Facebook & # 39; s cryptocurrency Libra, explained

What is Libra?


It is an excellent book by Don DeLillo, the American master. Published in 1988, it is a fictional account of the life of Lee Harvey Oswald, the ultimate assassin of President John F. Kennedy. It's better than that White noise but not as good as Underworld.


Nice. It is the new cryptocurrency of Facebook. The point is that you can send money anywhere in the world with lower costs than if you were to use Western Union for example.

However, it is dark as hell. Do you remember Tyler and Cameron Winklevoss? The twins whose Mark Zuckerberg pulled the original idea for Facebook? Yes, so they have one cryptocurrency exchange Gemini called. As every comic lover will tell you, both Scale and Twins his air signs and Geminis are stereotypically scarier than Libra. Gemini is the sign of twins and is associated with two faces. Moreover, it is a movable air sign, which makes it somewhat unstable. Libra, like a cardinal sign, is slightly more stable. Libra sees both sides; Gemini tries to become both sides.

On the other hand, astrology is made up. On some theoretical third hand: that's how money is!

What I want to say here is that Zuckerberg likes to crush the dreams of these handsome men, so who can say how this will turn out? Anyway, the name seems a bit bitchy.


Is Libra a cryptocurrency?

This is a kind of controversial question. Compared to the US dollar, the euro or the yen, it is definitely a cryptocurrency because there is no central bank. There is also a ledger, although only a few people can mine the coin. So I talked to a few experts to find out if Libra is a cryptocurrency.

"It is reasonable for this to use cryptocurrency technology," says Matthew Green, associate professor of computer science at Johns Hopkins University. (Facebook contacted Green a few weeks ago and asked him if he would look at the white paper as an external reviewer. "This was unpaid work that Green should have done to conclude a non-disclosure agreement "limited in the way the blockchain works, but even that is not entirely unknown."

Compared to the OG cryptocurrency, bitcoin, well … it looks less like a cryptocurrency. For example: bitcoin is one permissionless system. You participate through proof of work by competing to solve a puzzle that you can use to add a block to its chain. What that means is that everyone can participate. This is one of the most important ideas behind the 2008 Satoshi Nakamoto paper: bitcoin requires consensus, not trust.

Libra on the other hand permissioned, which means that only a few trusted entities can keep up with the ledger. That makes it more like a digital currency than a cryptocurrency, says Lana Swartz, an assistant professor of media studies at the University of Virginia who has studied the bitcoin community extensively. "I actually agree with the people who said that this is not a cryptocurrency at all," says Swartz.

On the other hand, Libra is assigned to pseudonymous & # 39; portfolios & # 39; and transfers are made 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's a cryptocurrency." Weaver also notes that the permitted model means that less computing power is required. Bitcoin wastes a lot of energy and prevents so-called Sybil attacks in which an attacker fills the network with computers that control the attacker and cause havoc.

The only conclusion I have is that there is no stable definition of "cryptocurrency", so I'm just going to call Libra a cryptocurrency for the sake of convenience and keeping it moving. If you want to put an asterisk on it, I can't blame you.


Why is decentralized currency exciting for some people?

Good, theoretical, removing the central bank from the comparison democratizes the currency. In practice, that is not exactly how it works. Bloomberg"S Matt Levine explained this very briefly, so I'm just going to paraphrase him. It is true that the internet is decentralized in some respects because it is not controlled by the government or a specific company. But the result is that certain major technology companies manage most of the infrastructure: internet search is Google, e-mail is Gmail, cloud computing that controls most websites is Amazon. "The democratizing effect of internet openness and decentralization is countered by its huge economies of scale and network effects, which tend to concentrate power in a few big winners," writes Levine.

And Facebook wants to be the big winner of cryptocurrency.

I heard that Libra is a & # 39; stalcoin & # 39; is. What is that and how is it expressed?

Scale is a stablecoin – sort of! Unfortunately, like "cryptocurrency", this is something of a semantic gray area.


