Bengaluru: Facebook Inc. is hoping that the stars will be aligned favourably when it launches its digital currency, christened Libra, in the first half of the next calendar year. The odds, though, are stacked against the world’s largest social networking site, despite it having a massive user base of nearly four billion users globally and over 700 million users in India alone (if one accounts for WhatsApp’s users too).

For one, Libra, when launched, will be just one of the over 1,600 cryptocurrencies globally (with new ones emerging every week)—the largest being Bitcoin, followed by Ripple, Ethereum and Tether that cumulatively account for about 90% of the market capitalization. In India, too, Paytm and PhonePe cumulatively account for a little over 80% share of all digital wallet accounts in the country. Libra, thus, will not have a first mover’s advantage.

Second, Facebook is anything but the poster boy of consumer data privacy protection. Third, Libra will be launched initially as a “permissioned" blockchain unlike the “permissionless" Bitcoin and Ethereum networks [effectively, the difference is whether an ordinary user of the currency needs authorization from a corporate entity to carry out transactions or not (see box)]. Fourth, regulations by central banks in some countries like India have cautioned against cryptocurrency trading and also tax the transactions (sale of Bitcoins is taxed in the country if converted to Indian rupees). The Financial Stability Board (FSB), a policy coordinator for G20 countries, also expressed scepticism about Facebook’s proposal on Tuesday.

Despite the many hurdles on its path, Facebook is pinning its hopes on positioning Libra more as an asset—or US dollar-backed stablecoin, rather than a Bitcoin-like cryptocurrency which has a limited amount of coins in circulation. In its white paper, Facebook states that Libra will be a stable currency built on a secure and stable open-source blockchain (Libra Blockchain), backed by a reserve of real assets—a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks—and governed by an independent body called the Libra Association. Since the new currency will be tied to “real assets" and controlled by a centralized entity, the asset will be more stable and reliable. At least that is the early claim for differentiation with every other crypto asset that has flooded the world in the last few years.

The proposed association currently comprises 28 members, including Mastercard, PayPal, PayU (Naspers’ fintech arm), Visa, Facebook/Calibra, Lyft, Spotify AB, Uber Technologies Inc., Vodafone Group, Coinbase Inc., and the Women’s World Banking. Facebook hopes to have about 100 members in the Libra Association by the time it launches commercially.

Appeal of stablecoins

Facebook chief executive officer (CEO) Mark Zuckerberg has a point. Given their volatile nature, cryptocurrencies like Bitcoins are finding a tough rival in stablecoins since the latter are pegged at a 1:1 ratio with certain fiat currencies such as the dollar or the euro that can be traded on exchanges. Other stablecoins are pegged to other assets such as gold or even to other cryptocurrencies.

Stablecoins have been actively used for the past four years. According to a March 2019 report State of Stablecoins released by Blockchain.com, the total market value of all stablecoins more than doubled in the past 12 months—up from $1.4 billion at the start of 2018 to $3 billion currently. Tether (a stablecoin) is the second-most actively traded cryptocurrency at approximately 75% of Bitcoin daily trading volume in 2019 (up from 57% in 2018).

Further, in a bid to stem the criticism that its users’ privacy and security can be at stake, Facebook has created a regulated subsidiary called Calibra “...to ensure separation between social and financial data and to build and operate services on its behalf ". On its part, Facebook insists that “...aside from limited cases, Calibra will not share account information or financial data with Facebook or any third party without customer consent".

“I think it’s a bold and positive move for financial inclusion globally, and an expected one from Facebook. In some ways, I see this as Facebook versus central banks, as they are the ones being threatened by a globally accessible alternative currency which undermines singular dependency on any single currency," says Oliver Gale, CEO of PayMachine and BaseTwo, a blockchain venture firm. “It’s clear there are also US national interests threatened by Libra, and Facebook will have to defend against these," he adds.

He believes that while permissioned systems “are not as censorship resistant as permissionless systems", they are often “more efficient as a trade-off".

Gale does add though that “the future of currency is still permissionless blockchain technology, which does not suffer from single points of failure and national censorship". “Look far enough ahead and there will be two dominant currency types: digital fiat currency issued by central banks and fully censorship resistant permissionless blockchains, with strong privacy controls," he says.

According to Bill Xing, CEO of Panda Analytics Inc., a blockchain “is nothing more than a database structure and it could be used in many cases. However, an open and permissionless blockchain is the real innovation here (anyone can participate in the network of Bitcoin), while a permissioned and private blockchain can only bring incremental changes inside some organizations (e.g. improving the efficiency of the banking settlement)".

