June 24, 2019
Libra’s Impact – Is it the Crypto Industry’s iPhone Moment?
Posted by Andries Verschelden
If you’re in the crypto industry, you’ve undoubtedly seen that the most important components of lofty white papers are often left unspoken. Reading between the lines in Libra’s latest white paper, some very important considerations about financial inclusion are left untreated. For example: regulatory matters, fiat on-ramping, and whether the system will focus on peer-to-peer payments or payments to businesses.
Outlined below are just a few of the important matters that are unspoken or unsettled, or could impact the future of Libra.
Libra may be interested in not just money, but also identity. The white paper 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 page 9 of the overview white paper, the identity standard is stated to be a “prerequisite 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 be an identity standard that a global citizen would want? These few lines on page 9 are an important signal of what may be coming for Libra.
Whether Libra will be in the good graces of regulators is an open question. Libra makes no mention of the regulatory environment in which it will exist. We do not know whether Libra will provide data to the global Financial Action Task Force.
Facebook may be in more trouble for banning ads for crypto projects. Facebook banned ads for many crypto startup projects — some of them also trying to bank the unbanked — for many months before announcing their own version of a cryptocurrency. There is likely an antitrust battle coming.
We don’t know how retailers will accept Libra, or whether they will have a ready means of trading out of it. The white paper does not mention retail integration. But, because Facebook and some of the known members of the Libra Association are attention merchants or consumer businesses that survive on subscription revenue, it seems likely that such integration 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 future of the project. Public discourse will certainly put Libra under a microscope. Some will apply the foundational ethos of cryptocurrencies, and some will apply the commercial lens, but there will undoubtedly be 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 challenge industry regulatory standards. It took all of a few hours for Democratic Rep. Maxine Waters of California, Chair of the House Financial Services Committee, to call for Facebook to pause Libra developments. While this may concern 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.
Whereas mobile messaging app Kik seems to be challenging the SEC from the outside in, Facebook seems to be making progress from the inside out. Facebook could use this position of political authority for self-serving purposes, but the more likely outcome is an eventual set of laws and guidelines that enhance regulatory clarity for all crypto projects. Scarcely any other entity in crypto could jump-start regulatory change in this fashion.
Facebook’s cryptocurrency may give all cryptocurrencies legitimacy with current non-crypto users. If cryptocurrencies are ever to be widely adopted, the general public will have to get comfortable with both the idea and use of cryptocurrencies. The public’s familiarity with Libra is greater than with any other crypto project to date.
Even with Facebook’s checkered past, the company’s involvement in cryptocurrencies gives credence to such currencies in the eyes of the public. And if the project is riddled with security vulnerabilities or falls prey to user wallet hacks soon after launch, that could swing sentiments the other way, giving skeptics and regulators reason to say that this crypto experiment will never work.
Libra could be a crypto on-ramp instrument. The plan is to have millions of users, if not billions, go through know-your-customer (KYC) and anti-money laundering background checks, and set them up with digital wallets. Then they are eligible to participate in the rest of the digital asset ecosystem as well: tokens, coins, IEOs, ICOs and STOs, representing everything from fine art to trust and hashing power. An ocean of digital investors and network participants is being unleashed.
Libra could spark public interest in the functions and origins of money. The issuance of a sovereign currency from a private party by Libra is sure to strike up conversations about what constitutes 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 U.S. on a wide scale since the nineteenth century, opening the conversation for other cryptocurrencies, like Bitcoin.
Potential Drawbacks of Libra
- Libra still relies on fiat systems
Tokenizing a fiat currency (or a basket of them) still relies on the power of central bankers to dictate monetary policy. Libra’s goals include long-term stability, but fiat-based systems have an average life span of 28 years. Even the most stable fiat, the U.S. dollar, has suffered an 84% devaluation in purchasing power since Nixon ended convertibility to gold in 1971. With Libra being many users’ first interaction with cryptocurrencies, the general public may overlook the groundbreaking creation of decentralized cryptocurrencies and assume fiat-packaged crypto is the norm.
- The specter of local currency destabilization hangs over Libra
Admittedly, Libra would need to gain a lot of traction before this would become a concern. But it’s possible that if Libra offers individuals in a politically and economically unstable country the chance for relatively stable purchasing power, compared to their inflated local currency, the incentive to move away from local currency will be strong. However, this chance may not be open to all, as internet connectivity and access to mobile technology are still a basic prerequisite. But mass moves away from local currencies could have wide-ranging in-country effects, not all of them positive for all citizens.
- Libra has 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 underexplained in the white paper. Gas fees and the incentive for validators to mine blocks were underexplained (mentioned precisely one time in this context). Indeed, the white paper mentions “low transaction fees,” and although these transaction/gas fees presumably 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 compared to rewards in a native asset.
All things considered, 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 them can still benefit from the press, regulatory action and crypto payment rails Libra will catalyze.
The release of the Libra white paper is only the first stage in the experiment. We are sure to see many more Libra memes and manifestos — and, 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 itself makes this a historic event for the industry.
There are many nuances in blockchain tech, crypto and cryptoeconomics. To learn more about Libra, we invite you to read our articles on the basics of Libra or the Libra white paper and details. For a great library of general educational resources, see our Armanino Blockchain Resource Center.
Andries leads the Blockchain practice and brings a passion for growth to his clients. He works with a variety of crypto and blockchain projects and exchanges, helping them navigate accounting, audit, tax and risk best practices as they grow. He also helps non-crypto industry clients transform their business through blockchain technology enablement.
Prior to joining Armanino, Andries was CEO at The Brenner Group, a boutique Silicon Valley financial services firm. Before that, he was a partner at Moore Stephens Belgium. He started his career at PricewaterhouseCoopers. He grew up in Belgium, and lived and worked in New York and Shanghai before moving to California.
Co Authors :
Noah has more than 10 years of audit, legal, IT and regulatory compliance experience. Noah leads the firm’s Privacy practice and helps clients achieve and maintain compliance with international privacy regulations while keeping pace with a changing domestic privacy landscape. In addition, Noah is a leader in Armanino’s established and fast-growing Blockchain practice, having served virtual currency exchanges, broker-dealers, crypto projects for over three years. Noah has expertise in security compliance and third-party assurance attestations, including System and Organization Controls (SOC 1,2,3), cybersecurity (NIST, SANS), and HITRUST assessments for startup, mid-market, and large publicly traded companies.
Noah is a member of the Information Systems Audit and Control Association (ISACA), the American Institute of Certified Public Accountants (AICPA), the AICPA Blockchain Working Group, the California Bar Association and International Association of Privacy Professionals (IAPP). Noah holds certifications for the Linux Foundation’s Hyperledger permissioned blockchain and is a Certified HITRUST CSF Practitioner.