What is Libra?It’s an excellent book by Don DeLillo, the American master. Published in 1988, it is a fictional account of the life of Lee Harvey Oswald, President John F. Kennedy’s eventual assassin. It’s better than White Noise but not as good as Underworld.
Liz.Fine. It’s Facebook’s new cryptocurrency. The point is that you can send money all over the world with lower fees than if you were to engage, say, Western Union.
It’s shady as hell, though. You remember Tyler and Cameron Winklevoss? The twins from whom Mark Zuckerberg ripped the initial idea for Facebook? Yeah, so they have a cryptocurrency exchange called Gemini. As any astrology buff will tell you, both Libra and Gemini are air signs, and Geminis are stereotypically scarier than Libras. Gemini is the sign of twins and is associated with two-faced-ness. Plus, it’s a mutable air sign, which makes it somewhat unstable. Libra, as a cardinal sign, is somewhat more stable. Libra sees both sides; Gemini tries to be both sides.
On the other hand, astrology is made up. On some theoretical third hand: so is money!
What I’m trying to say here is that Zuckerberg seems to love crushing the dreams of these handsome men, so who can say how this will turn out? Anyway, the name seems kind of bitchy.
Is Libra a cryptocurrency?This is kind of a contentious question. Relative to the US dollar, the euro, or the yen, it’s decidedly a cryptocurrency because there’s no central bank. There’s also a public ledger, although only some people are allowed to mine the coin. So I chatted with some experts to find out whether Libra is a cryptocurrency.
“It’s fair enough to say this uses cryptocurrency technology,” says Matthew Green, an associate professor of computer science at Johns Hopkins University. (Facebook contacted Green “a few weeks ago” and asked him if he’d look at its white paper as an outside reviewer. This was unpaid work Green would have had to sign a nondisclosure agreement to perform. He declined.) “It’s more restricted in the way the blockchain works, but even that’s not totally unprecedented.”
Compared to the OG cryptocurrency, bitcoin, well… it looks less like a cryptocurrency. For instance: bitcoin is a permissionless system. You participate through proof of work by competing to solve a puzzle that lets you add a block to its chain. What that means, essentially, is that anyone can participate. This is one of the most significant ideas behind Satoshi Nakamoto’s 2008 paper: bitcoin requires consensus, not trust.
Libra, by contrast, is permissioned, meaning only a few trusted entities can keep track of the ledger. That makes it more like a digital currency rather than a cryptocurrency, says Lana Swartz, an assistant professor of media studies at the University of Virginia who’s studied the bitcoin community extensively. “I actually agree with the folks who’ve been saying that this actually isn’t really a cryptocurrency at all,” Swartz says.
On the other hand, Libra is assigned to pseudonymous “wallets,” and transfers are done through public key operations, says Nicholas Weaver, a researcher at the International Computer Science Institute and a lecturer in the computer science department at the University of California, Berkeley. “So yes,” he told me, “it is a cryptocurrency.” Weaver also notes that the permissioned model means less computing power is needed. Bitcoin wastes a lot of energy, preventing so-called Sybil attacks in which an attacker fills the network with computers the attacker controls and wreaks havoc.
The only conclusion I have come to is that there is no stable definition of “cryptocurrency,” so I am going to just call Libra a cryptocurrency for the sake of ease and keep it moving. If you’d like to put an asterisk on that, I can’t blame you.
Why is decentralized currency exciting to some people?Well, theoretically, removing the central bank from the equation democratizes currency. In practice, that’s not exactly how it works out. Bloomberg’s Matt Levine has explained this very succinctly, so I’m just going to paraphrase him. It’s true that the internet is, in some ways, decentralized since it’s not controlled by the government or a specific corporation. But the result is that certain massive tech companies run most of the infrastructure: internet search is Google, email is Gmail, cloud computing that powers most websites is Amazon. “The democratizing effect of the internet’s openness and decentralization is counteracted by its vast economies of scale and network effects, which tend to concentrate power in a few big winners,” Levine writes.
And Facebook wants to be cryptocurrency’s big winner.
