What is the new Facebook Move programming language
Facebook's cryptocurrency Libra - questions and answers
What is libra
The publication of the White Paper on Libra in mid-June sparked a broad discussion. The banking association discussed the paper with its members - banks and FinTechs - and developed a wealth of questions with initial possible answers from the feedback.
None of these assessments are final - we will update questions and assessments as we develop further. We want to contribute to a broad discussion on the subject of Libra.
- A new decentralized global structure that enables digitally integrated services.
- Possibly the approach that can really drive digital innovation through smart contracts and cryptocurrencies.
- Libra is supposed to be a global public good for improving financial integration.
- The Libra Association currently consists of 28 companies, most of them from the USA.
- Libra offers an extensive network of merchants, technology companies, telecommunications companies, venture capital and non-profit companies.
Questioning the three promises of Libra:
1. Is Libra based on a secure, scalable and reliable blockchain?
(+) The crypto currency Libra is based on the Libra Blockchain (open source) and uses the Move programming language specially developed for this purpose.
(+) Libra is a stable coin that is tied to a basket of currencies.
(+) Initially, the Libra Blockchain will come onto the market in a completely “permissioned” form, which will be centrally controlled by the Libra Association.
(+/-) It is a new "blockchain" model with a new programming language. This harbors both opportunities and risks.
(-) Libra Association does not make it clear why a blockchain is needed for Libra. The technology has not yet required digital payment transactions on the Internet.
2. How stable is the Libra Reserve?
(+) The payments to Libra flow in full into the Libra Reserve and are invested in short-term government securities in stable currencies as well as in bank deposits. Libra is 100% covered by stable currencies. Libra Reserve is thus similar to a currency board as practiced in Hong Kong.
(-) The promise of value stability only exists on the basis of the currency basket. However, this is subject to market fluctuations. In addition, every user is exposed to the exchange rate risk in relation to their domestic currency. There is therefore a constant risk of “breaking the buck”, especially against currencies from emerging countries. It is uncertain to what extent users will accept permanent fluctuations in their means of payment.
(-) In addition to the "normal" market fluctuations, there are other potential risks for the Libra Reserve. These include
- the default risk of the securities or
- the failure of the managers of the reserve.
- In addition, negative interest rates on government securities could reduce the reserve.
- Facebook could change the composition of the currency basket, which would lead to fluctuations in value.
- After all, fluctuations in value could also be triggered by technical problems and cyber attacks.
- Last but not least, capital controls could affect the value of Libra.
(-) Full coverage by stable currencies can only be maintained if the Libras function does not extend beyond payment transactions. If a Libra universe were to give credit, which is likely to be the case, money would be drawn. This newly created credit money would no longer be covered. This would make Libra, like any currency board, prone to a bank run.
3. How independent is the Libra Association?
(+) The Libra Blockchain is to be monitored by the independent not-for-profit organization Libra Association, which will also manage the currency basket and the Libra Reserve at the same time.
(+) With the creation of the Libra Association, Facebook is trying to allay concerns from regulators, competitors, and consumers that it will control Libra. Facebook should not have a special role in the Libra Association. Calibra, as a wallet provider and not the parent company Facebook, is a member. However, Calibra is initially the only wallet provider.
(+) Facebook has only one vote in the Libra Association, which will be based in Geneva. The Libra Association initially consists of 28 companies from the tech and financial sectors as well as non-profit (in future also academic) organizations. It should be 100 by the start.
(-) However, the technical development is likely to be dominated by Facebook, which means that it is likely to have a greater influence.
Does Libra have the potential to be a “killer application”?
(+) There is a growing affinity for digital payment systems.
(+) Digitization and AI offer previously unknown ways of satisfying customer needs. Financial services are an indispensable part of it.
(+) Facebook already has a large number of users of its social networks who will easily be convinced of the advantages of Libra.
(+) Libra is raising hopes for a new generation of financial services based on blockchain technology (smart contracts, micro-payments).
(+) Libra could also be of interest to internationally active companies, as they can use the digital currency to limit their exchange rate risks. However, this requires recognition as legal tender.
(-) The credibility of Facebook is damaged, among other things, by improper use of data.
(-) There is no guarantee that people will accept the digital currency of a private company like Facebook.
