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How Libra Coin Will Change the World's Financial System

Author: Martin Moni
Martin Moni
All publications of the author

Coins have been around for over a decade, but none has received as much attention as Libra. This coin was created by FB to make a global currency, much like BTC was supposed to be. Unlike BTC, regulators and even legislators seem worried about Libra than any other coin. Perhaps this is because of the backing of FB, which including its subsidiaries WhatsApp and Instagram, has over 2 billion users.

There is no denying there is a lot of buzz around Libra coin from everyone, and this genuinely seems like something worth considering. Well, first, do not panic because it has not yet been launched, and now it’s time to learn everything about Libra and how it is intended to change the world’s financial system.

Everything you need to know about Libra

FB (NASDAQ: FB) has never been concerned with coins as far as we know. In fact, it was not until May 2018 that rumors started flying about FB’s interest in creating a coin. By this time, several major investment banks had already got into it, so it’s surprising that a tech company wasn’t into it. Nevertheless, the company became serious about creating a coin, and it was officially announced on June 2018. (These are the: 10 Most Important Resources to a Coin Trader)

How does it work?

In most ways, Libra will operate as a normal coin. A normal coin like BTC operates on a blockchain, which is the backbone of the entire network. The blockchain is run by a network of nodes all of whom have a copy of a ledger showing a record of all deals. On the BTC network, these nodes are referred to as miners because they are responsible for maintaining the ledger. The ledger remains public to everyone, but only the miners have a complete copy of all deals. (To understand more about blockchain, read: The lowdown on coin)

With Libra, the structure is very similar in that there will be a blockchain also to be maintained by nodes. The Libra blockchain has been made open-source just like BTC, but it has been created using a different programming language called Move. This new language was developed by FB using the already known Rust programming language that is known for increased security. With time, FB intends to allow for the creation of smart contracts on the Libra blockchain. For developers, they will have to acquaint themselves with the new programming language if they intend to use the network.

Contrary to most coins, though, the Libra blockchain is a permissioned network and not a public one. This means that those responsible for maintaining the network have to be given access by the network owner. For now, only those companies that contributed $10 million to the development of the network have access to it. Some of the companies include PayPal, Visa, Uber, Vodafone, etc., all of whom were awarded a Libra Investment token for access.  These will be the companies that will maintain the various nodes to be used by the Libra network. (Before investing: Learn How Coin Scams Operate And Avoid Them)

Within five years, the Libra network will shift to a proof-of-stake system and stop being a permissioned network. Proof-of-stake is a new type of validation system that is being used by recently released coins such as Cosmos. It is a better system compared to proof-of-work being used by BTC because there is no need for extensive use of processing power to solve mathematical problems. This makes the system faster and more efficient. From the project’s whitepaper, anyone who would like to operate a node for the network must have a 40 Mbps internet connection, 1 commodity CPU and 16TB SSD. All these are reasonable and doable, so it seems possible to transition to a permissionless system. (Find out how PoS is working by reading the: Cosmos (ATOM) price prediction 2020)

Speaking of the network owner, Calibra is the subsidiary of FB tasked with the development of Libra. In order to create some distance between Libra and FB, a non-profit organization called Libra Association, based in Geneva, Switzerland, was also created. It is into Libra Association that FB’s partners made their investment into the network and not to FB directly.

Another similarity with other coins is that Libra will also need a digital wallet for the storage of Libra. In this case, the wallet will be called Calibra, just like the subsidiary company. At first, the wallet will be available only through WhatsApp and FB Messenger, then maybe create an external wallet. Since FB services are used by billions of people worldwide, the Calibra wallet will be readily accessible by over 30% of the world’s population. (This is: The Strategy Of Coin Whales In 2019)

One of the major challenges coins face, and the reason why many banks and institutions have shied away from them is extreme volatility. There have already been several flash crashes on the ETH network, for example, where prices drop rapidly within seconds and rise afterward. The most recent of these flash crashes occurred just yesterday when the value of ETH dropped by 20% on the Poloniex exchange. A more serious flash crash was observed in June 2017 when ETH dropped from $319 to $0.10 within seconds on the GDAX exchange (formerly Coinbase Pro). (Do you know these: 5 Tips to Choosing the Ideal Coin Platform?)

To solve this common problem, the Libra Reserve was created to ensure every Libra coin has an equivalent asset value in the real world. These assets will be based on different currencies and will range in different classes, all to be managed by the Libra Association. By having the backing of real assets for every coin, Libra will be less susceptible to rapid price changes, and this would give merchants confidence in holding the coin and accepting it as a form of currency.