In short, any cryptocurrency that is linked to a fiat currency (for example, the US dollar) or some sort of government-backed security (such as a bond) counts as a stablecoin. The idea is that there is more stability – hence the name – and less volatile than in something like bitcoin that is not attached to anything. Bitcoin is just as valuable as people believe bitcoin is what makes it very, very volatile.

However, unlike most stablecoins, Libra is not linked to one specific currency. Libra is linked to a group of & # 39; of assets with low volatility, including bank deposits & # 39; s and government securities & # 39; in multiple currencies & # 39; s. While there is a Libra reserve, Libra does not seem as it is required linked to its value. On the contrary, the reserve functions as a kind of lower limit for the Libra value.

That means there is only one Libra, wherever you live. Levine is also great here, so I'm going to paraphrase him again: if Libra does strike, it will probably repress currencies like the dollar. That's because if you spend mostly, maybe because you buy most things online, you will only convert your scales into dollars for when you have to spend IRL money, and the dollar starts to seem annoying to you because it keeps rising and going to down compared to the Libra. "The goal is that Libra is more useful than any national currency, accepted in more places and with fewer complications; linking to a single national currency would only stop it," writes Levine.

What else do I need to know about the reserve?

Again, when you think of the traditional cryptocurrency, bitcoin, monetary policy is pretty meager: there is a finite number of bitcoins that can ever exist, and the number of bitcoins released by mining is decreasing over time. That is bitcoin's complete monetary policy. That is it!


On the other hand, the ruling members of Libra will pursue a certain policy by choosing the basket of investments for the reserve. (They said, "The association does not set a monetary policy, it only coins and burns coins in response to the question from authorized resellers." Tyler Cowen points in a useful way that there is some discussion about what monetary policy is.)

The reserve comes initially from Facebook and its partners, but later, if you have Libra (Libras? This also seems semantically unclear) for cash, your money will be part of the reserve. That reserve is then "invested in low-risk assets that will yield interest over time."

However, there is another problem. Under normal circumstances, such as a bank deposit, you could keep the interest. But with Libra that is not the case. Don't take my word for it from Libra itself:

The proceeds of this interest first go to the operating costs of the association – to finance investments in the growth and development of the ecosystem, subsidies to non-profit organizations and multilateral organizations, technical research, etc. Once that is covered, part of the remaining returns will be going to pay dividends to early investors in the Libra Investment Token for their first contributions.

So any interest from Libra goes mainly to Libra and then to early Libra investors such as … Facebook. Isn't that nice! It is also how Venmo and PayPal earn money: cash held in those systems is cash they receive to maintain interest, according to their user agreements.

Cryptocurrencies don't usually hope for a blockchain? Is libra?


Let's start with … uh … define blockchain. Just kidding, you can't.

If you look through the white papers, you will notice this, such as capital letters. Blockchain scale, in these newspapers, always takes a capital. And although I like to capitalize things for no reason, my editors constantly remind me that it makes my copy harder to read, and the joke is usually just funny to me. Now it is possible that the itty-bitty blockchain committee shares my amazingly advanced sense of humor, but what seems more likely is that there is a bit of skill going on. For example, take a look at this section of the white paper:

To securely store transactions, the data from the Libra Blockchain is protected by Merkle trees, a data structure used by other block chains that allows the detection of any changes to existing data. Unlike previous blockchains, which view the blockchain as a collection of transaction blocks, 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 that have access to the blockchain, allowing them to read data from any point in time and verify the integrity of that data using a uniform framework.

Libra Blockchain takes uppercase letters, but the regular blockchain does not. Isn't that interesting! Even more interesting is the sentence that begins "Unlike previous blockchains …" If the Libra Blockchain does not use blocks for transactions, is it even a blockchain?

Whatever it is, it doesn't work according to this Bloomberg broken – at least not yet. But what it is doing it seems from these materials that the scales are actually not very decentralized.

What do you mean?

