Libra and its Implementations on International Finance

Libra and its Implementations on International Finance

Libra

Facebook proposed the creation of a digital currency for global use, Libra.  The organization plans to introduce the currency to the world in the first half of 2020. The Libra White Paper defines Libra as a “global currency and financial infrastructure” (Schmeling 1). The currency would consist of three sections. Firstly, Libra is a digital currency based on blockchain. The blockchain would be reliable, secure, and scalable. Secondly, the currency shall have the backing of an asset reserve designed to avid volatility and maintain stability in the value of the currency (Schmeling 1). The financial assets to back the currency would include securities from the US Treasury and a basket of currencies.  Lastly, an independent organization called the Libra Association would govern the currency. The Libra Association consists of various companies that have membership in the organization. These companies come from diverse disciplines, including nonprofits, payment, venture capital, technology, online marketplace, and telecommunication (Deloitte 4). This association would be responsible for developing the ecosystem of the currency. It would manage the project, the transactions, and the currency.

Problems that Libra Solves

Libra would be a solution to various issues that most people experience around the globe in financial matters. One such problem is the issue of accessibility and trustworthiness. Notably, most developing countries do not use credit cards for financial transactions. Besides, reports indicate that such growing regions have more than 2 million residents with no access to banking services (Matthews). Reports show that the number of unbanked people across the globe is roughly 1.7 billion as of 2017, with the US alone reporting 8.4 million unbanked households and 34.2 million under-banked households (Taskinsoy 5, 10). Banks mostly prosper in cities and big towns in the developing world due to the higher population that provides a broader market. In effect, the banks end up neglecting the people living in remote areas. Such individuals would have to travel to the nearest urban centers to access banking services (Matthews). Consequently, the Libra crypto-currency would solve the accessibility problem for such unbanked and under-banked people (Weber 2). It would be possible to access funds to makes payments for purchases or receive funds for products or services rendered form any part of the globe, as long as there is an internet connection. Therefore, Libra solves the problem of accessibility to funds.

Libra also addresses the issue of untrustworthiness in digital currencies. Other digital currencies have had incidents that have prompted a lack of trust in the digital currency system. For instance, Bitcoin reported a $460 million deficit or loss from its accounts attributed to theft by hackers (McMillan). In a separate incident, $27.4 million went missing from the Bitcoin bank accounts.  Earlier on in June 2011, $8.75 million had disappeared due to hacking as well (McMillan). Therefore, such incidents have caused people to lose trust in the safety of their funds in digital currency. It is worth noting that Libra’s creation will also adopt the blockchain technology that Bit-coin used (Guller 1055), making it just as vulnerable to hackers as Bit-coin has been. Such incidents have mostly thrived on the fact that there is no regulatory body in the use of Bitcoin. Therefore, there is no framework to help retrieve the money even if there were any attempts. However, Libra has brought in a governing body that would propose rules and regulations on the currency’s use. There would also be mechanisms to help secure the system to prevent such incidents of hacking (Taskinsoy 5, Guller 1055). Therefore, Libra solves the problem of untrustworthiness in digital currency..

Another issue with current traditional financial systems such as banks is the costs associated with the transactions. Banks act as middlemen between the two ends of a deal. As such, they get a percentage of the transacted amount as a transaction fee (Amsden 1). Notably, the rate for this transaction fee is dependent on the transaction volume and the distance between the two ends of the deal. This means that large volume transactions cost more than small volume transactions (Guller 1057). Similarly, long-distance transactions such as cross border transactions cost more than short distance transactions such as those within a country. The absence of banks in digital currency implies the elimination of middleman transaction fees (Taskinsoy 10). Therefore, Libra makes it cheaper to transact any amount across any distance.

Assuming that Libra users would comply with regulations set out by the Libra Association, the power and continuous success of the project would probably rest on the acceptance of digital currency as a way of moving and representing value over a broad scope of providers of services and products, conveniently (Deloitte 7). The currency project has a collaborative framework for evolving financial infrastructure. This framework could see the project forming an innovation platform, thereby enabling new business models and fostering new opportunities for present and future global users. Reaching the global economic and banking systems’ fringes surpasses the unbanked population from a traditional perspective. It also means novel business models fostered by universal transactions for the regular participants and the underserved in the world’s economic and banking systems (Deloitte 7). Notably, the new digital asset has a programmatic nature and a frictionless, streamlined approach. Such features would make micropayments or low-value transactions feasible due to reformed cost structures.

Additionally, they would facilitate a deeper integration in the present and new business models driven by digitalism. For instance, people could get micro-compensation for data-revenue or ad-revenue sharing. Furthermore, the project’s ecosystem has an extensive and tightly linked economic activities and participant network resting on a broad and famous array of consumer goods and services (Deloitte 7). Participants in the system as suppliers may use the same payment in the same network with no need for bank accounts.