This also raises the question of how many Libra coins there will be. According to the whitepaper, Libra Association will be in charge of creating new coins and destroying existing ones depending on the demand. When there is increased demand from authorized resellers, the association is able to mint new coins and destroy them when demand is lowered. But because every coin has an asset with an equivalent value in the real world, there should be no fear of inflation.

How is Libra coin different from other coins?

From reading the above structure of the Libra coin, there are several stark differences between it and the most popular coins in the market today. The main one is that it will not be a public network like, say, BTC. For most of the current coins, anyone can choose to become a miner for free just by downloading the software and the complete ledger. After that, they can start mining the coin and hope to successfully complete a hash and receive the reward. (Will Institutional Investors and Sharks Invest Massively in BTC in 2019?)

With Libra coin, it will be impossible to run a node in the network, and it might still be difficult after the 5-year period stated by the company. After 5 years, becoming a miner will still be very difficult unless one can prove they have the clout and a significant amount of Libra coin to participate in the proof-of-stake system. For FB, their main goal is to ensure their network remains fast, stable and secure., which means they will be very selective in who they give permission to. Furthermore, there aren’t any rewards for miners defined as yet, and there is no incentive to become one. (Gram (TON) Vs BTC in 2019: Best Worldwide Coin Fight, Pros and Cons)

Moreover, Calibra will be some sort of a de facto central bank for Libra coin, meaning that it won’t really be a decentralized network. This is essential for FB because they want to receive regulation from authorities, but in turn, it will put off some enthusiasts and users who value privacy. Coupled with FB’s past of infringing on users’ data, there are many people who will be afraid of sending money and transacting using Libra coin.

Making Libra coin a stable coin is not completely new, because there are already some successful stable coins like Tether. To stand out above the rest of the stable coins, FB hopes to ride its popularity and trust. Tether, for example, is quite controversial because some experts don’t believe that every Tether token is backed by a dollar amount in the real world. Recently, this fear was confirmed and the token is now considered to be like any other coin. Such fear and lack of trust in other organizations may give FB an edge because of its size and reputation; plus, some very meaningful partnerships with other corporations. (Do you know: How Did Tether Coin Survive The Coin Arena Selloff?)

Libra coin is also fundamentally different from other coins in the way it was designed. Using Rust, Calibra managed to create an entirely different programming language, Move, that is meant to increase, speed, scalability, and security. After the initial launch, the Libra network will be able to process up to 1,000 deals a second – much faster than most popular coins. Furthermore, it will only take 10 seconds for a deal to be committed to the blockchain and finalized. This is also much faster than, say, what you see on the BTC live chart. (These are: The Most Prominent Coin Hacks and Scams You Should Know)

Deals are verified by the nodes through a system referred to as LibraBFT (Byzantine Fault Tolerance) according to the project’s whitepaper. When one validator receives a deal, it processes the deal and sends a signature of the new state of the database to the other validators. This makes it easy to add new validators because they won’t have to download the entire database as long as the previous validators are all trusted.

The controversy surrounding the coin

In the more-than-a-decade period that coins have been in the limelight, there have been a lot of questions over the future of coins and financial systems. But no other coin has drawn more controversy within months of its announcement as Libra coin. Find out why. (Do you know: What is the future of coin in finance)

Regulatory pressure

So far, the biggest challenge to Libra coin has been regulation since so many legislators are skeptical about the coin and a few concerned about the disruption of money systems. The coin was formally announced by FB on June 18, 2019, citing David Marcus as the head of the division and one of the creators of Libra coin. (These are the: Coin Regulations Around the World)

Less than a month later on July 2, democrats at the House Financial Services Committee (HFSC) sent a letter to FB asking them to stop developing the coin. By July 17, Marcus was summoned by the HFSC for a hearing to discuss the coin. The senators’ main concern was that of privacy, following FB’s previous misconduct in its association with Cambridge Analytica. Interestingly, Republicans in the HFSC instead asked for clarity on digital assets. Their argument was that curtailing tech companies would stall technological development and force companies to relocate. They further argued that other countries such as Switzerland, Singapore and the United Kingdom already had clear regulations whereas the US was still undecided about crypto. (Now: Coin Ads Banned From Google And Social Media)

The scandal showed how Cambridge Analytica obtained individuals’ personal information to help them with the 2016 US presidential elections. As a result, FB was under fire for their role with founder and CEO Mark Zuckerberg appearing before Congress and apologizing for his role. To date, many tech experts shun working for FB and the company has been perceived as not being careful with users’ personal data.

