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UPDATE: On October 12, 2019, just a day after I posted this, Visa, Mastercard, Stripe, and other companies have also pulled out of the Libra Association. This is huge! Their reasons for doing so have more to do with threatened regulatory scrutiny. It makes what I've written about below a little more interesting!

The recent news about PayPal pulling out of the Libra Association as well as the association’s head of product leaving has re-piqued my interest in the Libra coin. I’ve wanted for a while now to write about Facebook’s Libra, but I didn’t know if I would be able to write anything about it that hadn’t already been mentioned elsewhere. Then, this past week, while listening to an interview with Brad Garlinghouse, something clicked.

I’ve always been at a loss for why Facebook would create Libra. It seemed like a very strange move for a company that seemed to prefer buying out other companies and properties rather than create everything themselves. And so, in this blog, I want to look at some of the problems inherent in blockchain cryptocurrencies, analyze whether Facebook’s Libra can solve them, and see what else we can come up with in the end.

What is Libra?

On the surface, Facebook proposed Libra digital currency isn’t a competitor to mainstream cryptocurrencies like Bitcoin and XRP. The Libra coin, while not stated as such in its white paper, is a centralized stablecoin, meant to be “backed by a reserve of assets designed to give it intrinsic value”. The assets mentioned thus far to back the Libra coin are the US Dollar, the Euro, Yen, British Pound, and the Singapore dollar, with most of it being backed by the US Dollar.

I think it’s important to keep in mind how successful Facebook has been in the past with most of their projects and acquisitions. Mark Zuckerberg, co-founder, chairman, and CEO of Facebook, is known to see himself as a sort of pupil of the late Steve Jobs. In the same way that Apple makes their products appealing to consumers through design and aesthetics, rather than the best and most recent tech, Facebook has also monetized and created near monopolies with easy-to-use and efficient UI and UX for their software. In other words, it doesn’t really matter that the Libra isn’t a decentralized cryptocurrency. If they can sell it to their massive audience as something akin to new blockchain tech, then they may very well succeed and replace Bitcoin and various other crypto’s.

How does it compete?

In order to see how the Libra is meant to compete with more popular cryptos, let’s look at what Bitcoin was originally designed for.

In its infamous 2009 debut, a person of group of people under the pseudonym Satoshi Nakamoto detailed out the creation of a digital coin which was meant to be a “purely peer-to-peer version of electronic cash [which] would allow online payments to be sent directly from one party to another without going through a financial institution.” Thus, Bitcoin and the idea of cryptocurrency, was born.

Since then, numerous coins have come and gone, looking to augment and improve upon that idea. Those who championed Bitcoin took the idea and saw it as a way to transact without needing to deal with a broken financial system that was still reeling from the 2008 global economic meltdown. To be able to transact value across the world independent of authorities was a cause to celebrate. With this achievement, however, there came a couple problems.

First, since these transactions didn’t depend on governmental authorities, they didn't guarantee stable value. A single Bitcoin was valued collectively and democratically (that is, until the whales came in). While, at first, this was a problem since there were very few people transacting in Bitcoin, as it grew in popularity, its value also rose. However, this rise in value didn’t create stability, but a wild west of sorts where price speculation and even manipulation now determines its value against fiat currencies.

The second problem was technological. It’s great that, theoretically, anyone can have access to Bitcoin. However, practically, this meant you needed a to build out infrastructure and tech, and then market this new technology, so that more and more people can use it. Given the slow adoption of any cryptocurrency globally thus far, this decade-long experiment hasn’t yet been able to show its true value in the world at large.

Facebook’s Libra seems to be trying to address both problems. The second problem is solved by default simply due to the incomprehensibly vast user-base Facebook already has, now greater than any single nation. Given the incredibly fast rise of both Instagram and WhatsApp in the number of total users, it’s an easy bet that, should the Libra take off, it would reach a larger number of people far quicker than any other crypto could ever hope to presently.

The first problem, as mentioned before, the Libra means to address by having the large number of fiat currencies as collateral, backing the direct trade-in value of the coin. But does it actually solve anything?

Is Libra’s Asset Backing Any Good?

The reserve of assets backing Libra, conceptually, seems to give the asset more stability, though personally, I’m not as sure. Coins like USDC and USDT are more stable because they’re only backed by a single currency. Having multiple assets backing a single coin may produce more harm than good. For example, the Euro currently exchanges with the US dollar 1.1:1. This means that every 1 Euro gets me $1.10 in USD. However, this rate is not always stable. In fact, just a few years ago in 2014, the Euro traded with the US Dollar at around 1.33:1. These kinds of devaluations happen all the time.

How would Libra account for the changes in exchange rates? Would it source these rates from exchanges around the world? Will it do its own internal rating? Either way, it could have a great, and possibly negative, effect on how fiat is valued, as people hedge currencies against the Libra coin and take advantage of increasingly quick changes in exchange rates.

For example, let’s say that, one can initially purchase 1x Libra for 1x USD, and purchase 1x Libra for 0.9x Euro. This reflects the standard market today. However, if someone decides to sell his or her Libra for 0.8x Euro on a global exchange (perhaps in a short bet against the Euro), they can do so as well. The buyer of that Libra can then go onto an exchange with Libra and purchase 0.9x Euro, thus making a slight profit.

If Libra sources its rates from the global exchange, then, depending on how much Euro was sold, it will eventually make it onto the crypto market. Thus, the buyer would now be able to make a further profit by purchasing 1.1x Libra for that 0.9x Euro.

When traders see that the Euro has now gone down in value against the Libra, more people will short it, and thus more devaluation of the Euro could happen. If Libra has its own internal rates, then third-party organizations would probably create their own analysis of Libra rates versus other market rates, and so the quickening devaluation would happen anyways. These kinds of things happen all the time in the foreign exchange markets, but I believe Libra would actually quicken the rate of change for all fiat currencies, due to it being a blockchain-based digital coin.

It’s easy to see how a scenario like this could quickly and heavily depreciate currencies around the world. The predictable 'side effect' would be the destabilization of local economies around the world. And as local economies capitulate, those governments would devolve into chaos. This, presumably, is why many nations and governments have expressed concern over Facebook’s project, in addition to the data and privacy scandals the company has become embroiled in recently.

Is There Another Solution?

Of course, Facebook isn’t the only company that is working on blockchain and cryptocurrency projects, just the most popular (in the public’s eye). The other elephant in the room, for the most part, is Ripple and XRP. Since 2012, when it was founded, Ripple has been working “to enable financial institutions to send money across borders”. In this endeavor, they took the cryptocurrency XRP, which was given to the company at its inception, and began to build software with and around it for banks, exchange markets, and financial institutions around the world to use.

Let’s talk XRP for a bit. Built as a Bitcoin 2.0, XRP is decentralized and open source, so its value is democratically dependent. It runs on the XRP Ledger, which can be used to trade and exchange other currencies. In other words, you can use the XRP ledger to send Bitcoin, Ethereum, and any other cryptocurrency, including (I would imagine) the Libra. The exchange is also extremely fast, settling in around 4 seconds. In fact, there was a report that the XRP Ledger is the fastest way to transfer Bitcoin. It has the potential to run more than 50,000 transactions per second.

Furthermore, Ripple has already started working with hundreds of banks and financial institutions around the world. These institutions are beginning to realize the blockchain revolution happening, and are adapting Ripple’s technology in order to compete. In other words, XRP is already on the way to becoming mainstream in the financial world. With Libra, there can really be only one “winner”, even though it was meant to be a stabilizer. However, with XRP and the XRP Ledger, many can rise, which is the heart of decentralization.

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