Facebook recently announced the creation of Libra, a digital currency built on Blockchain technology that will enable users to send, spend and secure their money globally.
This announcement generated lots of criticism amongst crypto enthusiast and governments alike. Facebook boasts 2.38 billion monthly active users and its entry into the cryptocurrency sphere will pose numerous security concerns and potentially threaten the central banking system.
The Libra Association declares that its official mission “is to enable a simple global currency and financial infrastructure that empowers billions of people” and revolutionize the global economy. Its detractors argue that the objective is more sinister: to create a global currency that will compete and ultimately try to replace dominant fiat currencies like the USD. Although this seems like an impossible task, the digital and technological revolution at play is certainly capable of disrupting the established order.
As pressure mounts on Facebook to clarify its motives, the cryptocurrency community is already wondering how Libra will compare to Bitcoin. Will it threaten the King Crypto?
Well, rest assured because Libra is no match for Bitcoin. Here are 4 key reasons why it will not pose a serious threat to the One True Cryptocurrency.
- Libra is a centralized digital currency
First, it is important to remark that Libra will be a highly centralized digital currency: it is a permissioned system where only selected entities will be entrusted with issuing coins, keeping track of the ledger and running nodes.
The Libra Association is composed of companies and NGOs who pay $10 million dollars each to participate. The Association will have the power to run nodes, block trades, rewrite the entire Blockchain or even block the project if some members who wish to do so ever gain a majority vote within the Association.
The only discernible upside to this centralization is the Association’s power to fight criminal activities on their network and track stolen Libra, something impossible in the Bitcoin sphere. However, this centralization confers absolute authority to the Libra Association and this is precisely what Satoshi Nakamoto, Bitcoin’s mysterious creator, sought to prevent when he created the peer-to-peer electronic cash system.
2. Libra is a stablecoin that will be used as currency
Facebook’s ambition is for Libra to be “stable” meaning not subject to extreme volatility like Bitcoin. A stablecoin encourages people to use it as a means of exchange (currency) because they have some guarantees that the value will not significantly increase or decrease overnight. Currency is based on trust and people want their money to keep a stable value over time.
Extreme volatility is the main reason why Bitcoin is increasingly viewed as a store of value rather than as a currency. Indeed, only a small fraction of Bitcoin’s total supply is used as a means of exchange; the majority of people either trade Bitcoin for currency on exchange platforms or store it to secure their cash (which is why some call Bitcoin “digital gold”).
Facebook Libra will be backed by a basket of currencies so theoretically Libra’s value should remain stable even if one of the underlying currencies crash. The choice of currencies composing the basket remains unknown and the Association will have utter discretion in this matter. This centralization is not exactly in line with Bitcoin’s ideals and poses numerous transparency concerns.
3. Libra transactions will not be anonymous
Cryptocurrencies are appealing because of the anonymity of transactions. Although the golden age of anonymity for Bitcoin is largely over, Bitcoin transactions remain semi-anonymous: transactions are tracked on the Blockchain but there it is very difficult publicly identify the holder of a particular wallet. KYC procedures are progressively being enforced and this will affect anonymity in the long run but, for the time being, cryptocurrency holders still largely benefit from anonymity.
We don’t know how anonymous Libra transactions will be but we can safely assume that the Facebook Association will know exactly who is behind every transaction. Indeed, chances are that your Libra wallet will be directly connected to your Facebook account and valid concerns are being raised as to whether Facebook will honor your privacy. Unless you’ve been living under a rock you’ve heard about the numerous scandals surrounding Facebook’s use of your personal data. This has actually caused a drop in usage although user numbers are still growing. Why would a platform that has based its entire business model on selling your information to private businesses be scrupulous in using Libra database to further boost its revenues and monitor our behavior?
4. Libra is easier to regulate than Bitcoin
Libra, being a centralized digital currency, will be easier to regulate than Bitcoin. However, we must remember Facebook itself is more powerful than many countries. Just by itself, Facebook would be the 90th richest country in the world by GDP. Now imagine their power when they team up with the largest corporations in the world. This might be a little bit farfetched, but together they could even be more powerful than virtually any government in the world. Still, it would be easier for governments to regulate Facebook than Bitcoin. For example, the US Congress is proposing legislation to force Facebook to register as a financial institution. Senator Sherrod Brown stated that “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight”.
If this proposed law is passed and lawmakers succeed in regulating Libra, more governments may follow suit. For now, the only regulatory pressure against Bitcoin is controlling access to exchanges and implementing repressive taxation. Outlawing Bitcoin is possible but even that won’t stop it from circulating. Also, contrary to Libra, Bitcoin is not at the mercy of a centralized authority controlling the Blockchain, nodes and the value underpinning the currency itself.
So will Libra kill Bitcoin?
If Facebook can convince lawmakers that it will operate “honorably”, Libra will be a hit because millions of people will use it daily to bypass exchange rates and banking inefficiencies. The masses generally adopt whatever innovations mega corporations throw their way and Libra will be “cool” among the general population, especially young people. However, I don’t believe Libra will prove a threat to Bitcoin in the long run because the differences between them are too great. Indeed, those concerned with privacy breaches, currency manipulation and confiscation will prefer Bitcoin’s decentralized Blockchain, semi-anonymous transactions and offline wallets.
Bitcoin is increasingly viewed as digital gold and those who want a secure store of value will not place their cash in a digital currency that is controlled by a centralized authority that can change the rules of the game at any given time.
The world at large is very unstable and everyone is talking about “the next crash” that will cause global mayhem. If and when this crash will occur is uncertain however history teaches us that capitalism is a cycle of boom and bust. The 2007 crisis was very severe (it led to the Great Recession) and although we feel like it is long in the past many factors lead us to believe we may be heading for another crisis.
Many countries and regions around the globe have experienced severe crises in the recent past such as Argentina, Southeast Asia, Zimbabwe, Cyprus and Greece. Others, like Venezuela, are experiencing crises right and Bitcoin use is on the rise. Those who lived through these crises know the importance of securing their wealth and those of us in the West who know that a crisis can occur at the most unexpected time are actively looking for ways to secure our cash now. Even Forbes suggests that “Diversification is a good idea” [hint:away from the stock market].
In sum, when we factor in global instability, Big Brother corporations controlling our access to data and an economic system built on cheap debt, Bitcoin’s mass appeal keeps increasing and leads me to believe that the king of cryptos will only get stronger.