Now that the same company is planning to launch a global currency based on blockchain, it was only natural that the legislators would be worried about the same thing. This time, it would even be more personal since it would involve personal finances. Chair of HRFC, Maxine Waters, has been especially vocal against Libra coin saying that it would be a threat to privacy and national security. Meanwhile Sherrod Brown, member of the US Banking Committee, believes that FB is already too big and too powerful to be let into people’s finances. (Do you know: Which Are The Most Influential Coin Arenas By Country?)

An example of this was written in the Washington Post with the example of WhatsApp. The post refers to FB’s promise to keep data on their website and the app separate and secure. However, the company has already been sued in Europe under GDPR regulations for failing to do exactly what they promised. If Libra coin was allowed to operate, FB would have extensive knowledge about their users’ daily lives and could use this to make money. The term surveillance capitalism was used to explain this business model used by the company. (Investor Tips 2019: What To Include In Your Portfolio)

This concern is spread beyond the US, by the way, into Europe and other countries in the world. In Germany, Finanzwende chair Gerhard Schick believes that FB’s dominance around the world, if allowed to spread into finance, would hold the world at ransom. Add to that, he doesn’t believe that FB can be trusted to keep people’s data secure, again because of their previous record. Even a Bank of International Settlements (BIS) analyst, Hyun Song Shin, expressed his concern that Libra could jeopardize financial stability around the world.

Absurdly, some people are concerned about the opposite. While many legislators are worried about FB’s lack of privacy, some think that Libra may actually cause too much privacy. Finance Minister of France, Bruno Le Maire, believes that FB could become a shadow bank to be used for money laundering and terrorism. This sentiment is also shared by Gerhard Schick mentioned previously, which goes to show just how much controversy Libra is causing around the world.

The most recent hearing by the HFSC did not lead to a specific conclusion either. In this meeting, the SEC was asked about whether Libra coin and Libra Investment token should be considered as securities and it seemed they will be deemed as such. Therefore, these could receive regulation by the SEC, but the SEC chair Jay Clayton expressed some concern about the potential to use Libra to ‘evade regulations’. Clayton went on to say there is a task force at the SEC specifically meant to assess digital assets including Libra coin. (Do you know: What is An ICO and How Can I Make Money On It?)

FB claimed that it will not launch Libra until it receives proper regulation in the US, which is turning out to be a bit of a problem. There is hope, however, and it is possible the SEC will allow Libra to go live in 2020 as the company had planned. About FB’s intent to be used around the world, that is a different matter entirely that you would have to wait and see.

Experts

It’s not just the legislators that are worried about Libra coin, because even crypto experts and enthusiasts are too. One of the main concerns stems from the fact that Libra will be a private blockchain and not decentralized as BTC, ETH, etc. are. Such a coin would therefore not be validated by many anonymous nodes around the world but by a single node controlled by FB. Not only does this go against the whole concept of a decentralized network, but it also makes hacking easier. Keep in mind, we use easier here just to compare it to a normal coin.

You see, blockchains are impossible to hack or gain control over because the network is self-sustaining and there is no one in charge. Deals are verified by many different nodes, and it is impossible to hack all of them simultaneously. Even when there is a need for an update on the network, all the major miners (who control major nodes) must agree on the way forward in order to achieve a majority consensus. Without this consensus, a fork occurs and there are two different blockchains. (After The BTC Cash Fork, Which Is The Real BTC?)

However, Libra coin will be a private blockchain in the sole control of FB… okay, maybe Libra Association but you know what we mean. If a hacker wanted to gain control of this network, all they would need to do is hack FB and they have everyone’s money in their control. There would be no need to attempt a 51% attack or whatnot, just go directly to the source.

In this regard, Libra is not a truly decentralized coin, and this has got some experts worried as there is no way to verify deals on a public blockchain.

Scams

It should not come as a surprise that scammers have already spotted a new opportunity and are cashing in on it. What’s more, these scammers are so brazen that they even place their adverts on FB after creating FB pages. Some are even paying for sponsored ads to reach more people, meaning that FB is receiving money from scammers who are lying about their products.

These scammers have also created elaborate websites to gain even more victims. In a research report by Digital Shadows back on June 19 after the formal announcement of Libra coin, there were already over 100 domains associated with Libra. By now, you can bet the number has risen exponentially. Many of these websites even use the Libra website font and excellent web design and graphics to appear legitimate. 

