The Crypto Conundrum – Governments Question Facebook Backed Libra Coin

Jun 19, 2019
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Facebook, Visa, Mastercard, Uber, Lyft, among other finance and tech companies partner for Libra Coin in Libra Association to promote global currency.

Libra Coin Idea

Libra coin is being created to try to expand payments globally and lower transaction costs while maintaining security. The underlying feature of the coin is that it’s backed by international deposits from “high quality” central banks to create diversification and inflation control. The Libra Association released its white paper on how the cryptocurrency would function, highlighting better security and performance while maintaining easy to access networks.

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The Underlying Technology

The underlying technology at the heart of Libra Coin is the Libra Core; this is an open source platform written in Rust to perform the read and write requests in the blockchain. When it comes to performance, the network will have “validators” that will need to be certified to help run the network. The performance will begin at 1000 payment transactions per second, with a 10 second finality time which would help smooth over demand. Each transaction including overhead is 5KB with 1000 transactions being done per second Libra estimates a requirement of 40Mbps and a “commodity” CPU would be able to handle the workload.

The Merkle Tree method they are using to run the blockchain claims to be far more efficient than competing blockchains as they can be “pruned” to only carry essential data in the blockchain as long as information is stored in replicas on different servers from the main processing for queries, this keeps the ledger state of the blockchain small. This, in combination with the Move programming language, attempt to keep performance high while using fewer resources.

 

Below is a brief description of a transaction provided from the white paper:

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Validators maintain the database and process transactions submitted by clients for inclusion in the database (1). The validators use a distributed consensus protocol to agree on an ever-growing list of transactions that have been committed to the database as well as the results of executing those transactions. This consensus protocol must be reliable even in the presence of malicious or erroneous behavior by a minority of validators. Validators take turns driving the process of accepting transactions. When a validator acts as a leader, it proposes transactions, both those directly submitted to it by clients and those indirectly submitted through other validators, to the other validators (2). All validators execute the transactions (3) and form an authenticated data structure that contains the new ledger history. The validators vote on the authenticator for this data structure as part of the consensus protocol (4). As part of committing a transaction Ti at version i, the consensus protocol outputs a signature on the full state of the database at version i— including its entire history — to authenticate responses to queries from clients (5).

Figure 1 shows the two types of entities that interact using the Libra protocol: (1) validators, which maintain the database and (2) clients, which perform queries on the database and submit transactions to modify it.

 

 

What Separates Libra Coin

From outside investors and regulators what makes Libra Coin different from other cryptocurrencies are the central deposits backing the currency. These deposits are assets from different countries who have experienced inflation stability. The stable currencies/assets backing the coin and the diversification globally, are what the founding consortium hopes will keep the value of Libra relatively stable (at least as far as cryptos are concerned). The consistency of the coin makes it more viable for payments as it would be less susceptible to the speculation, which has created extreme volatility with other cryptocurrencies.

The second point that separates Libra Coin from others is the association backing the coin with founding members including Visa (NYSE:V), Mastercard (NYSE:MA), PayPal (NASDAQ:PYPL), eBay (NASDAQ:EBAY), Facebook’s calibra (NASDAQ:FB), Lyft (NASDAQ:LYFT), Spotify (NYSE:SPOT), and Uber (NYSE:UBER). Having payment processors support the currency is vital to getting global adoption, and having tech companies such as eBay, Uber and Lyft using the currency would increase in use the digital marketplace.

There have been previous attempts at an asset back crypto coins termed Stablecoins, with Tether coming to mind. The firm promised a U.S. dollar backed each coin on a one to one basis. However, they lacked transparency, were hacked, and now have been accused of hiding losses while the coin is still trading on the market. Libra Coin appears to have a much larger backing with many tech companies willing to join the association.

Global Outlook

Having different global currencies in reserve would essentially peg the currency to multiple different currencies, this would provide less flexibility for the coin to adjust to global demand around it. With a decentralized approach, the movement of the currency would be based almost entirely on outside forces, this would eliminate the ability to provide their guidance on value, for an interesting look at foreign currencies pegged to others’ see the “Impossible Trinity”. There is also the issue of developing countries without their currencies pegged to others that may experience inflation and merchants not updating their exchange rates fast enough, giving the consumer less buying power.

Libra Coin hasn’t established a size yet or what criteria there is for using a currency in their central holdings. If the coin does gain value over time AND becomes widely accepted, it’s possible it may one day have an impact on other currencies as well that it derives its value from although this would likely be a long way off and at present it’s unclear what the underlying basket of instruments/currencies are which will “back” Libra and whether the value will be derived/range pegged somehow or floated although pegging a currency usually only is possible for central banks as it takes huge currency reserves to maintain a set ratio at the currency level. Take for instance Black Wednesday in 1992 where the British Pound Sterling fell outside the range set by the ERM and was forced to withdraw. George Soros had been shorting the currency and flooded the market leading to the ejection from ERM, while solidifying himself as an FX trader and as “the man who broke the Bank of England”.

It’s assumed the “High Quality” assets will include the United States Dollar and Euro given the nature of the currencies and amount of countries already pegged to them, potentially with some of their government bonds. It would also be possible to add the Japanese Yen, Swiss Franc or Sterling to the list for increased diversity. It would be hard to imagine the inclusion of the Chinese Yuan Renminbi given the current state of U.S.-China relations and the backing of the coin being from U.S. based companies.

Mark Carney, the governor of the Bank of England, spoke to the press saying if the currency is successful in signing up many users, it would be “inevitable” to have regulations around the coin. France’s finance minister Bruno Le Maire also echoed similar sentiments when asked about the currency.

As of writing the U.S Senate has also called representatives from Facebook to testify about the project asking to put the project on hold until it can be reviewed.

From early information on the currency, it seems that Libra Association is doing what they can to make the currency used for payments instead of investors speculating on the coin in unregulated markets. The implementation timeframe was not given, but only then will we find out if adoption and stability can be achieved. This story is just developing, in the comign weeks will be updated as information comes out.

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