Libra’s Impact on the Crypto Industry – The iPhone Moment?

If you are in the crypto industry you undoubtedly have witnessed the most important components of lofty whitepapers left unaddressed. They have left you to read between the lines regarding financial inclusion and there are some very important considerations left untreated (regulatory matters, fiat on-ramping, whether the system will be focused on peer-to-peer payments, or payments to businesses) in Libra’s latest whitepaper and details. Outlined in this post are just a few of the important matters that are unspoken, unsettled, or matters which, depending on how they shake out, could significantly impact the future of Libra.

Libra may be interested not just in money, but also identity – The whitepaper includes a reference to the Libra Association developing an “open identity standard” for a “decentralized and portable” digital identity. Last time I checked, my identity was portable. But Facebook has been accused of making some of our identities a bit too decentralized and “open” for prying eyes.  Although the bold statement was only given a few lines at the end of an unrelated section on Pg. 9/12 of the overview whitepaper, it is stated to be a “pre-requisite to financial inclusion and competition.” Control of one’s identity is in fact not key to financial inclusion, it is key to financial privacy. And, if privacy is marginally decentralized (from Facebook’s silo, to a shared silo of its trusted corporate partners), will this actually be an identity standard that a global citizen would want? These few lines on Pg. 9 are a very important signal as to what may be coming for the future of Libra.

Whether Libra will be in the good graces of regulators is an unanswered question – Libra makes no mention of the regulatory environment in which it will have to exist. We do not know whether Libra will provide data to the Global Financial Action Taskforce. 

Facebook may be in trouble for banning adds for crypto projects – For many consecutive months, before announcing their own version of a cryptocurrency, Facebook banned adds for many crypto startup projects, some of them also trying to bank the unbanked. There is likely an anti-trust battle coming. 

How will retailers accept Libra, and will they have a ready means of trading out of it – The whitepaper does not mention retail integration; however, as Facebook and some of the known members of the Libra Association are Attention Merchants or consumer business’, which survive on subscription revenue, it seems likely that this will be a key initiative for development while the platform remains mostly closed.

What is the Potential Impact?

The Libra announcement gives us enough information to start thinking about the potential future of the project. Public discourse will certainly put Libra under a microscope; some will apply the foundational ethos of cryptocurrencies, some will apply the commercial lens, but what is undoubtedly true is there are potential positives and negatives. These pros and cons will impact the banked, the unbanked, the banks themselves, retailers and other consumer businesses, as well as the existing players and projects in the digital asset ecosystem. 

Potential Positives for the Industry:

Facebook has the financial and social firepower to demand and challenge current industry regulatory standards

It took all but a few hours for Rep Maxine Waters (D-California), Chair of House Financial Services Committee to call for Facebook to pause Libra developments. While this may cause some concerns for Libra fans, Facebook has already engaged with the most powerful regulators and monetary forces in the world, including the Federal Reserve, as Chairman Powell noted. While mobile messaging app Kik seems to be challenging the SEC from the outside in, Facebook seems to be making progress from the inside out. While Facebook could use this position of political authority for self-serving purposes, the more likely outcome is an eventual set of laws and guidelines that enhance regulatory clarity for all crypto projects. Scarcely any organization, if any other entity in crypto, would be able to jumpstart regulatory change in this fashion.

Facebook’s crypto may give all cryptocurrencies legitimacy with current non-crypto users

If cryptocurrencies are to ever be widely adopted, the general public will have to be both the idea of and comfort using cryptocurrencies. The public’s familiarity (even with the privacy scandals) are greater than any other crypto project to date. Even with Facebook’s checkered past, Facebook’s involvement in cryptocurrencies gives them credence in the eyes of the public. If the project is riddled with security vulnerabilities or falls prey to user wallet hacks early after the launch, it could certainly swing sentiments the other way and give skeptics and regulators reason to say that this crypto experiment will never work.

Libra could be a crypto onramp instrument

The plan is to have millions, if not billions go through KYC (Know Your Customer) and AML (Anti-Money Laundering) background checks, and set them up with a digital wallet. Once these processes are complete, they are eligible to participate in the rest of the digital asset ecosystem as well. Tokens, coins, IEO, ICOs, STOs, representing anything from fine art to trust and hashing power. An ocean of digital investors and network participants is being unleashed.

Publicizing the functions and origins of money

The issuance of a sovereign currency from a private party by the Federal Reserve Libra is sure to strike up conversations of what makes a functional unit of account, medium of exchange, and store of value. As this thinking evolves, the general public will naturally ponder monetary basics and revitalize a conversation that hasn’t been had in the US on a wide scale since the 19th century, opening the conversation for other cryptocurrencies like Bitcoin.

Potential Drawbacks of Libra

  • Still reliant on fiat systems

Tokenizing fiat (or a basket of fiat) currencies still relies on the power of central bankers to dictate monetary policy. While Libra’s goal includes long term stability, fiat-based systems (for which the system is based) have an average life span of 28 years. Even the most stable fiat (USD) has experienced an 84% devaluation in purchasing power since Nixon ended convertibility to Gold in 1971. With Libra most likely being many users first interaction with cryptocurrencies, the general public may overlook the groundbreaking creation of decentralized cryptocurrencies and assume fiat packaged as crypto is the norm.

  • Specter of local currency destabilization

Admittedly, Libra would need to gain a lot of traction before this would become a concern. However, it is certainly possible that if Libra offers an individual in a politically and economically unstable country the ability to maintain relatively stable purchasing power as compared to their inflated/inflating local currency, the incentive to move away from the local currency will be strong. However, this still may not be an opportunity open to all as internet connectivity and access to mobile technology are still a basic pre-requisite. Mass moves away from use of local currencies could have wide ranging in-country effects, not all of them positive for all citizens.

  • Potential vulnerabilities

Leaving aside the question of whether the proposed Libra data structure will be vulnerable to malicious attacks, it is also worth noting that an early downside will be the fact that the Libra “Move” programming language may have inherent vulnerabilities, or vulnerabilities that can arise from lapses in secure coding practices. If Move is meant to be the programming language for the internet of money, then code vulnerabilities could lead to monetary losses. 

  • Other key open questions remain

The Libra Investment Token was very under-explained within the whitepaper. Gas-fees and the incentive for validators to mine blocks was under-explained (mentioned precisely one time in this context). Indeed, the whitepaper mentions “low transaction fees”, and while it is assumed these transaction/gas fees will (and probably should)go to block validators, the interest on the reserves held at the custodians was highlighted as the key incentive for founding members. Since this gas fee is denominated in Libra (backed by “real” assets), validators are now rewarded in a pseudo-fiat currency rather than a cryptocurrency, which lowers the incentive for network health as compared to a native asset being the reward.

Conclusion

All things considered the question remains: Does the introduction of Libra change anything long-term for projects based on an open, neutral, censorship resistant, borderless blockchain? If so, an open blockchain was probably not necessary in the first place. However, open blockchains, and the projects built on top of them, can still benefit from the press, regulatory action and crypto payment rails that Libra will catalyze.

The release of the Libra whitepaper is only the first stage in the experiment. We are sure to see many more Libra memes andmanifestos, but most importantly for the industry, more cryptocurrency users. This experiment is already educating billions of people around the world on decentralization, encryption, peer-to-peer payments and blockchain. That in and of itself makes this a historical event for this industry. 

This is an article written by Andries Verschelden a partner from Armanino LLP, an independent firm associated with Moore Global.

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