Another problem that businesses face is the volatility of currencies in foreign exchange. Most other forms of currencies are subject to inflation and hyperinflation. It follows that it can become expensive for people to trade in certain currencies depending on their location.  Libra aims to solve this problem by “backing the entire Libra stock with safe and liquid reserve assets” (Schmeling 2). The countries’ currencies hold reserve assets. Notably, currencies for major countries tend to experience relatively low inflation. Therefore, the Libra coin was to inherit this property mechanically (Amsden et al. 2). Its asset portfolio is also diversified geographically, which would be an advantage in minimizing the fluctuation effect on the currency across the globe. Simply put, the value of a Libra would be fixed against a specific currency basket, with the creation of a new Libra dependent on the addition of new assets to the reserve stock and vice versa (Schmeling 1). Such a feature is similar to currency boards, whose objective is to fix local currency exchange rates against specific reserve agencies. Currency boards purpose to stabilize the rate of exchange by backing each domestic currency unit that the board issues with an equal value of safe assets in liquid form in the foreign currency at the fixed rate of exchange. For instance, Hong Kong has had a currency board since 1983, against the US dollar, just as Bulgaria has the Lev set against the Euro, and previously the German Mark (Schmeling 2). Therefore, Libra addresses volatility in foreign exchange.

Libra’s Benefits

Libra has a distributed governance structure through the Libra Association. This association has various firms from various fields, forming a governing body for the use of the currency. The founding members were 28 heavy-weight firms during its inception in 2019, and it is expected that once this number gets to 100 in 2020 (Guller 1055), each of the firms will have only one voting right on matters about the operations of the currency (Taskinsoy 6). Some firms that support Libra include global leaders in payment systems such as Stripe (USA), Mastercard (USA), PayU (Netherlands), Visa (USA), Mercado Pago (Brasil), and PayPal (USA) (Guller 1055). Their support for the project implies readiness to adapt to the upcoming financial sector’s change wave.

In the communications sector, there is Vodafone (UK), which is among the biggest telecommunications companies globally. Therefore, Libra would not have any problem with communications. Other companies in communications include Iliad (France), which is credited for pioneering various new inventions in ultrafast and broadband connections. There is also Anchorage (USA), Xapo (Switzerland), Coin-base (USA), and Bison Trails (USA), all of which have experience in blockchain technologies. This support means that Libra’s technical infrastructure set up would not be difficult (Guller 1055). Some venture capital firms that are known for their start-up business investments also support the project. These are Breakthrough Initiatives (USA), Thrive Capital (USA), Andreesen Horowitz (USA), Union Square Ventures (USA), and Ribbit Capital (USA). Therefore, finances will not be a problem.

Other supporters in the nonprofit sector include Kiva (USA), which acts as a lender to individuals without access to the financial system. Women World Banking (USA) is involved with designing and investing in financial solutions and institutions for women’s welfare. In contrast, Mercy Corps (USA) conducts humanitarian activities and raises funds to aid millions of individuals. The Creative Destruction Lab (Canada) combines economical design and computer technologies, making it an organization of value to the Libra project. Other supporters are global players (Guller 1055). Booking Holdings (USA) is a travel solutions provider. eBay (USA) provides online shopping services, and Lyft (USA) and Uber (USA) are in the transport sector. Fartech (UK) is involved in luxury fashion, and Spotify (Sweden) is a critical player in the entertainment industry. Facebook is a leader and spokesperson for the Libra Association. As a social media platform, it can reach masses from across the globe, being the most used social media site with 2.375 billion users, which is 20.8% of the global population as per 2019 data (Guller 1055). WhatsApp, a Facebook-owned communication program based on the internet, has 500 million daily users as of 2019 data. All these individuals will have a say in the operations of the project; therefore, there will not be a single entity that will have excessive power over others in the project, making the project serve different sectors equally for the benefit of the users.

Another Libra benefit is the decentralized or permissionless network structure. However, the network presently is centralized but is working towards decentralization. This situation means that there will be open access to the system so that any individual as an internet connection can be a user of the Libra network (Amsden et al. 2). Notably, conventional or traditional banking systems may require some documents of identification to open an account. Additionally, in accessing funds, the same identification documents are needed, as well as guarantors in the case of accessing loan funds. There is also the use of credit scores to determine an individual’s creditworthiness. The result is that most people are locked out of some banking service, making them unable to perform some transactions (Fiedler et al. 12). With Libra, there are no requirements to be able to access or transfer funds. The Libra project ensures that there is a low entry barrier for users. Innovation could assume a role change mode in an ecosystem or an industry. In particular, the digital working concept of Libra has an overarching working premise (Deloitte 8). This concept facilitates greater ease and success, thereby minimizing entry barriers in new business opportunity formation. Yet, reducing entry barriers could alter existing orders, thus creating an even playing field for incumbencies in the area (Amsden et al. 2, Deloitte 8). For instance, in the context of the Libra ecosystem, new entrants in fitech may need Libra for easier access to activity areas compared to previously when accessing financial infrastructure in institutions would have required significant time, capital, and effort investments. As such, new entrants could substitute present incumbents, and current incumbent rivals could collaborate to create novel and unique offerings on the market as well as other cooperative projects. Therefore, fitech firms could adopt the Libra Network in providing compelling offerings in financial services (Deloitte 8). Alternatively, traditional providers of financial services could utilize Libra’s digital assets to build on new products, which is also innovation. All these factors of innovation and low entry barriers ultimately benefit consumers due to healthy competition.