I’ve heard Libra is a “stablecoin.” What is that, and how does it figure into this?Libra is a stablecoin — kind of! Unfortunately, much like “cryptocurrency,” this is something of a semantic gray area.
Basically, any cryptocurrency pegged to either a fiat currency (say, the US dollar) or some kind of government-backed security (like a bond) counts as a stablecoin. The idea is that there’s more stability — hence the name — and less volatility than in something like bitcoin, which isn’t pegged to anything. Bitcoin is exactly as valuable as people believe bitcoin is, which makes it very, very volatile.
Unlike most stablecoins, though, Libra isn’t pegged to one specific currency. Libra is pegged to a group of “of low-volatility assets, including bank deposits and government securities” in multiple currencies. While there is a Libra Reserve, Libra doesn’t seem like it’s necessarily pegged to its value. Rather, the reserve functions as a kind of lower bound on Libra’s value.
That means that there’s just one Libra, no matter where you live. Levine is great here, too, so I am going to paraphrase him again: if Libra does catch on, it’s likely to displace currencies like the dollar. That’s because if you spend mostly Libra, perhaps because you buy most things online, you’ll only convert your Libras into dollars for when you need to spend IRL money, and the dollar will begin to seem annoying to you since it keeps moving up and down relative to the Libra. “The goal is for Libra to be more useful than any national currency, accepted in more places and with fewer complications; pegging it to a single national currency would only hold it back,” Levine writes.
What else do I need to know about the reserve?Again, if you think about the classic cryptocurrency, bitcoin, its monetary policy is pretty sparse: there’s a finite number of bitcoins that can ever exist, and the number of bitcoins that are released by mining decreases over time. That is bitcoin’s entire monetary policy. That’s it!
By contrast, the governing members of Libra will be setting some kind of policy by picking the basket of investments used for the reserve. (They have said: “The association does not set monetary policy. It mints and burns coins only in response to demand from authorized resellers.” But Tyler Cowen helpfully points out that there’s some debate about what monetary policy is.)
The reserve will come initially from Facebook and its partners, but later, if you buy Libra (Libras? This also seems semantically unclear to me) for cash, your cash will be part of the reserve. That reserve is then “invested in low-risk assets that will yield interest over time.”
There’s a different hitch here, though. Under normal circumstances, like with a bank deposit, you’d get to keep the interest. But with Libra, that’s not the case. Don’t take my word for it, this is from Libra itself:
The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc. Once that is covered, part of the remaining returns will go to pay dividends to early investors in the Libra Investment Token for their initial contributions.
So any interest from Libra will go primarily to Libra and then to early Libra investors like… Facebook. Isn’t that fun! It’s also how Venmo and PayPal make money: any cash that’s held in those systems is cash they get to keep the interest on, per their user agreements.
Don’t cryptocurrencies typically run on a blockchain? Does Libra?Let’s start by... uh… defining blockchain. Just kidding, you can’t.
If you look through the white papers, you’ll notice this, like, capitalization thing. Libra Blockchain, in these papers, always takes a capital. And while I love capitalizing things for no reason, my editors consistently remind me that it makes my copy harder to read, and the joke is usually only funny to me. Now it’s possible the itty-bitty blockchain committee shares my amazingly sophisticated sense of humor, but what seems more likely is that some sleight of hand is going on. For instance, check out this paragraph from the white paper:
In order to securely store transactions, data on the Libra Blockchain is protected by Merkle trees, a data structure used by other blockchains that enables the detection of any changes to existing data. Unlike previous blockchains, which view the blockchain as a collection of blocks of transactions, the Libra Blockchain is a single data structure that records the history of transactions and states over time. This implementation simplifies the work of applications accessing the blockchain, allowing them to read any data from any point in time and verify the integrity of that data using a unified framework.
Libra Blockchain takes capital letters, but the regular blockchain doesn’t. Isn’t that interesting! What’s even more interesting is the sentence that starts “Unlike previous blockchains...” If the Libra Blockchain isn’t using blocks for transactions, is it even a blockchain?
