Facebook wants to issue a crypto coin
On June 18, 2019, Facebook’s Swiss subsidiary the Libra Network (Libra Network) along with 26 associated companies around the world released a white paper announcing the cryptocurrency project. With the official name of the cryptocurrency being Libra.
The first sentence of the white paper was: “The Libra Association’s mission is to enable a simple global payment system and financial infrastructure that empowers billions of people.”
It is clear that Libra’s aim was to establish a “borderless currency”. Libra originally had another name, GlobalCoin, But Mark Zuckerberg finally chose the symbolic name of Libra, trying to downplay the “big ambition” of the name GlobalCoin and replace it with something with more balance.
Libra anchors a “basket of currencies” composed of multinational fiat currencies, which is defined as a “stablecoin” in the blockchain world.
It is clear that with Libra Facebook wanted to establish a “borderless currency”, but why?
- 2.7 billion potential users will have access to the cryptocurrency payment system.
- Three-quarters of the Internet population could enter the blockchain world.
- Hayek’s “Denationalization of Money” will get a reality verification.
- The battlefield of technology giants has expanded from user data and storage to the financial world.
- Non-sovereign currencies are really starting to impact “dollar hegemony”.
As a company that has achieved so much in the Internet era, Facebook issuing a crypto coin was seen as an entrepreneurial way to expand its business into the financial sector, while at the same time utilizing its huge user base.
What is a stablecoin?
Contrary to highly unstable cryptocurrencies such as Bitcoin, Ethereum, and Litecoin, stablecoins keep volatility low. This is because although they use the same blockchain technology they are pegged to regular fiat currencies and/or assets such as gold and silver. Making their price much more stable, and providing more potential use cases.
Stablecoins are the “bridge” between cryptocurrencies and the fiat currency world, and they have the following specific values:
- The emergence of cryptocurrency payments
The first major issue with cryptocurrency is that the volatility in their price severely hampers their use as a payment method for goods and services. For example, would you want to be paid your salary one day and the following day find it worth 20-30% less (probably not!). The emergence of stablecoins solves this issue, while at the same time also greatly helping the circulation of cryptocurrency.
- Digital storage of real assets
There are many ways to anchor the assets of stablecoins. gold, silver, US dollars, power, credit, securities, and fixed assets can all be anchors. Libra is anchoring the credit assets accumulated by Facebook over many years, digitally mapping 2.7 billion active users in the cryptocurrency world.
- Stable ecological value exchange
To form a “stable ecology” of stablecoins, the stablecoin of one enterprise should be freely exchangeable with the stable assets of another enterprise according to specific values. After the value exchange, the assets of both parties can be “gasified”.
With its sheer number of users it was almost inevitable that Facebook would want to issue its own coin. Its big advantage over other cryptocurrencies (including Bitcoin) being that it already had a user base of potentially billions from the get-go.
Almost all multinational’s around the world (as well as many smaller companies) share the same three goals:
- To digitize existing assets;
- To obtain residual value in the flow of digital assets.
- To create a digital value exchange system.
Libra’s ambitions and struggles
Facebook announced the “Libra stablecoin project” after choosing one of the three following routes:
Option 1: Anchor to the US dollar 1: 1.
Option 2: Peg to fiats such as the US dollar, Euro, Japanese Yen, formulate a “basket” plan, and create a reserve of the above three currencies in the company’s international account to which the stablecoin is attached, and finally move to a fund form.
Option 3: A mixture of credit currency and collateral currency, the value is generated by “behavior mining + user recharge”. The currency value of the behavior mining part comes from the use-value of products provided by the Facebook ecosystem, with the rest of the value coming from users recharging their accounts using fiat currencies.
The first option is obviously the most secure one, and there are legal precedents. In September 2018, the US government approved two stable currencies, Gemini Dollar and Paxos Standard, for every token exchanged for $1. If Facebook adopts this method, it is tied to the US dollar, and it will become the most sturdy pioneer in the digitalization of the US dollar, and the two interests are the same.
The third option is the blockchain strategy of many Internet companies, also known as the tokenization of the token economy. It uses the lowest cost method to tokenize Internet assets.
The second solution is inherently the most difficult because it means that from the beginning it is ready to become a “world currency”, a leader in the blockchain world, and fight against the traditional fiat world.
Facebook is invincible in the Internet world. Mark Zuckerberg can steadily lay out the blockchain and become the “ultimate predator” among conservative forces. But he chose the second option. Why did he move forward in such a radical way?
Active reasons: This was Facebook`s pre-emptive and one-stop strategy in the blockchain world. Unlike the traditional world, there is only one unified currency in the digital world. Who will occupy the first place, the Matthew effect will be prominent, and this was Facebook’s “ambition”.