According to Amsden et al. (2-3), the Libra blockchain is a database that is authenticated cryptographically and maintained through the Libra protocol. A programmable resource ledger holding resources such as Libra coins is kept in the database. Resources abide by custom regulations that the declaring module specifies. The module is also stored in the database. Accounts own resources following authentication through cryptograph with a public key. Accounts could represent entities or direct system end-users. Such entities could be custodial wallets acting on the users’ behalf. Account owners have signing abilities for transactions operating on an account held resources. Validators keep the database as well as process transactions that clients submit, to add to the database. Validators utilize a protocol of distributed consensus in agreeing on the continually increasing transaction list for entry into the database.

Similarly, they use the protocol on agreeing on the results of transaction executions. Reliability is critical even when a few validators behave erroneously or maliciously. Validators rotate on pushing the transaction acceptance procedure (Amsden et al. 2-3). Validators acting as leaders see the proposition of transactions from direct client submissions and indirect submissions through different validators. Validators foresee transaction execution and create authenticated structures of data containing updated history for the ledgers. They then vote on the data structure’s authenticator as a consensus protocol requirement. The consensus protocol gives a signature on the database’s full version for response authentication to client queries (Amsden et al. 2-3). Therefore, the Libra protocol ensures the protection of the integrity of funds.

Libra’s Downsides

There have been concerns about criminal activity prospering through the Libra project. Such illegal activities include acts of money laundering (Weber 2). Notably, crypto-currencies such as Bit-coin employ permissionless blockchains. Presently, Libra’s network is not decentralized. Therefore, the system is reliant on trust in the Libra Association to play the role of a “de facto central bank.” Therefore, this network has to ensure an airtight system to eradicate such concerns. Other arising issues have to do with privacy. Facebook is the most widely used social media platform globally, and it has other subsidiaries such as Instagram and WhatsApp with an equally significant traction of users. Notably, Facebook is planning on using its extensive outreach to promote the network. There have already been privacy issues with the corporation in the past, which makes it a problem for the Libra network, mainly because it is dealing with finances and not just personal data. The system is not entirely different from existing digital currencies such as Bit-coin, which have had hacking issues before that have led to the loss of funds from the company’s accounts. Libra becomes vulnerable to similar attacks as it uses the same blockchain. Therefore, privacy issues and criminal activity concerns are a problem for Libra.

Additionally, there are other products on the market, similar to Libra. These include Alipay and Bitcoin, which will be a source of competition for Libra. For these two products, they have a decentralized network with encrypted transactions. Consequently, there is open access to every individual who so wishes to participate as long as there is an internet connection, with the assurance of security of transactions (Taskinsoy 11). Libra’s network is currently not decentralized, with the Libra Association controlling its usage. This feature means that there no easy access for users. However, Libra has the advantage of currency backup for justifying currency value (Fiedler et al. 12). Libra is also stable relative to other currencies, including the digital currencies, which gives it an edge on the market.

In conclusion, Libra is an upcoming crypto-currency that would provide a stable currency for global use. It would use similar blockchain technologies as other digital currencies use, except for the inclusion of a regulatory framework. The framework consists of members from a diverse geographical background and dealing in different fields or industries who support the project. Therefore, implementing Libra in international finances would facilitate wire transfers, reduced transaction costs, a stable rate of foreign exchange, bypassing the control of the foreign exchange, and fostering trustworthiness in the system.

Works Cited

Amsden, Zachary et al. The Libra blockchain.

Deloitte. Libra: Shaping the evolution of financial infrastructure.

Fiedler, Salomon et al. The future of money: compilation of papers. European Union, 2019

Guller, Arif. Libra: The new world currency? Journal of International Social Research, 12(65), 2019

Matthews, K. (2018). 5 ways Bitcoin affects the economy. TechnoBuffalo. Available at https://www.technobuffalo.com/5-ways-bitcoin-affects-the-economy

McMillan, R. (2014). The inside story of Mt. Gox, Bitcoin’s $460 million disaster. Wired. Available at https://www.wired.com/2014/03/bitcoin-exchange/

Schmeling, Maik. What is Libra? Understanding Facebook’s Currency. SAFE Policy Letter, No. 76, 2019

Taskinsoy, John. This time is different. Facebook’s Libra can improve both financial inclusion and global financial stability as a viable alternative currency to the US Dollar. Journal of Accounting Finance and Auditing Studies, 2019. DOI: 10.32602/jafas.2019.27

Weber, Beat. Libra: A new competitor among international currencies? SUERF Policy Note, No 85, 2019