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NGRAVE Opinion Piece on Libra

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ngrave logiIt is no mystery anymore that more than 1.5 billion adults around the world have no access to a bank. Facebook is setting its sights on solving this problem through its Libra coin, to make sure that digital banking services reach this group. Countries in Asia, Latin & South America are in dire need of banking access, especially when it comes to remittances. The World Bank, for instance, estimates that about 80 billion US dollars were remitted to India alone in 2018.

What Is the Libra Coin Exactly?

Libra is an international, “digitally native, reserve-backed cryptocurrency” that is built on blockchain technology. As such, communities in developing countries, like India, will be able to send, receive, spend, and secure their money, enabling a more inclusive global financial system.

The main aim of Libra is to introduce a widely accepted value system that is easy to use, and therefore increases the confidence of billions of people. It is built on the belief that storing your money on your smartphone should be simple, moving money around should be easy, cheap, safer and ultra-secure. The fundamental idea is that innovation and new coins will lead to mass adoption.

As such, Libra was intended to be a stable cryptocurrency that will be backed by real assets, called the Libra Reserve, that is supported by exchanges that purchase and sell Libra.

Unlike other coins, anyone that has Libra can convert their digital currency into a local fiat currency (based on an exchange rate). The fact that Libra will be backed by low-volatility assets, like short term government securities from central banks is what makes Libra stand out. The belief is that in this way, Libra is building trust and confidence because people will actually be using the coin. Because it is backed by government securities, its value will remain stable.

So, Why Is Facebook Suddenly in the Game?

After some back and forth and some hesitation, Facebook has now warmed up towards both leveraging Blockchain and cryptocurrency. One of the reasons why is that crypto or digital currencies have various unique properties that could potentially address, or solve problems having to do with trust and accessibility. These properties include the concept of distributed governance, which means that no single entity controls the entire network. They also include what is called open access, which enables anyone with wifi or an internet connection to participate in the network. Finally, it leverages security through cryptography, which protects the sum of money being transacted.

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Will Libra Work?

To ensure the stability of the Libra coin, Facebook is reportedly backed by low-volatility assets and short-term government securities from central banks. The company has already confirmed partnerships with PayU, PayPal, Visa, Mastercard and Stripe ( which are part of the Founder’s Group) – although some of these partners highlighted that they signed “only a letter of intent”. Yet, these collaborations are likely to increase trust from regulators and every-day users who continue to be concerned about Facebook’s influence and handling of user’s data.

Stable coins appear to generally be a safe bet and Facebook will play an instrumental role, simply because it is a mainstream organization. Also, apparently, Facebook is meeting with regulators in Europe and in the US to ensure that a secure, scalable, and safe network supports its new cryptocurrency. Getting the regulatory aspects of Libra coin is critical to the cryptocurrency’s success, especially in developing countries.

All in all, Facebook’s Libra coin could also be good news for Bitcoin, Ethereum, and Litecoin as they continue to rise in value.

In fact, because Bitcoin and Ethereum are already in the game, some argue that it would have been wiser if Facebook had followed their lead or created some sort of partnership instead of introducing a completely new coin. On the other hand, Facebook argues that by working with the financial industry, it ensures that a secure, trusted and solid framework underpins the system of blockchain technology and cryptocurrencies.

Facebook believes that its approach marks a big leap towards a cheaper, more accessible and more massively connected financial system – linking or connecting developing and developed nations as a whole.

Regulators might not be very happy with the appearance of the Libra coin. France’s finance minister Bruno LeMaire has already said that the Facebook currency would have to face the same dirty-money standards that would apply in any currency, and in the US it had to face public examination in a pair of hearings on Capitol Hill earlier this month.

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The Importance of Public and Private Keys

Of crucial importance to this tension between US regulators and Facebook will be key management. Calibra, a Facebook subsidiary, is designed to dispense or furnish financial resources that will help people to participate in the Libra network. Calibra will be custodial, meaning it will store the private key for the users. But will Libra allow non-custodial, key-holding wallets?

If it does, this would effectively enable users a greater degree of freedom in the management and control over their financial assets. The US’s role as the world’s reserve currency is also at stake, and regulators won’t be happy with this new, borderless competitor. Bitcoin and other cryptocurrencies have always had as their goal to become a global replacement for the US dollar, but it’s only with the prospect of Facebook adoption and its 2.38 billion users that the threat has become real.

If Facebook decides to let users manage their own keys, it will face severe scrutiny from the government. Probably this will involve concessions of some kind for control or oversight. But even if Facebook doesn’t, blockchain-enabled cryptocurrencies will have gained a lot of exposure anyway, and people will feel more comfortable using them.

What the Libra Coin Does and Signifies for the World at Large

The Libra coin is not only geared towards the unbanked or even the never banked. The way it works is in direct competition with almost all other blockchains. The Facebook Libra also has smart contract capabilities and developed its own programming language for it.

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There are 2 important differences:

1-Decentralized governance (we may be familiar with this term, but the next man on the street, may not be). The Libra Coin will be controlled by a consortium of 100 corporations in the Libra Association. This is unlike other blockchains, where there is no central control. Ethereum and Bitcoin, for example, are more ‘decentralized’, meaning that the role of managing the blockchain, adopting new rules or update the protocol, is open to anyone with access to a powerful computer.

2- Price volatility: The Libra coin will have a relatively stable value. People who buy Libra can be relatively certain that their Libra coin will have the same value tomorrow or even months in the future.

All in all, the Facebook Libra coin will challenge the value proposition of nearly all blockchains (especially Ripple), except for Bitcoin and Ethereum and other actually decentralized coins.

Why?

As it stands, if a coin has no stronger decentralization that the Libra Coin, it can technically be replaced by it. Because the price will be pegged to a basket of currencies (amongst which the United States Dollar), there is no strong incentive to trade it. Do the other coins have any other use besides gambling on their value?

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What does Decentralization actually mean in this context?

The fact that Facebook got involved, means that suddenly the stakes are very high. Governments will take notice and will start to take the threat of new, borderless currencies very seriously and they will attempt to control them.

Facebook can’t replace Bitcoin for its censorship resistance, but it will be a gateway to a huge number of new users, and it will have the resources to fight significant legal battles.

Ultimately it will cement even more the unique proposition of truly decentralized coins, and it will force all other coins to solve this (hardest) part of the puzzle. Otherwise, Facebook will do it better anyway.

I don’t think it’s possible to underestimate the importance of what Facebook just did.

We mentioned above how important it is that users are allowed to maintain full control over their assets.  In the blockchain world, you only control your funds if you alone have access to your private key. Crypto wallets that provide this extra measure of security are called non-custodial, meaning they don’t hold the private keys for you. Instead, you have to keep a safe copy yourself.

This inevitably raises the thorny problem of safe, secure storage of the private key. We at NGRAVE call this the ‘private key paradox’: Real financial freedom and security is guaranteed because of the private key, but it’s also its biggest vulnerability. Once someone steals it, they can irrevocably steal your funds.

At NGRAVE we have developed a breakthrough solution for the safe handling of your crypto assets, taking into consideration the need for transactions, backup, and even posthumous recovery. Facebook’s entrance on the scene with Libra only makes the issue of security more urgent, and we’re excited to be part of the solution to this problem.

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