Passive reasons: Facebook is heavily flagged by global public authorities. The data privacy breach in 2018 brought a shadow to Facebook. Zuckerberg was questioned as a “criminal” at a US Congressional hearing. In May of the same year, the EU passed the GDPR bill. Zuckerberg refused to go to the UK to accept the question and almost get arrested, Facebook’s business model is facing threats of public power, which is why Facebook urgently needs to change, this is Facebook’s “struggle.”
Facebook has been invincible in the Internet world since its inception. Zuckerberg’s social media business is also the most viable and excellent product. The success of the Internet has fuelled Zuckerberg’s ambitions to enter the blockchain sphere.
Facebook’s open-source strategy
Facebook is a smart company, and Internet companies that work hard out of the market are far-sighted.
Blockchain is a decentralized world. Too much emphasis on Facebook’s central position is not the optimal strategy. Zuckerberg, who has a very broad vision, adopts an “open source” strategy:
- Establish a stable blockchain ecosystem.
- To promote the establishment of alliances in a decentralized manner.
- Leading the operation of Libra with the foundation governance model.
- Combined with the POS mechanism of the blockchain to share benefits.
From the beginning, Facebook has drawn cooperation from more than 20 companies around the world, in many fields such as blockchain, investment, shared mobility, payments, e-commerce, social media, and telecommunications. The following were the first organizations (by industry) to belong to the “founders” published in the white paper:
- Payment industry: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, and Visa.
- Technology and trading platforms: Booking Holdings, eBay, Facebook / Calibra, Farfetch, Lyft, and MercadUber Technologies, Inc.
- Telecoms industry: Iliad, and Vodafone Group.
- Blockchain industry: Anchorage, Bison Trails, Coinbase, Inc., and Xapo Holdings Limited.
- Venture capital industry: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, and Union Square Ventures.
- Non-profit organizations, multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, and Wom.
Facebook’s cryptocurrency is managed by a consortium called the Libra Association. This association is a digital economy composed of 100 cooperative alliance nodes. Each of these node partners will also obtain a place in the Libra Association as a node operator and have the right to send a representative to the consortium.
At the same time, Facebook has begun to monetize its own products:
1. Apply its stablecoin to its three major communication / social tools: WhatsApp, Facebook Messenger, and Instagram.
2. Incorporate the Libra stablecoin into its core advertising system to reward users for their creation, sharing, and broadcasting. Users can also purchase their products through Facebook’s stablecoin.
3. Libra will also be used for actual payments. Facebook has been negotiating with Visa and MasterCard. The negotiations include the application of Libra to financial data service company – First Data and some e-commerce platforms.
4. Facebook allows internal employees of the Libra project to receive the cryptocurrency as a salary.
Taking its own products as the core of its strategy, it manages cryptocurrencies with designated partners, and invites third-party institutions as “nodes” to participate in community governance. This is Facebook’s overall “open source” strategy.
Fighting alone is not the value of blockchain because it relies on all participants sharing their knowledge and interest to progress.
To counter “dollar hegemony”
Put simply dollar hegemony is the USA’s control over the international monetary system. The dollar’s position as the world currency came after WW2, usurping the British pound as part of a deal to wipe debts accrued during the war. Removal of the gold standard from the US dollar in 1971 gave the US government even more power.
Even though Libra could have been registered in the United States they eventually chose Switzerland, perhaps showing at least an initial attempt or possibility that they wished to break free from the dollar.
However, their recent switch to a USD backed stablecoin means they will be subject to the supervision of the New York Department of Financial Services (NYDFS) like GUSD. And, the consequences are:
- Use legal means to suppress stablecoins outside the “US dollar system”
In April 2019, the legal department of New York issued an injunction on the US company Bitfinex, which has the world’s largest stablecoin USDT, freezing over $850 million in assets. All because although USDT anchors the US dollar 1: 1, but was not subject to the supervision of the US financial authorities.
- Incorporate stablecoins into the financial system and become part of a digital dollar
In September 2018, the New York Department of Financial Services (NYDFS) authorized the digital currency exchange Gemini Trust and blockchain startup Paxos Trust to issue encrypted digital currencies with stable prices strictly linked to USD 1: 1.
- Establish a mechanism to control cryptocurrencies in the existing financial system
On June 13, 2019, Bakkt, a subsidiary of the New York Stock Exchange’s parent company Intercontinental Exchange Group, announced that it will begin testing Bitcoin futures products on July 22.
- Cultivate competitors to balance Libra
This is a legal means of market competition, such as JP Morgan’s stablecoin MJ coin, which supports international payments in the banking sector, or encourages companies such as Google and Apple to embed their own cryptocurrency from the bottom.
- Issuing the national digital currency of the United States.
