What is Facebook’s Libra Cryptocurrency and Blockchain?

25 Jun 2019

The official whitepaper for Facebook’s highly anticipated cryptocurrency project, referred to as Libra, has now been published. In addition to the detailed whitepaper, the Libra project developers have launched a website which explains how the different components of the blockchain-based cryptocurrency will work together. The main objective of Facebook’s Libra coin is to allow people located anywhere to access cheaper and more efficient financial services.

Libra: Global Currency with Supporting Financial Infrastructure

According to the newly launched website dedicated to providing updated information regarding the Libra project, Facebook’s cryptocurrency aims to be “a simple global currency and financial infrastructure” that will “empower billions of people.”

As noted on the project’s official website, the developers of the Libra project are planning to “reinvent money” in order to transform the global economy. One of the main goals of Facebook’s crypto-related initiative is to help people throughout the world “live better lives.” 

Nearly One-Third of the Global Population Is Unbanked

Some of the main problems with the existing financial system include 1.7 billion people worldwide, or 31% of the global population, not having access to modern banking services. 

For those that are able to open a bank account, making cross-border payments is a slow and inefficient process - as it normally takes around three business days to finalize international transfers.

Moreover, banks usually charge relatively high transaction fees which makes their services impractical to use for many small and medium-sized organizations (SME) and businesses. In order to address these issues in the current financial system, the founders of the Libra project plan to make “moving money around” as simple and cost-effective as sending text messages.

Notably, Facebook’s cryptocurrency will be accessible to users regardless of where they live and the type of work they do. To enable greater financial inclusion, the Libra project developers also aim to allow people from all income brackets to access Facebook’s crypto-based medium-of-exchange (MoE)

“Mobile, Stable, and Fast”

As mentioned on the Libra project website, the global currency will be “accessible to anyone with an entry-level smartphone” and a basic internet connection. The Libra currency is also “backed by a reserve” in order to “keep its value stable”, the project’s developers noted.

Reserves backing the Libra cryptocurrency will include a set of “low-volatility” assets such as bank deposits and traditional financial securities. Assets backing the Libra coins in circulation will consist of major fiat currencies like USD, Euro, GBP, and JPY. As noted in the project’s documentation, Libra is “not pegged to a single currency and does not have a fixed value in any real-world currency.”

Transactions involving Libra will be fast and simple to make, regardless of where the funds are to be transferred. This, the cryptocurrency project’s founders claim will allow users to easily and affordably spend their money.

“Scalable, Secure, and Globally Accessible”

The Libra cryptocurrency will be accessible to users throughout the world and its financial infrastructure will be designed to “foster an ecosystem of products and services” - which make it easier for people to conduct day-to-day transactions.

In order to provide a safe and secure environment for users to transact, the Libra cryptocurrency will be developed on distributed ledger technology (DLT). Additionally, Facebook’s cryptographic currency aims to address what its developers consider some of the inherent problems associated with major decentralized digital assets - including Bitcoin and Ether (ETH), the native token of the Ethereum blockchain network.

Value of Libra Today Will Be “Close to its Value Tomorrow”

The Libra project website states that the cryptocurrency will be created in a manner that will allow users “to know” that the value of a Libra coin today will be “close to its value tomorrow” and in the foreseeable future.

As explained by the Libra project development team, Facebook’s cryptocurrency is backed by a reserve, which is “the key mechanism for achieving value preservation.” The crypto’s founders further noted that by “fully backing each coin” with “stable and liquid assets”, users should always have the option of selling their Libra coins “at or close to the value of the reserve.”

Libra Coin Will Have “Intrinsic Value”

The stability of Facebook’s cryptocurrency will reportedly be supported by a “competitive group” of digital asset exchanges and several other liquidity providers. According to Libra’s developers, this type of ecosystem will give the cryptocurrency “intrinsic value” and it should also ensure protection against extreme price fluctuations experienced by most existing cryptoassets. 

The funds held in reserve will come from various investors in “the separate Investment Token” and everyday Libra users. An association will be formed in order to “pay out incentives” in Libra coin to founding members, the project’s website states. 

To cover the operating costs involved with maintaining the Libra network, a security token will be launched after obtaining regulatory approval. The Libra Investment Tokens will also form part of the cryptocurrency project’s reserves. Only accredited investors will be able to acquire the investment tokens, which may potentially allow holders to earn profits generated from interest payments

Libra Blockchain to be Implemented As “Programmable Database”

This type of incentivization model will be used to promote adoption of the new global currency by a diverse group of consumers - which will mainly include software developers, merchants, and the typical users. According to the project’s management, the funds for the Libra coins that will be paid out as incentives are to be drawn from “a private placement to investors.”

To support a large number of platform users, the Libra blockchain will be implemented as a “programmable database” - which will primarily be used to facilitate transactions involving a “low-volatility” cryptocurrency. Notably, Facebook’s decentralized, DLT-enabled platform will have “the ability to serve as an efficient” MoE for billions of users throughout the world, Libra’s whitepaper notes. 

The Libra Protocol

The Libra protocol will consist of an implementation of the Libra blockchain network. The distributed platform will aim to “create a financial infrastructure” that encourages innovation by lowering entry barriers - while also improving access to basic financial services. 

According to the Libra protocol’s official documentation, the decentralized DLT-powered crypto network will be launched after its open-source prototype, Libra Core, has been thoroughly tested. Libra’s design team is reportedly anticipating “a global collaborative effort”, which will be aimed at advancing Facebook’s evolving cryptocurrency ecosystem.

The Libra Association: An Independent, Swiss Non-Profit Entity

An independent, Switzerland-based non-profit organization, called the Libra Association, has been established in order to “empower billions” of expected new users of Facebook’s cryptocurrency. As explained by the Libra development team, the Association’s members will include a group of (transaction) validator nodes. 