Xing believes Libra “is very different from most cryptos, since the governance structure is very centralized. This project seems to be Facebook’s attempt to find some new business models, e.g. serving the unbanked people in less developed countries and getting more leverage in e-commerce". Xing, though, does not “foresee the fiat system...being replaced by cryptos completely, but people are going to have more options on which currency to use and which one to store their wealth in. In that case, government or central banks can no longer abuse the power of minting money".

Such hopes of a more liberalized currency system governing global economics, which set off the Bitcoin movement, are now seeing a revival with the announcement of Libra. Francis Ang, founder and CEO of Kozjin, believes the launch of Libra “will be massive for the blockchain and cryptocurrency industry". “Their aim is to build a payments network by creating an online ecosystem on which users can buy things and pay each other. Facebook has a relationship with seven million advertisers and 90 million small businesses—we can only imagine how huge the Libra community will be".

These staggering numbers, however, have also given rise to fears that Facebook could misuse the financial data that users share, especially given that its track record in protecting the privacy of user data has not been exemplary.

A recent survey by security firm Kaspersky reveals that a lack of understanding and trust is holding consumers back from using cryptocurrencies. To avoid such a situation, Facebook is promising its users that Calibra customers’ account information and financial data will not be used to improve ad targeting on the Facebook family of products.

However, Ang believes that despite Facebook trying to separate financial data from other “social" data that it uses on its platforms, the firm may “...face regulatory issues due to its recent controversies". Facebook itself has said it expected to be fined up to $5 billion by the Federal Trade Commission for privacy violations.

Possible pitfalls

Some analysts are also sceptical about whether Libra can address the scalability issue of a permissionless blockchain. Mastercard and Visa, for instance, can do about 50,000 transactions per second while even the best of permissionless blockchain networks cannot match those speeds, as yet. And the volume of transactions per second matter because it will determine the speed at which an ordinary person can buy or sell on a network with millions of other users.

“The Libra architecture is a mix of Ethereum (a cryptocurrency with smart contract functionality) and Hyperledger (a blockchain). The Libra project aims to reach 1,000 TPS (transactions per second), whereas some of the existing third-generation blockchain technologies already operate at a much higher (few tens of thousands of TPS) capacity," says Jayanth Kolla, founder and partner, Convergence Catalyst. “Although the Libra project eventually aims to become a permissionless blockchain, there exists no current solutions that could deliver the scalability and support that is needed to bolster such a permissionless network, which means that it will not only begin but also remain as a ‘permissioned’ blockchain for the foreseeable future."

As an example, for the Lightning Network (a payment protocol used by currencies like Bitcoin) to work, not all transactions need to be recorded on a blockchain. Instead, the transactions are taken off the blockchain. But this also makes the network a permissioned one since some centralized, external entity has to maintain a record, thereby freeing the blockchain to focus on fast transactions.

Besides, considering that an entity needs to pay $10 million (apart from various other criteria) to be a part of the Libra Association and own a Validator Node, it will remain within the reach of only a few global organizations, adds Kolla.

He concludes, though, that Libra “is a good attempt to make the masses (who have not yet heard of cryptos or a blockchain) aware of a cryptocurrency and potentially on-board them onto the ecosystem, but it might never be the flag-bearer of the original vision of decentralized blockchains or cryptocurrencies".

In the short-term, according to Kolla, the announcement of Libra has (and, will continue) to increase the price of the existing cryptos and altcoins. Bitcoin has gone up from around $5,000 to over $11,000 in a matter of days. He concludes, “Other altcoins prices and trading volumes have also gone up... this is the beginning of another investment cycle for crypto enthusiasts after a poor 2018 and first half of 2019. Meanwhile, Libra, in its current avatar may start off to be nothing but a ‘Low yield Government Bond on a Blockchain’."

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In India, there’s a blockchain boom

In 3 August 2018, the Telangana State Information Technology, Electronics and Communication Department signed an agreement with information technology (IT) services provider Tech Mahindra to launch India’s first blockchain district in Telangana.

A blockchain network can either be public (permissionless) or private (permissioned), based on who is authorized to participate. One may liken it to the difference between an intranet and the internet.

In India, though, most pilots are being done with private blockchains. For instance, two years ago, the Mahindra Group and IBM announced the development of a cloud-based permissioned blockchain solution in a bid to reinvent supply chain finance across India by enhancing security, transparency and operational processes.

Similarly, banks in India formed the “BankChain"—an alliance of banks formed in February 2017 to explore and build blockchain-based solutions. The BankChain community has 37 members with representations from 28 Indian banks, including SBI, ICICI Bank, HDFC Bank and Yes Bank.

And early this year, 11 banks including ICICI Bank, HDFC Bank, Axis and Yes Bank decided to come together and launch India’s first blockchain-linked funding initiative for small and medium enterprises.

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