Of course, the United States generally does not take such extreme measures. It prefers to use the free market to escort the dollar.
For the United States, if a stablecoin or the cryptocurrency industry is not under the control of the financial system, it will eventually no longer need power and the endorsement of the U.S. dollar, just like the decoupling of the U.S. dollar from gold in 1971, eventually becoming a global digital currency. This is the territory that the Federal Reserve and Wall Street will never give up. Although Libra has ambitions, there is still a long way to go.
Libra vs Bitcoin, Internet vs Blockchain?
Although Bitcoin has reached a market value of $13 billion today, it still pales in comparison to Facebook.
In 2019, Facebook’s net profit was as high as $18 billion, the number of users was 2.7 billion, and its market value exceeded $519 billion. With the world’s largest user base and endless cash, it stands at the pinnacle of the Internet world.
Libra has potentially 2.7 billion users from the outset, compared with Bitcoin’s 10 million, showing the clearly different levels the currencies could operate at.
When Libra meets bitcoin, what kind of spark will be created?
Libra is a product of the Internet world, it is an eagle flying on the World Wide Web, Bitcoin is a native species of the blockchain, it is a night owl lurking in the grey world, Now that the eagle wants to invade the grey world, will it become the ruler of this grey world or be unable to see?
The blockchain world does not believe that Libra can succeed. Although Libra’s grandeur is somewhat shocking in the current grassroots cryptocurrency world, the more bigger companies want to come in and usurp the role of the central banks, the more they will be fatally suppressed.
The reasons for supporting Bitcoin against Libra are as follows:
- Libra is just a kind of token. It is not fundamentally different from JPMcoin launched by JPMorgan Chase. It just adds a new competitor. The actual effect is unknown.
- The “network stablecoin” supported and fully anchored by fiat currency, no matter how the design changes, it can only be a dedicated token running on a specific network platform, and it is impossible to replace or subvert fiat currency.
- Libra is pegged to a basket of currencies and will be more complicated and face more risk challenges than GUSD and JPMcoin,
- Libra would need to strengthen the research and unification of online payment rules and support the promotion of a unified global payment settlement supervision system, which is inextricably linked to the traditional world.
But things are not as simple as they appear. In this trafficking era, users are everything, no company can bridge the real world and the blockchain world like Facebook. Before the price of Bitcoin stabilizes, if Libra becomes an ecological currency of the blockchain unimpeded, as ordinary users, who care about the “centralization” or “decentralization” behind it?
The duel between Libra and Bitcoin is a “centralized” and “decentralized” duel, which is the Internet VS blockchain. The final outcome will depend on whether the Internet harvests the blockchain or the blockchain harvests the Internet, and that can only be verified by time.
As long as the nation-state still exists, Libra’s fate will be bumpy.
Let’s try to explore the future of Libra:
- First, small countries and Facebook are constantly arguing because stablecoin first threatens countries with unstable currencies. Residents of many small marginal countries in Africa will prefer to hold Libra instead of the local fiat currency. The ability to purchase materials and exchange strong foreign currencies is very attractive to the citizens of small countries.
- The strong fiat currencies of big countries will also suppress Libra because Libra will always nibble at the fiat currencies of various countries, and the more powerful Libra is the more marginal the fiat currencies will be, which strong fiat currencies will not want.
- Finally, On April 16, 2020, the Libra project updated the white paper. In the 2.0 version of the white paper, Although it is very euphemistic, Libra has strategically withdrawn and formed an alliance with the US dollar and become an important member of the digital USD. Under the protection of US national power, it has expanded its digital territory, but this time Libra is no longer a global coin.
Once the alliance between Libra and the digital dollar is formed, it will verify the terrible. However, the digital dollar makes national barriers impossible. It can more easily penetrate into any country.
Is the Utopian era of currency coming?
In 1976 Hayek wrote the “Denationalization of Money”.
He said in the book that a free currency system should be allowed, to allow various currencies to compete with each other to defeat the weakest, rather than naturally accepting the government’s power to issue currency.
In 2009, the emergence of blockchain technology made it possible to “denationalize money”.
In 2019, Facebook and Zuckerberg brought this “currency utopia” closer to real life.
There are too many injustices in the fiat world dominated by “dollar hegemony”, it is time to introduce more competitors. Libra’s white paper reveals a strong sense of compassion. Throughout the world, the poor pay more for financial services, and their hard-earned income is used to cover all kinds of complicated expenses…
What is Facebook’s ambition?
- To reshape/expand their business model?
- To build a global “borderless money”?
- To build a blockchain “digital empire”?
- To fundamentally change the way money is controlled?
Perhaps we are all a little short-sighted and malicious. Don’t forget, Libra is a symbol of balance and justice.