I keep noticing that there are things here that are decentralized in the future, " but from the jump it comes out in centralized form. They call this centralization "permission" in the paperwork. In principle, the first version of Libra is controlled by the coin coins. You know, those who also keep the interest. (There is a vague plan to expand this initial clique in five years or so. Every new member of the clique will have to meet his requirements, that are substantial.)

Ugh, that sounds like fiat currency.

It is actually worse. In the white papers there is the possibility that your data can be archived for a fee to save space. I am happy to report that the Fed cannot tolerate that mess. Paper money 4eva.

But it is even worse for another reason. The thing about cryptocurrency is that it does everything the regular currency does, but much slower. That is because of the blockchain: all those calculations delay your transaction. Libra setup makes transactions a bit faster, but not nearly as fast as traditional payment processors. It seems that Libra can do around 1,000 transactions per second, Green says. A traditional payment processor such as Visa can perform around 3000 transactions per second.

So it can be reasonable that Facebook does something different than all those individual transactions. Gather all Netflix invoices from all users in one giant invoice and let a giant transaction cover the whole thing, Green says.


So is that private?

This is Facebook. Your privacy does not exist for Facebook. If you trust Zuckerberg, it's worth thinking about he thinks you're "fucking stupid""He apologized for this exchange, but I have to say that, in light of how Facebook has treated privacy, I think he usually only regrets what we know about it.

"They have the idea that their business model is not rooted in user data, grown by hand, but I cannot imagine that there is no interest there," says Swartz. The French finance minister Bruno Le Maire shares her skepticism. "With this money, this company can collect even more data, which only increases our determination to regulate internet giants," said Le Maire, according to Bloomberg.

In the example I just used of a large, aggregated Netflix account, there is still the problem that Facebook itself knows your transaction history, which is not great. But this is the best scenario.

There is a vision of Libra where people … use it, such as at physical locations or to send money to individual people. And unlike a bank transfer, this is not private information. In that world, the privacy problem can be pretty bad, says Green, because every company that does something on that layer is visible. "Then you suddenly have Twitter in front of your bank account, where everyone in the world learns all the transactions you make."


So very much like Venmo?


Yes, but with a much larger user group. Imagine the scale that is intentionally international. There are almost certainly governments that would be interested in transaction data, especially when it comes to a granular strategy, says Green.

But I don't get privacy with my bank, do I?

Well, you do that and you don't. Chase does not broadcast the details everywhere I sent money to, so in that sense it is more private. But in another important sense, Chase is less private. This is because of the Know Your Customer and Anti-Money Laundering laws, which in the US stipulate that certain parts of my identity are disclosed to the US government by my bank and also that my bank assesses how likely it is that I commit crimes (such as money laundering). Those laws seem to be something Facebook should pay close attention to when it is serious about Libra. The laws also differ per country. It seems like a lot of overhead for regulatory compliance, if you ask me!

So far, how Libra will deal with those laws is a bit vague. "They do a weird dance in between, oh, we're getting a little light on KYC and super inclusive, but we're really going to be according to book rules," says Swartz. "They seem to be playing it both ways."


But that is not everything. There is also the IRS. So as a scale is a cryptocurrency – and, again, it appears to be one – it is classified by the IRS as a commodity, such as belly or gold. That has tax consequences, says Weaver. Do you remember that cryptocurrencies are usually quite volatile, and Libra was deliberately designed to be less? This does not necessarily have to guarantee low or no volatility. So if I take my salary in Libra, and the value of Libra against the dollar goes up while the money is being transferred, so I earn $ 100 extra, that $ 100 is taxable.

That of course means something to me, but it also means something to Facebook, Weaver wrote:

(S) From the moment that an integration into Facebook Messenger or WhatsApp falls under the control of Facebook, Facebook should probably submit income tax documents and keep track of the otherwise difficult cost base matheming in the name of Facebook customers, as other investment brokers do. The IRS must remind both Facebook and the public of these implications and requirements. Of course, this would render Libra completely useless in the United States by increasing the cost of using it above all possible resources.

When we spoke on the phone, Weaver told me that real financial privacy is a tool for bad results. What you want is a company that does not allow privacy, but is good at protecting your data. "And since Facebook is notorious for misuse of data, the idea of ​​giving Facebook insight into a whole range of financial transactions is simply disturbing."