Whatever it is, it doesn’t work, according to this Bloomberg piece — at least not yet. But what it does seem like from these materials is that, actually, Libra isn’t very decentralized.
What do you mean?I keep noticing there’s this stuff in here about being decentralized “in the future,” but from the jump, it’s coming out in centralized form. They call this centralization “permissioned” in the paperwork. Basically, the first version of Libra is controlled by the founding coiners. You know, the ones who also get to keep the interest. (There is a vague plan for expanding this initial cabal in five years or so. Any new members of the cabal will have to meet its requirements, which are substantial.)
Ugh, that sounds like fiat currency.
Actually, it’s worse. In the white papers, there’s a possibility that your data could be archived for a fee to save space. I am pleased to report that the Fed can’t pull that shit. Paper money 4eva.
But it’s worse for another reason, too. The thing about cryptocurrency is that it does everything regular currency does but way slower. That’s because of the blockchain: doing all of that computation slows your transaction. Libra’s setup makes the transactions a little faster, but not nearly as fast as traditional payments processors. It looks like Libra can do about 1,000 transactions per second, says Green. A traditional payments processor like Visa can do about 3,000 transactions per second.
So it might be reasonable for Facebook to do something else, rather than all those individual transactions. Aggregate all of its users’ Netflix bills into one giant bill, and then allow one giant transaction to cover the whole thing, Green says.
So is that private?This is Facebook. Your privacy does not exist to Facebook. If you trust Zuckerberg, it’s worth remembering that he thinks you are “dumb fucks.” He’s apologized for this exchange, but I have to say, in light of how Facebook has treated privacy, I think he’s mostly just sorry we know about it.
“They’ve sort of hand-waved around the idea that their business model isn’t rooted in user data, but I can’t imagine that there isn’t an interest there,” Swartz says. French Finance Minister Bruno Le Maire shares her skepticism. “This money will allow this company to assemble even more data, which only increases our determination to regulate the internet giants,” Le Maire said, according to Bloomberg.
In the example I just used of a large, aggregated Netflix bill, there’s still the problem of Facebook itself knowing your transaction history, which isn’t great. But this is the best-case scenario.
There is a vision of Libra where people just… use it, like at physical locations or to send money to individual people. And unlike a bank transfer, this won’t be private information. In that world, the privacy problem can be pretty bad, Green says, because every business doing anything on that layer is visible. “Then, all of a sudden, you have Twitter for your bank account, where everyone in the world learns all the transactions that you make.”
So a lot like Venmo?Yeah, but with a much larger user base. Imagine the scale here, which is deliberately international. There are almost certainly governments that would be interested in the transaction data, particularly if it’s granular, says Green.
But I don’t get privacy at my bank, do I?Well, you do and you don’t. Chase is not broadcasting the details of everywhere I sent money, so, in that sense, it’s more private. But in another important sense, Chase is less private. That’s because of the Know Your Customer and Anti-Money Laundering laws, which, in the US, mandate that certain parts of my identity be divulged by my bank to the US government and also that my bank assess how likely it is that I’m doing crimes (like, for instance, money laundering). Those laws seem like something Facebook should be paying close attention to if it is serious about Libra. The laws also vary on a country-by-country basis. Seems like a lot of overhead for regulatory compliance, if you ask me!
So far, how Libra will deal with those laws is kind of vague. “They’re doing a weird dance between like, oh, we’re kind of going to be light on KYC and super inclusive, but also we’re going to be really by the book regulatory,” Swartz says. “They’re seeming to play it both ways.”
But that’s not all. There’s also the IRS. So if Libra is a cryptocurrency — and, again, it does kind of seem to be one — it’s classed by the IRS as a commodity, like pork bellies or gold. That has tax implications, Weaver tells me. Remember how cryptocurrencies are usually kind of volatile, and Libra is designed deliberately to be less so? That doesn’t necessarily guarantee low or no volatility. So if I’m taking my paycheck in Libra, and the value of Libra relative to the dollar goes up while the money is being transferred such that I make $100 extra, that $100 is taxable.
Source: THEVERGE
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Topic: LIBRA, EXPLAINED (Read 4807 times)