Via Angry Bear

Yesterday, Facebook released a White Paper on their planned supposed cryptocurrency, Libra, which has apparently long been under development.  This triggered two stories in the New York Times, as well as lots of commentary by lots of people, including several posts by Tyler Cowen at Marginal Revolution, who is moderately favorable to the proposal.  This is supposed to become an international currency backed by a reserve account provided initially by 27 major corporations such as Uber and VISA, which will be tied in value to a basket of currencies.  While tied to Facebook, it is supposed to have a firewall separating FB’s data on individuals from data arising from anybody’s activities in connection with Libra.  It is to be overseen by an association based in Geneva and run by the 27 companies, each of which will have control over a node in the supposed blockchain of the currency.  It is to use a new program, “Move,” and will have potential features that resemble Etherium, such as an ability to set up contracts.

First of all, it may be that Libra will not be allowed to get off the ground by politicians or regulators.  Rep. Maxine Waters (D-CA) has demanded a halt in the development until Congress can look at it more closely.  There  is concern that it may be too much of a real currency in competition with the USD, which might be illegal.  Other nations reportedly are worried about regulatory issues based on the apparent partial resemblance to a bank, with no banks among the 27 companies, with France being one nation also expressing such concerns.  There are also no  Wall Street firms in the 27, for better or worse.

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Aside from these matters there is a lot of disagreement among commentators about crucial aspects of this, involving what it really is and how it is supposed to work, with some forecasting that it may be a total bust because of internal problems, even if it is not blocked by any governments.  Only a few commentators seem ready to accept the optimistic story one sees in the White Paper, much less even how it describes what the system is.

A central issue has to do with if Libra is really a cryptocurrency and if what it operates on is really a blockchain.  It is clearly not standard in either way, with quite a few commentators declaring outright that is not either a cryptocurrency at all and that its data structure is not a blockchain at all either.  This argument says that it is really just a pay system ledger system like PayPal, although with a few extra bells and whistles and an ambition to operate at a much larger scale.  This is partly driven by the lead organizer of the effort is David Marcus, who was most recently the president of PayPal.  Rather like some internal stablecoins like JPM of J.P. Morgan it seems to be basically a system for transferring money for an insider group, with control of the nodes in the data structure controlled by the 27 companies (a group that may increase). The initial supposed market is users of Facebook who supposedly will use it to move from one FB app to another.  There is a lot of verbiage about helping unbanked people in less developed countries, and the supposed first place an effort will be made to introduce it will be India.

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Libra’s supposed blockchain differs from ones used by regular cryptocurrenies in several ways, although a lot of details of this remain unclear at least to me, and people are differing on this, with the White Paper simply calling Libra’s system a “blockchain” repeatedly, while others say this is false advertising.  It certainly is not open, but more importantly it does not seem to fully solve a system in the way usual blockchains do, which exist in blocks.  It is a unified ledger, and so critics say it really is just like a PayPal system approving transfers without the deep solving of problems of a real blockchain involves, although it has more cryptographic security protection than does PayPal.  Without this deeper solving, it does not need mining for creating new Libra units (this is done more conventionally by one of the companies selling some actual currencies from the reserve, which will begin with $10 million at least from each of the 27 companies).  Without mining it is certainly more energy efficient than bitcoin, but then it lacks the deeper solution element of a real cryptocurrency.

Some claim that its efficiency is that it will use “proof of state” rather than “proof of work” as bitcoin does.  But from what I gather, XRP (formerly Ripple, used between some commercial banks) and Etherium, which has the potential for setting up contracts like Libra, already use “proof of state,” which is indeed more efficient than proof of work, but proof of state still requires some mining and related energy usage as cryptographic solutions are still needed, if not as extensively in proof of work.  But it seems that this is not the issue with Libra, which supposedly needs no mining at all, and this is not due to using Move.  It simply looks not to use a real blockchain, rather being a fancy version of PayPal, with some features of Etherium. But it should be noted that Etherium is facing serious difficulties in moving to its next stage of development.

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There is then the possible impact of Libra on the regular cryptocurrencies.  The immediate reaction to the White Paper release was an upward blip for bitcoin in particular, less so for Etherium and XRP, but then they settled back.  Some see Libra as a possible threat if it works, the “cryptocurrency” that succeeds in fulfilling at least part of the dream of the bitcoin inventors. Others argue that the ongoing failures of the existing cryptocurrencies will inhere to Libra as well, dooming it to at best far less than is being claimed for it.  At least one problem it will avoid is that given its supposed tie to a basket of actual currencies, it will not become an object of speculation, although so far such stable coins have not generated much enthusiasm.

So it looks like this preview of a rollout of Libra seems rather overhyped, and this is not even taking into account that many will be highly skeptical of its security aspect given the recently revealed history of Faceebook violating personal security of many people.

Barkley Rosser