Facebook’s Libra – in 30 seconds

What is Libra?

Libra is a new financial infrastructure currently in development. The project was initiated  by Facebook and is run by an association of large for-profit and non-profit organizations (the Libra Association).

What is Libra made up of?

This new financial infrastructure consists of:

  • Libra coins – these are digital coins that are either backed by a single currency (such as Libra USD, Libra GBP or Libra EUR) or by a basket of currencies (the coin for this is just called Libra Coin).
  • A shared database – a distributed ledger (blockchain) that a specific group of organizations have permission to use.
  • A reserve – cash (and some other assets) that back the value of the coins.
  • Members with different permissions – a set of members that have different permissions – for example some have the ability to create transaction (in the blockchain), some have the ability to vote on changes to the system, some have permission to interact with end customers, etc..

What is the history of Libra?

Facebook started working on cryptocurrency in 2017.

In 2019 there were reportedly over 50 engineers at Facebook working on this project.

Libra was announced in June 2019.

After announcement, regulators around the world had concerns about Libra (based on the details provided in the white paper explaining Libra).

A number of firms announced that they were no longer involved with the project after regulators started voicing concerns – these included MasterCard, Visa, PayPal, Vodafone and eBay.

The Libra Association made changes based on regulators’ feedback, and issued a new white paper (White Paper v2.0) in April 2020.

Who is in the Libra Association?

The Libra Association comprises a number of large for-profit and non-for-profit organizations – including: a Facebook subsidiary (Novi Financial), Spotify, Uber, Lyft, Coinbase, Andreessen Horowitz, Temasek Holdings and Kiva. More organizations are still being added.

The Libra Association is established in Geneva, Switzerland. The Libra Association’s subsidiary responsible for operating the Libra system is called Libra Networks. Libra Networks is applying for a payment system license from Switzerland’s Financial Market Supervisory Authority (FINMA).

What were regulators worried about?

Government officials in the US, Europe and elsewhere voiced concerns about a number of issues, including – losing monetary sovereignty, reducing the effectiveness of monetary policy, the risks of using Libra for illegal activities (such as money laundering or financing terrorism), risks around the undesired collection and use of individuals’ data (related to their purchases, wealth, etc.), risks of consumers losing their money, and knock-on risks to the overall financial system if there were a failure in the Libra system.

What cryptocurrencies are expected to be part of Libra?

Initially, Libra is expected to have:

  • Coins that are effectively pegged to existing currencies (“single-currency stablecoins”) – including Libra USD, Libra GBP, Libra EUR and Libra SGD.
  • A composite coin that is effectively pegged to a basket of currencies – called Libra Coin. In 2019, this basket was announced as being 50% USD, 18% EUR, 14% JPY, 11% GBP and 7% SGD – though this basket is likely to change before launch.

The Libra stablecoins are planned be backed by reserves in those currencies (and so are redeemable for that currency).

The composite Libra Coin, is intended to be backed by a basket of Libra stablecoins.

The system is designed to keep the value of each Libra coin highly stable (relative to its respective fiat currency or basket of fiat currencies) – as if there was a deviation, this is engineered to create an arbitrage opportunity.

What are the potential benefits of Libra?

If it can be successfully launched, Libra has the potential to have a large positive impact on the global economy – possibly acting as an upgrade on a part of  the operating system of the world economy.

Libra has the potential to be a more efficient form of financial infrastructure – using newer (blockchain) technology to create a much cheaper, more open way of making payments. This could materially reduce costs for customers and foster innovation that grows the economy.

This might reduce the costs of making payments within a single country, as well as between countries (and currencies). It could help customers reduce their currency exchange and transfer costs – in part by implementing a system that reduces the need for (and cost of) intermediaries.

The Libra Association also asserts that Libra could significantly improve financial inclusion – bringing many of the 1.7 billion adults that are currently outside of the financial system into the financial system. This could provide a significant contribution to global development and the reduction of extreme poverty.

Version 2 of the Libra white paper is available here.