Fortunately, unlike the ongoing debate about the regulation of Libra, scams are an easy thing to avoid as long as you know Libra is not yet live. Besides, one should always be aware of such schemes and take necessary precautions before going ahead with a deal.

Can Libra coin actually achieve its lofty goals to change global finance?

This is the main question in everyone’s mind since FB has made some pretty bold claims about the future of their coin. Indeed, the company does have ambitious goals because even David Marcus pretty much claimed the goal was to change how people access and use money in the same way the internet revolutionized communication and information sharing. (Does BTC Stand A Chance Of Becoming The Worldwide currency?)

The one thing going for the company is that it already has a very wide user base of over 2 billion users – roughly a third of the world’s population. Most of these customers make use of FB’s products Messenger and WhatsApp, which is precisely where the Calibra wallet will be put first. A country like India, for example, has 200 million of its population using WhatsApp. The second thing is that the company is hoping to reach people who do not have access to conventional banking services.

In the latest report by Global Findex, World Bank reported that there are about 1.7 billion adults who remain unbanked as of 2017. Half of this population includes individuals from countries like Nigeria, India, Mexico, Pakistan, etc. Although these people do not have bank accounts, they make use of mobile money accounts for financial services and most of them have smartphones. These statistics show that, although other coins like Litecoin could not attract many users, Libra may have a leg up thanks to FB’s reach. (Find out more about the: Growth Of The Forex Market In Africa And Other Developing Countries)

But it’s not just the unbanked populace that is in need of, or could make use of, Libra coin. The whitepaper claims that deals will be free on the Libra network, and merchants will only be charged a small fee for deals. Having such a cheap means of sending and receiving money would be beneficial to everyone. And when coupled with the speed promised, it’s likely that everyone would be interested. Perhaps even foregoing BTC for the new Libra coin.

For the coin to work, people would also need to get their hands on it, and here too FB has got it figured out. Users will be able to exchange fiat currency for Libra coin and vice versa using verified merchants provided by the company. These merchants will be most likely based in several locations around the world to allow for more users to acquire the coin using the local currency. Besides, the Libra Association has partnered with financial companies like Visa, MasterCard, and PayPal, so it will also be possible to buy Libra coin using a credit card and/or PayPal and other services. The ability to acquire the coin easily and from a trusted source will definitely place it above others where users frequently have to risk their capital. (Some of the: Alternative Coins beside BTC to invest in)

These partnerships will also be great for Libra in providing trust in the company. There are currently 28 partners in Libra Association spanning different industries. Some of the most notable ones have already been mentioned as well as Lyft, Uber, eBay, Vodafone, Coinbase, Andreessen Horowitz, Women’s World Banking, etc. To be clear, these companies have promised to contribute $10 million each to the project, but they are yet to do so as they wait to see how things go with the regulators and legislators. (Learn the: 5 tips to forming the most promising coin investment portfolio)

And that will be the final sticking point for the success of the coin going forward. FB made it clear that they were not going to launch the project until they received permission to go forward from US regulators. Perhaps this is why a company like Visa and three other companies were still on the fence about staying in Libra Association. Legislators have already expressed their reservations against the new coin as seen during the three hearings held by the House Financial Services Committee (HFSC). If the SEC denies Libra coin as a security, then FB will either have to scrape off the entire project or launch it from a different location. The latter seems more plausible because such a company would not want to waste all the resources already committed just to let it go.

Now, going back to the question, a lot of factors are lined up to make FB’s dream come true. The company is already a behemoth, meaning that it has the resources to implement this project and push it through. Most startups have difficulty making themselves known to people, but everyone knows FB and probably has one of their apps on their phones. This is a plus for any company that wants to push new products, especially for FB.

Therefore, except for regulation from the SEC other regulators and central banks around the world, there is no sign that Libra could not become a reality. But it is also too early in the project’s development. Some developers have already tried to test run the Libra code that is open source, but it didn’t work as well as expected. This showed that there are still a lot of kinks to be worked out before the rollout in 2020. (These are: The 3 Most Trusted Platform Authorities in The World)

Is it possible to invest in Libra coin?

Unfortunately, it will not be possible to invest in Libra coin because it is meant to be a stable coin. Being a stable coin, the value of Libra will remain equivalent to $1 throughout so as to represent the value of real-world assets. Speculators can forget about quick turnarounds from Libra coin as a result, because its price will remain the same throughout. The value of the coin will mainly be that of legal tender and not in price changes.

 

To get a quick glimpse at what Libra coin is all about, here is a short clip from FB about it:

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.
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