August 27, 2019

Facebook’s Libra Cryptocurrency Highlights Public and Private Blockchain Differences

Facebook’s Libra Cryptocurrency Highlights Public and Private Blockchain Differences Blockchain

In June, Facebook announced its entry into the digital asset space via its white paper for its new cryptocurrency, Libra. The Libra project aims to provide a better global offering of financial services through what amounts to a private blockchain.

This is an exciting announcement since potentially two billion Facebook users would instantly have access to Libra. The white paper lays out the generalities of how Libra will technically work; how its’ blockchain will run; how governance will occur; and what will back the Libra cryptocurrency. General answers to these questions, however, lead to more questions about how this cryptocurrency will operate. This quickly drew the attention of regulators, as two hearings were held on July 16 and 17 in the U.S. Senate and U.S. House of Representatives immediately following the announcement. These hearings were intended to gather more specific answers on generalities presented in the white paper. They also sought clarity on whether a technology company should even be allowed to be in the business of what essentially would be banking. One fact remained evident throughout the questioning by representatives: they understand the difference between Bitcoin and the 2,000 other cryptocurrencies that have subsequently been created.

Facebook’s Libra proposal

Facebook’s stated goal with Libra is to assist “unbanked” people in societies throughout the globe—i.e., “…those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation.” Facebook believes Libra is the solution to this as it would allow for a lower-cost and more accessible and connected global financial system.

Libra essentially is made up of three systems: it is built on a blockchain, backed by a reserve of assets and governed by the independent Libra Association.

The Libra Reserve

“Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets – the Libra Reserve – and supported by a competitive network of exchanges buying and selling Libra.”

It is important to note that this reserve of assets will be a collection of government fiat currencies and other low-volatility assets. It will not be pegged exclusively to the U.S. dollar. Regulators pressed David Marcus, head of Libra, on this nuance of the coin. Marcus stated that while the majority of the basket would be made up of the U.S. dollar, that could change if the Libra Association decides to change it. This is an important detail, since regulators are concerned about the potential impact of the U.S. dollar as the world reserve currency. Regulators also addressed concerns over the governance of the reserve.

The Libra Association

The Libra Association will be the governing entity over the Libra blockchain and Libra Reserve. This entity is stated to be a nonprofit entity and was created in Geneva, Switzerland. The association will have full control over creating or destroying Libra coins. It will manage the reserve and ensure all coins are fully backed with fiat assets. All decisions will be voted on and require a two-thirds vote by the council to be enacted. It is required that entities that wish to join the council commit $10 million to the project. Currently, Mastercard, PayPal, Stripe, Visa, eBay and others already have joined as part of the founding members.

“To make the mission of Libra a reality – a simple global currency and financial infrastructure that empowers billions of people – the Libra blockchain and Libra reserve need a governing entity that is comprised of diverse and independent members. This governing entity is the Libra Association, an independent, not-for-profit membership organization, headquartered in Geneva Switzerland,” according to the Libra white paper.

Public vs. Private blockchains

Bitcoin is a decentralized and permissionless blockchain, which essentially makes it public in nature. The true identity of its creator, Satoshi Nakamoto, is unknown to this day. The bitcoins being traded are not backed by any fiat currencies or any other tangible asset. Simply put, they are backed by supply and demand of users on the network. The issuance of bitcoins is known to users and will not change.

As other cryptocurrencies or “altcoins” were created, there was a commonality amongst all of them; a central person or group of people were responsible for creating it, and potentially can make changes to the network without consent of the users. Some of these altcoins have created public permissionless blockchains, but still see the creator influencing the networks.

Controversy has followed in many cases of altcoins. Creators still heavily influence the project through updates to the code or even marketing the coin. In other instances, creators have pre-mined an abundance of coins and then sold when the market value increased. Many of the scams in this space have come from the altcoins created. In some cases it isn’t clear at all what the purpose of the launched coin is for the network. Plenty of altcoins show innovative promise, and I do believe we will continue to see current assets tokenized onto blockchains. But those networks will require compliance with regulators, and those tasked with administering and overseeing them must make sure they follow SEC rules.

Congress seemed well aware of these differences and pressed Facebook on them during the July hearings. Representatives often suggested Facebook seek out the same requirements and oversight that banks are subject to. Facebook hopes to launch Libra in the first half of 2020; yet, many members of Congress urged Facebook halt the project until it can be further deliberated. As the industry eagerly awaits regulatory clarity, Facebook has helped shine the spotlight on the differences between open public blockchains and private ones.

At Marcum LLP, we closely monitor issues and trends around cryptocurrency and blockchain and help our clients navigate this exciting yet evolving landscape. We’ll continue to follow news surrounding Libra and all other cryptocurrency/blockchain issues and keep you updated as developments occur.

Do you have questions about Libra, blockchain or other cryptocurrency issues? Please contact your Marcum representative.

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