It is not just Facebook. It is also anyone who has a node to process these transactions, right?

Yes, and that brings us to another potential legal hurdle: keeping banking and commerce separate. Facebook has 27 partners, including Visa, Mastercard, eBay, PayPal, Stripe, Spotify, Uber, Lyft and Coinbase. Depending on what data is visible to them, there may be legal bottlenecks to work out, writes Matt Stoller, a fellow at the Open Markets Institute:

Since the Civil War, the United States has had a general ban on the crossing between banking and commerce. Such a barrier has been strengthened many times, such as in 1956 with the Bank Holding Company Act and in 1970 with an amendment to that law during the conglomerate situation. Both times Congress blocked the banks from going through non-banking businesses because Americans historically did not want banks to compete with their own customers. Banking and payment is a special activity in which a bank gains access to the confidential business secrets of its customers. As a travel agent told Congress in 1970 when he opposed banks' right to enter his company: "Every time I deposited checks from my customers," he said, "I gave the banks the names of my dear customers "

Imagine that Facebook & # 39; s subsidiary Calibra knows your account balance and your spending, and offers to sell a retailer an algorithm that maximizes the price for what you can afford to pay for a product. Imagine that this cartel has such financial visibility with not only many consumers, but also with companies throughout the economy. Such conflicts of interest are the reason why payments and banking are separated from the rest of the US economy.


Yikes is right. And that is before we come to the possibility of scammers! See, the whole draw of cryptocurrency for the nerds who started the Bitcoin community was the lack of interference, says Green. But most of us are not advanced enough to function without a sort of safety net. And the reality is that Bitcoin has created many opportunities for scams and extortion. Do you remember when all those "Elon Musks" appeared on Twitter to commit crypto scams? Weaver also points out that cryptocurrency is preferred for ransomware.

Those were problems with early adopters who tend to be smarter than we are. There is a world in which a billion people who adopt Libra lead to those problems on an unimaginably large scale.

Weaver regards scams as a concern, but extortion makes him more concerned. For example, he points out that an important limiting factor in online drug markets is that paying with Bitcoin is a pain. But an easily accessible cryptocurrency – one that has privacy protection that keeps everyone from seeing who you send money to – makes it much easier to pay for illegal drugs online. "I would like to say that cryptocurrency has committed a crime against me," says Weaver. "It has made me believe in the need for strict enforcement of money laundering legislation."

So can Libra be stopped?

Who can say?

Rep. Maxine Waters (D-CA), the chairwoman of the House Finance Committee, asks Huisleiding to join her and asks that Facebook stop the development of Libra until the Congress considers Libra. Bloomberg has reported. Senator Mike Crapo (R-ID), the chairman of the Senate Committee, organized a hearing on July 16. Facebook was invited to testify at a hearing of the financial services panel on July 17, so pop your popcorn!

But legal and regulatory barriers can be removed in some cases. Or Mark Zuckerberg could all have the guts and governments dare to come get him. It is 2019 and everything is possible. However, I will say that I find this all very entertaining, and I would like to share with you what is perhaps the most unbelievable way to stop Libra, and it is about Presidential hopeful Howard Schultz.

Before he decided to become president, Schultz was just the billionaire CEO of Starbucks. During a profit call last year, he said that legitimate cryptocurrencies were en route. (Bitcoin is not legitimate, according to Schultz.) His remarks sounded as a big indication that Starbucks was working to some extent on cryptocurrencies, or at least the blockchain.

People don't trust Facebook. They do trust Starbucks. Trust is a big part of how money works, says Swartz. Starbucks has a wider geographic reach in terms of branches than any other bank in the world, she says. It has a widely used payment app and some of the most advanced fintech in the world. So maybe that's the answer: Starbucks launches StarBucks, its own cryptocurrency, and it just kills Libra because we like and trust Starbucks, and we don't like Facebook.

That is what I am aiming for.

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