When the Libra coin is first introduced, the validators will mainly be large multinational companies, major academic institutions, and several “social impact partners” (SIPs). This initial group of Libra network validators will be considered the project’s founding members. It’s expected that the association will eventually grow to include “any entity” that can run a validator node while also maintaining a “sufficient stake” in Libra.

$10 Million Minimum Investment Required to Become Validator Node

Libra network’s validator nodes will be required to invest a minimum of $10 million in Libra Investment Tokens, which will be issued by the cryptocurrency’s Association. To maintain and manage a full-node on the Libra blockchain, operators can expect to incur annual costs of around $280,000. 

Not-for-profit organizations or those focusing on providing public services such as NGOs, social impact partners (SIPs), academic institutions, and multilateral organizations will not have to make an investment to join the Association. However, all validator nodes will have to cover the operating costs of maintaining a full-node

Promoting Greater Financial Inclusion

According to Libra’s developers, the Association's main role will be to “coordinate among the validator nodes the efforts” required to implement and maintain a secure and distributed cryptocurrency network - which will promote greater financial inclusion. 

As mentioned in Libra’s extensive documentation, the two primary areas of “coordination and governance” include a technical aspect - which will “drive toward alignment among validator nodes” and the cryptocurrency’s open-source development community. The second aspect to complement Libra coin’s ongoing implementation efforts involves proper financial management. This will include maintaining adequate reserves and properly allocating funds to various initiatives aimed at enabling broader financial inclusion.

Charter Members of Libra Association: Visa, Mastercard, PayPal 

Reacting to the seemingly positive news of the upcoming launch of Facebook’s new cryptocurrency (expected in 2020), the stocks of giant payment processor Visa recently outperformed a broader index of financial services company stocks.

Notably, Visa, Mastercard, and PayPal are charter members of the Libra Association. These founding members will reportedly be allowed to have an inside look at how Facebook’s developers are creating what may become one of the world’s largest digital payment networks - as it could potentially onboard the social media giant’s two billion active monthly users. 

No Association Member May Control More than 1% of Libra Blockchain

Other well-known organizations that have joined the Geneva, Switzerland-based Libra Association include Uber and Silicon Valley-based venture capital firm Andreessen Horowitz (a16z). In order to establish and maintain a decentralized network, no Association member will be allowed to control more than 1% of the Libra blockchain.

Unlike the Bitcoin network, the Libra platform will be launched as a permissioned blockchain and only founding members will be able to access the cryptocurrency network (at first). However, the long-term development plans for Libra will involve a transition to a permissionless network in which “no single party will be able to unilaterally change the rules of the network.”

Libra Blockchain Will Transition to Permissionless Network

According to the Association members, the Libra blockchain must eventually become permissionless in order for it to be considered a “true public service.” As noted in its whitepaper

the Libra blockchain is currently based on (and will be managed by) a variation of the Byzantine Fault Tolerant (BFT) consensus algorithm. The Libra platform has been developed on VMware’s HotStuff framework.

Transactions conducted on the Libra blockchain will be pseudo-anonymous. This means that for all Libra-based transactions, the amount transferred, timestamp (when the transaction took place), and the public crypto address will be viewable to all network participants. However, the Association clarified that it will not keep records of user data.

Cryptocurrency transfers on the Libra network that involve custodial wallets can be finalized off-chain and will most likely require that users submit know-your-customer (KYC) / anti-money laundering (AML) documents.

FinCEN-registered Subsidiary, Calibra to Handle User Data in Compliant Manner

To “separate between social and financial data and to build and operate services on its behalf on top of the Libra network”, Facebook’s management has established an entity called Calibra. As a Financial Crimes Enforcement Network (FinCEN)-registered subsidiary of Facebook, Calibra’s main purpose will be to ensure regulatory compliance when handling user data. According to records on file, Calibra has been registered with FinCEN as a money services business (MSB). 

Assigned in February 2019, Calibra’s registration number is 31000141265767. Under this type of MSB license, Calibra may legally operate in all 50 U.S. states. The FinCEN registration will also permit the commercial entity to provide services in nine commonwealths and territories. 

Calibra Wallet Will Be Accessible from WhatsApp, Facebook Messenger

Regulatory clearance for Calibra was required because it’s meant to serve as a wallet that will hold monetary value in the form of Libra coins. It will reportedly be available as a standalone mobile app, which means users will not be required to maintain a Facebook account to use Libra.

The Calibra wallet will also be accessible from WhatsApp and Facebook’s Messenger app.

Through the user interface of both these apps, users will be able to send and receive Libra coins. In a manner that is similar to other online wallets, users will have the option to top up (which means converting local fiat currencies into Libra coins); and withdraw local currency (which involves conversion from your the Libra cryptocurrency to fiat money).

Global Regulatory Compliance and Testnet/Mainnet Launch

Application developers that use the Libra blockchain network will be required to comply with the appropriate regulatory guidelines, which will vary depending on the jurisdiction in which the development work is being conducted. However, the Libra blockchain network itself will reportedly not follow any specific regulatory policies.

As explained, the Libra blockchain network’s mainnet is scheduled for launch in 2020, and the platform’s testnet will be introduced in the coming weeks, according to the Association.

U.S. Lawmakers Request Facebook’s Management to Put Crypto Project on Hold

On June 19, 2019, American lawmakers requested that Facebook put its cryptocurrency development plans on hold. U.S. Congresswoman Maxine Waters, the chair of the House Financial Services Committee, argued that Facebook is “continuing its unchecked expansion and extending its reach into the lives of its users.”

Waters also mentioned that due to the social media giant's “troubled past”, she has “requested that Facebook agrees to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action.”

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