Libra Cryptocurrency and the Circle of Centralisation

August 12, 2019
Writer(s): Vincent Wu

Facebook has become an integral part of daily life for millions of people everywhere– for better or for worse. The social media giant aims to extend their influence and change the way its users handle transactions with the launch of their digital currency: Libra. The currency is expected to debut in the first half of 2020 and aims to address problems faced by the financially illiterate and those excluded from financial services.

What is Libra

Despite the hype of Libra as “Facebook’s cryptocurrency”, it is in fact the brainchild of the Libra Association, a conglomerate of brands such as Spotify, Uber and venture capitalists Ribbit Capital and Thrive Capital, not to mention global payment powerhouses Visa and Mastercard.

In many ways, Libra is similar to other cryptocurrencies in that it is completely digital and built on a native blockchain. However, the blockchain uses a single data structure that records all transactions and states over time, instead of operating as a traditional distributed ledger as other cryptocurrencies do. Moreover, unlike other cryptocurrencies, Libra will be secured to a basket of assets that will, in theory, anchor the value and mitigate fluctuations in price that plague other cryptocurrencies. In order to access the storage and bandwidth, users will have to pay the Libra Association a fixed fee, which Libra says should cover operational expenses in conjunction with assets held in the Libra Reserve. While the interest on reserve funds have been speculated to allow investors to receive dividends and cover operational overhead, others believe that the model is unfeasible and unsustainable in the long term.

Another aspect that separates Libra from its cryptocurrency counterparts is its rejection of central ideological underpinnings of cryptocurrency in that it is highly centralised. Libra envisions a collaborative organisation among the founding members of the association, but this also insinuates a level of exclusiveness and control of the organisation. Being a member of the association affords the right to vote; however, Libra gives voting right power based on the level of investment, not participation. This is not democratic, instead resembling a plutarchy where the wealthiest rule and a global currency is governed by the elite and powerful. If successful, Libra has the potential to become a plutocratic behemoth that serves no interest except its own members. It is no wonder, then, why many government bodies are hesitant to trust the conglomerate and its product.

Regulatory Concerns

Both US and European regulators and legislators have serious concerns about Libra. The lack of regulation and obligations imposed on Libra currently mean that security and privacy are both are a source of apprehension for the Senate Banking Committee, who raised issues such as how Libra plans to prevent money laundering and how consumers’ data and funds will be protected. France’s finance minister, Bruno Le Maire, also has reservations regarding Libra becoming a “sovereign currency” that can issue debt or serve as a reserve currency. The systemic risk posed to the global financial system in undermining the ability of central banks and governments to buy and sell bonds and their state currencies means that the primary means of managing the economy is crippled. The lack of current regulation in the face of a dynamic and changing environment means legislators are highly concerned about the disruptive nature of the cryptocurrency platform. US Federal Reserve Chairman Jerome Powell says that “Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability”. Libra is currently only governed by the Libra Association, a fact that is worrying to those that fear the cryptocurrency would be used for black market transactions and financing of terrorist activities. Others have called for stringent and rigorous regulation given Facebook’s lack of track record in fiscal and monetary policy. Bank of England Gov. Mark Carney has reflected these sentiments, saying “Anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation”. Maxine Waters, chair of the House Financial Services Committee, has similarly called on Facebook to pause the project until the regulatory framework can be established, and legislators can vet Libra.

Libra is a double-edged sword: its introduction is an important step toward mainstream acceptance of cryptocurrency, yet the lack of transparency synonymous with Facebook and the highly centralised nature of Libra is a dangerous tool. Regardless, while it is unlikely to fulfil the goal of a truly decentralised currency, Libra will certainly compete as an innovative and substitutable product that can project crypto into the established sphere of legitimate currency and disrupt traditional forms of currency.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

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Vincent Wu
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