digital currency into a fiat currency. At the moment, there is no such information available. It is noticeable, however, that the Libra Association engaged in extensive exchange with regulatory authorities. This led to a great deal more clarity on how certain requirements had to be fulfilled and how risks are to be managed.
The best example of this is the Libra reserve. The initial whitepaper was a bit naive about it fundamentally underestimating the complexity and significance of short-term liquidity management. The new whitepaper offers up more details on the administration and risk management of the reserve.
What does that mean for other stablecoins?
By tackling regulation meaningfully and seeking to reach common ground with the regulatory authorities, the Libra Association is doing a great service for stablecoins around the world. Since June 2019, there has been significant progress made in the regulation of stablecoins, and the clarity that has been provided figures to allow other projects to profit as well. This clarity, of course, is also a clear signal that regulators are prepared to issue a blanket ban on decentralized currencies that are completely decoupled from a national government.
This article originally appeared in our German-language financial blog FinanceForward.