You’ve probably come across Facebook’s newly discovered cryptocurrency, Libra. The news drew the attention of international media and dominated headlines for about more than two weeks from the time of the official announcement. But if we first hear about it, welcome to the future where the data wasn’t sufficient and now Facebook wants to control monetary policy as well.
Those of us who were in Bitcoin’s sphere knew that Facebook had been working for the cryptocurrency from some time, but we weren’t able to know how it exactly looks like till 18th June 2019. Well for many in the cryptocurrency market, it was somewhat we expected, Libra isn’t a cryptocurrency and also didn’t benefit the Bitcoin.
What’s the mystery of Cryptocurrency?
Bitcoin, the world’s first cryptocurrency, popular in pop culture for its wild price fluctuations, is called cryptocurrency because it uses encryption for transaction processing and transfer value. This end-to-end encryption makes transactions very secure and irreversible. These transactions are recorded on the so-called Blockchain. This technology, the backbone of the Bitcoin Network, acts as a digital book that maintains unchanged and constant up-to-date information about all account balances on the network and ensures that nobody cheats on the system to spend the fake coins.
The main features of the Bitcoin Network are its un-changeability, safety, permissionlessness, and decentralization – all transactions are final, the network is virtually impossible to compromise, everyone can use it as freely as the Internet itself, and no central organization or bank) controls it. The currency of the network, bitcoin is rare and cannot be censored. The number of bitcoin that will exist will be 21 million, and the currency is unreasonable for the police or to be banned alike internet.
Bitcoin is also global as an endogenous currency for the internet. Sending Bitcoin from Nashville to, say, Seoul, South Korea may take only a few minutes, depending on the transaction fee that the sender determines. On the contrary, a bank card may take up to a week.
Why Libra doesn’t fall under the category of Bitcoin?
In order to understand Libra’s importance in the wider cryptocurrency world of which there are thousands, it is better to understand how Bitcoin works and why its users see value in a decentralized, non-national monetary system. By highlighting how Bitcoin works with Libra, it is clear that they both have so many things in common as the Federal Reserve’s monetary policy is doing with mining of gold or a corporate powerhouse with a company owned by employees.
For example, Libra is closed and will be heavily hidden unlike Bitcoin, which is an open system. Facebook has announced the currency in partnership with 27 other major corporations, businesses and nonprofit organizations including Visa, MasterCard, Spotify, Lyft, Uber and Ebay. These founders form the Libra Association, which will be responsible for processing network transactions and maintaining its version of a blockchain. Until the beginning of the coins in 2020, the project hopes to enlarge to about 100 members.
This means that only 100 servers, also known as nodes, will support the network. Bitcoin, on the other hand, has about 11,000 units globally to check and broadcast transactions to the rest of the network. These “full nodes,” as they are called in the crypto industry, are accompanied by “mining nodes” that provide computational power to order blockchain transactions and protect the network from attacks. They receive transaction fees and freshly cut Bitcoin from the network as a reward for this service; this coin-retrieving process, which set free freshly extracted coins with a fixed inflation schedule (right now, approximately 2% per annum), is the way the network manages monetary policy without a centralized organization. Together, these nodes build a decentralized framework that makes Bitcoin so healthy that if you want to bring down or compromise one of these nodes, the network will still be safe due to the fact that thousands of others still uses the code to support the network.
In any case, Libra will not be decentralized or offer protection for Bitcoin design features. With Bitcoin, everyone can manage a full or a node, but with Libra, each founder had to commit a minimum of $10 million to have the pleasure of joining the network. In the future, if any other organization wishes to join the Libra Association will have to pay a similar or even higher amount.
Also, with becoming a protector of an entirely new monetary system, they will also be given awards for deals and bonuses from the Libra Reserve. The assets that are government-backed such as the national currencies, bonds, and securities, will be included in this basket. The interest of those assets will be paid into the dividends to members of the Association according to the share of they have in the Libra network.
Seems familiar? If the federation of members who have monetary control to issue or redeem coins for national currencies of authorized brokers do not lend it, then Libra’s reserve must bring it home. Unlike the Federal Reserve, Libra Association is a corporation run the central bank. Its bank reserves will give the coin a stable value, possibly a dollar coin, and each coin will be issued/borrowed against this reserve and will be recovered from it.
This is another big deviation from Bitcoin, which is not supported by any asset other than it. Some argue that this means that the bitcoin has no inherent value, and the Libra project explicitly states in its document that Libra’s currency is backed by assets issued by the government to be injected with “real” value. But as every Bitcoin exhibitor will tell you, the nature of bitcoin as a monetary network separated from the interests of the state is precisely why it is valuable, unlike the government currency, which may be the subject of irresponsible emission/inflation and centralized control, the gold-like bitcoin is limited and decentralized.
Because Bitcoin is decentralized, there is no central authority to control the monetary policy or the activity of police users. Nobody in the network can block you from participating, no one can protect you from transactions and no one can freeze your funds.
On the other hand, Libra is a centralized network which loses all of these functions that we associate with cryptocurrencies. The association will be able to put blacklists on the users who will not serve, will be able to cancel the transactions they dislike, and as a bank they will have full access to all their financial information: who you paid when you paid, why you paid and how much you paid. Considering Facebook’s reputation for incorrect user data management and its frivolous approach to privacy, understandable concerns from the community and even legislators are: “Can we trust Facebook with our money and its related data?”
The takeover of the Crypto world by Libra
If Libra is not abolished by regulators before it starts, the market will decide where to trust and assess the convenience of privacy and financial sovereignty. Libra poetically advocated the creation of a comprehensive, cross-border monetary system that would serve both untied banks and economically privileged. Facebook drew a page from Bitcoin’s book with this because that’s exactly what Bitcoin’s creator, Satoshi Nakamoto is doing. He made the launch of Bitcoin in 2009 that concludes: It is a parallel monetary system which is beyond the existential framework, borderless, free to join, and it is extremely difficult for governments to censor. With Bitcoin, you are your own bank.
Libra has kidnapped this story without offering any of the features on which the story is built. It is highly centralized, it can prevent people from using it as a means of exchange, and it will make it very easy for governments to trace transactions and deprive citizens of the freedom to ask the network. With Libra you are not the bank; it is. This is the glorified IOU for the dollar and other national currencies, masked as a cryptocurrency whose “blockchain” is likely to look something closer to the cloud database than the real one.
Moreover, the main competitor of the Libra is the banking industry. With Libra, Facebook and friends opened a new monetary front. For the first time since the Wildcat Banking of the 1800s, the Austrian ideal for private currency competition is again an occasion. With Libra people already have an extra option along with the state monopoly on the issuance of currency. If you use Libra, the new boss is the same as the old boss; they just work in the Silicon Valley corporate offices instead of the Federal Reserve banks.