The Libra Association is pulling back from its original vision of a global digital currency backed by a basket of national currencies in a bid to appease global regulators.
The consortium set up last year by Facebook now plans to develop a handful of stablecoins each representing a different fiat currency. One libra coin could be tied to the U.S. dollar, for example, another to the euro and so on.
Libra still intends to issue a multi-currency stablecoin, but it would be backed by the new stablecoins, rather than directly by fiat currencies held in a bank. The new model arguably limits Libra’s flexibility, since adding (or removing) a currency from the basket requires issuing (or retiring) another digital token.
The pivot, announced Thursday, represents a major concession to governments and central bankers around the world who balked at Libra’s original plan, partly out of concern it could undermine their monetary sovereignty.
“The journey since the original white paper was released has really provoked an important conversation around the world about, ‘How do we appropriately regulate digital payments and digital currencies?'” Libra Association vice-chairman Dante Disparte said in an interview.
Unveiled in June 2019, the Libra Association was originally a collection of 28 organizations including credit card companies, tech giants and venture capital firms, all convened around blockchain technology created by Facebook designed to open up global payments, with an emphasis on the developing world.
However, Libra’s model drew regulatory ire, particularly in the developed world. The watered-down version squares with reports by The Information in March and German publication FinanceFWD in January, which said the changes have been in the works since early 2020.
“We remain committed to our goal of being ready to launch in 2020,” a Libra spokesperson told CoinDesk.
Libra's new look
Libra will now mainly serve to make existing currencies easier to use, both in a peer-to-peer fashion and internationally, by emphasizing a series of stablecoins backed by sovereign currencies.
A cover letter to the revised Libra white paper released Thursday morning acknowledged widespread objections voiced by policymakers:
"While our vision has always been for the Libra network to complement fiat currencies, not compete with them, a key concern that was shared was the potential for the multi-currency Libra Coin (≋LBR) to interfere with monetary sovereignty and monetary policy if the network reaches significant scale and a large volume of domestic payments are made in ≋LBR. We are therefore augmenting the Libra network by including single-currency stablecoins in addition to ≋LBR."
As examples, the cover letter lists libra iterations based on the greenback, the euro, the British Pound and the Singapore Dollar.
“Every stablecoin would be backed by a reserve of high-quality assets and short-term government securities such that their value is preserved,” Disparte said. “And we think this type of model improves the proximity to central banks and public institutions.”
While a multicurrency libra coin (≋LBR) will persist, it will only ever include a combination of those stablecoins, using a model emulating the International Monetary Fund’s special drawing rights, much as the Saga stablecoin launched in early 2018 proposed.
A slide deck shown to CoinDesk during the conversation with Disparte said ≋LBR “will not be a separate digital asset from the single-currency stablecoins.”
Further, the letter said, “≋LBR can be used as an efficient cross-border settlement coin as well as a neutral, low-volatility option for people and businesses in countries that do not have a single-currency stablecoin on the network yet.”
A Silicon Valley crypto investor speaking on the condition of anonymity told CoinDesk that stablecoins have already proven to be a major source of success. For example, one of Ethereum’s chief use cases has become a way to move stablecoins around.
While it’s inevitable that major currencies such as the dollar will become digital, the investor said, some governments may realize they are better off effectively outsourcing that work to an entity like Libra rather than doing it in-house and having a Healthcare.gov-esque debacle.
The larger question, the investor argued, will be whether partners will want to stay engaged in a project whose business model is largely based on extremely conservative returns in a world where interest rates hover around 0 percent in a post-COVID-19 environment.
In a further concession, the association’s new white paper removes any mention of ever introducing permissionless participation in the Libra network. All counterparties operating nodes in the Libra network will remain known to all others.
“Regulators raised thoughtful questions about the perimeter of control for the Libra network – in particular, the need to guard against unknown participants taking control of the system and removing key compliance provisions,” the cover letter states.
The original white paper envisioned Libra starting out as a permissioned network controlled by the Association’s members, but there were explicit plans for Libra to become permissionless beginning in the next five years.
“The idea there,” Disparte said of the changes, “is to have a model that has the best qualities of permissionless systems but really at all times knows who the counterparties are. So it’s KYB, know-your-business and know-your-counterparty.”
The cover letter to the revised white paper also hints that the new roadmap will be more compliant with regulatory recommendations from Financial Action Task Force (FATF), by limiting what individuals and unregulated entities can do on the network. (The FATF formalized its guidelines for crypto businesses three days after Libra was unveiled in June.)
“Unhosted Wallets” will be subject to balance and transaction limits, and initially, the network “will only be accessible to” virtual asset service providers (VASPs), the letter said, using the intergovernmental body’s term for regulated crypto firms.
Of course, limiting the ability of unregulated parties to interact with the network may hamper Libra’s stated goal of fostering financial inclusion.
Regulated in Switzerland
Material changes to its roadmap aside, the Libra Association is still looking for regulatory approvals to launch.
Disparte said the Libra Association has initiated the licensing process with Switzerland’s Financial Markets Supervisory Authority (FINMA), which would allow it to offer monetary and banking services.
“One thing that’s quite unique about how they [FINMA] have approached reviewing the Libra project and our licensing application is they’ve formed a regulatory and supervisory college which effectively comprises a range of countries and parties around the world,” Disparte said. “The value of that is to get to as close to a consensus approach to what really is an appropriate framework for managing these types of projects.”
The group also intends to register as a money services business (MSB) with the Financial Crimes Enforcement Network (FinCEN), typically a first step to offering currency exchange and transfer services in the U.S. (Libra told CoinDesk it does not intend to provide these services). Meanwhile, Facebook’s blockchain subsidiary, Calibra, is already registered as an MSB.
The technology stack remains largely the same.
“Obviously there’s ongoing work with the Libra blockchain to ensure readiness,” Disparte said. “We are continuing that buildout of the blockchain and the technology supporting this and we want to flatten as much as possible the barriers to entry in this network to the open source world.”
Without permissionlessness, many in the industry would argue a classic centralized system would work as well or better, a point bitcoin advocate Jimmy Song has made repeatedly over the years.
Disparte defended the reliance on blockchain technology despite the fact that Libra will never be a truly open network by saying, “PayPal bought Venmo many years ago, but a PayPal user can’t pay a Venmo user, so there’s no interoperability. I think that’s where sticking to using blockchain in this construct really supports the free flow of Libra payments from person to person that by today’s standards are not possible.”
This peer-to-peer payment element, Disparte argued, is only feasible under a blockchain architecture. “So the Libra system’s big breakthrough … it’s really the concept of a scalable peer-to-peer payment network, that doesn’t sacrifice security,” he said.
When Libra debuted last year, CoinDesk contacted various people in the industry to ask what they thought the potential of this new Facebook-birthed blockchain might be. Investor Naval Ravikant’s opinion at that time has proven at least partly prescient.
“I don’t think it means much for crypto because it’s not really (sovereign-resistant) crypto,” Ravikant wrote.