Facebook's Libra coin: the truth behind the hype
FT Alphaville's Jemima Kelly says the social media giant is piggy-backing on hype surrounding 'blockchain' and 'cryptocurrency' and she separates PR puff from reality to bust five myths about the new currency
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Facebook has announced its new Libra coin to much fanfare and media attention. But it's fair to say that we at Alphaville remain sceptical. So we've started a series called 'breaking the Zuck buck', in which we examine Mark Zuckerberg's new baby and explain what we think is wrong with it.
Myth number one. A 'blockchain' is what will allow Libra to function. Libra is meant to be supported by what's been called the Libra blockchain, which is described as a decentralised programmable database. But we'd argue that the Libra blockchain is not, in fact, a blockchain, as some of the defining characteristics of a blockchain are missing.
Whereas in a normal blockchain, like the one underpinning Bitcoin, blocks of transactions are hashed down and added to a chain of other blocks, hence the word blockchain, Libra will use neither blocks nor a chain. Instead, Libra will be a 'single datA structure that records the history of transactions and states over time'.
Facebook says that because it uses technology that's associated with blockchains, such as Merkle trees, Byzantine consensus protocols, and other complex cryptography, it should be called the blockchain. But we don't think Facebook should get to decide what a blockchain means. And furthermore, it doesn't need a blockchain for what it's trying to achieve.
Myth number two. Libra is decentralised. So Libra says that it's a decentralised system, but we think calling it that is a stretch. Unlike cryptocurrencies such as Bitcoin, Libra won't use the proof of work mechanism that incentivises miners to keep the network going. Instead Facebook, and the other 27 founding partners of the Libra association, will run their own nodes that validate Libra transactions.
The partners include Uber, PayPal, and MasterCard, and each one has paid $10m for the privilege. Facebook says Libra will move to a more decentralised permissionless system in the future, but we don't have any details on how and when that will happen.
Myth number three. Libra can magically reduce cross-border payment fees. These fees are high, not just because of technological issues, but political and regulatory ones associated with the complicated process of moving money from one jurisdiction to another. Although it's true that many banks still charge extortionate rates for cross-border transfers and remittance payments, we already have many companies working on making those fees lower, like TransferWise and Revolut.
There's no reason to believe Libra can lower those costs further. And as long as people still use central bank money as their primary means of payment, they'll still have to somehow exchange that money into Libra, which will come with a cost. Myth number four. Libra is about helping the unbanked.
Facebook wants you to think that the reason they're doing all of this is because they want to increase financial inclusion and to bring in the 1.7bn around the world who remain outside the banking system. But it's not clear how the unbanked will be able to buy Libra if they have no bank account, particularly if Labour wants to keep regulators happy by doing proper checks on its users to avoid money laundering.
Libra is also unlikely to help people in countries with rapidly depreciating currencies, as those countries tend to put in capital controls to prevent a run on their banks. Facebook has never shown much interest in the unbanked before, and we're not sure why it's suddenly so interested.
Myth number five. Libra legitimises Bitcoin. Libra calls itself a 'low-volatility cryptocurrency', but just as the Libra blockchain isn't a real blockchain, Libra coin isn't a real cryptocurrency either. That's because it's issued by a centralised entity, doesn't run on a real blockchain, and rather than being subject to the whims of crypto markets, is pegged to a basket of fiat currencies.
So it's much more akin to something like the Gemini dollar, the stable coin issued by the Winklevoss twins' exchange. And it's probably not a coincidence that the twins' longtime rival Mark Zuckerberg chose another star sign for the name of his coin. Overall, we think that the use of the words 'blockchain' and 'cryptocurrency' is more about PR value than substance, like many such projects. For Facebook, maybe it's also about getting regulators to smile upon them.