(-) Libra is not free. The Libra Association withholds interest paid on the securities in the Libra Reserve.
(+/-) Nothing is specifically said about the costs of payment transactions in the Libra system. It also remains to be seen whether the speed of the Libra system is sufficient. Bitcoin's blockchain technology, for example, is rather slow.
(-) There are high hurdles to regulation and data security. It is currently not foreseeable whether a license according to EMD will be sufficient for Libra or whether a license to trade in securities or even a banking license will be required. It is also unclear whether the existing regulations can be applied to a cryptocurrency like Libra.
(-) The trust of users (based on ignorance and information asymmetry) in BigTech companies is already greater in parts of the population than in the existing banking and currency system. Therefore a success of Libra is quite conceivable.
(-) Facebook has shown that worldwide networking is possible. This could be possible for Libra. However, this would only be possible due to an inadequate international legal framework.
(-) If we draw on the experience from China, then an integration of the payment transaction function into the messenger services of BigTech companies leads to a quick and almost exclusive adoption by end customers.
Can Libra improve financial integration?
(+) According to the white paper, 1.7 billion people (not just Facebook users) have no access to financial services or have high payment transaction costs. Libra would be an easy way to get people involved in payments and reduce costs.
(+) McKinsey Global Institute has calculated in a study that the provision of financial services via mobile phone could increase the GDP of the emerging markets by 3.7 trillion US dollars within a decade.
(-) Facebook and almost all other future members of the Libra Association who have shopped so far are for-profit companies. Social or socio-political motives are therefore rather unlikely.
(-) Facebook is of the opinion that the problem can easily be solved with a private investment. As a rule, however, more complex social and economic problems are hidden behind them.
(-) The problem is often not in the lack of access, but in the belief that people do not have enough money for a bank account (according to surveys in the USA). The lack of a bank account is therefore primarily a problem of poverty. Changing that takes more than just providing digital currency.
(-) Another reason for a lack of financial integration is that, from the banks' point of view, people have a KYC / AML problem. With data already available, Facebook may be able to become the global standard-setter for creating digital identities.
(-) Smartphones and internet access are required for Facebook's services. In most of the emerging markets, these requirements are likely to be insufficiently met. In Africa only 37% of people have internet access and only 15% have a Facebook account (M-Pesa, the mobile payment system from Vodafone in Africa works with the cellular network).
(-) Facebook has not yet explained how people without bank access can purchase Libra and is also silent about the costs that will arise when transferring cash to Libra and vice versa.
What is the impact of Libra on financial stability?
(+/-) If Libra is sufficiently successful, the Libra Reserve will quickly reach a three-digit billion volume. This means that there is no question of relevance for international financial stability.
(+) Libra will draw the attention of regulators around the world to the need to regulate cryptocurrencies. This will benefit these currencies in the long term.
(-) Libra invests the incoming funds in short-term government securities of stable currencies. This security class is also of great importance for monetary policy and for the liquidity management of banks. The more people who use Libra, the faster the scarcity of these securities will grow, which will put additional pressure on interest rates.
(-) Libra is apparently betting that the use of the currency in emerging countries will displace the national currency. Such a weakening would, however, result in further devaluation and higher volatility of the national currency. In doing so, Libra would in no way contribute to improving living conditions; on the contrary, it would make them more difficult and could exacerbate crises.
(+/-) The financial sector is a "critical infrastructure" area. It must therefore be ensured that major innovations are understood and their possible effects on the global financial system.
(-) Libra tries to bypass regulation (only wallet providers and exchanges are subject to regulation according to the white paper). Regulators will hardly accept this.
(-) It is completely open how national or supranational regulators can enforce their rules against Libra. Providers in areas in which Libra is active are subject to various requirements (KYC, AML, CTF, data protection, PSD 2, macro-prudential regulation, etc.).
(+/-) The national and international supervisory authorities must examine Libra very carefully to ensure that this currency also meets the high international regulatory standards.
(-) If there is a run on Libra, there is no one who will stop it. At the same time, the Libra Reserve is likely to rapidly advance to a size that will make it too-big-to-fail. The systemic relevance is obvious.
What impact does Libra have on competition?
(+) New market participants increase competition and challenge the previous market participants. This leads to better and cheaper financial services.
(-) However, this does not necessarily apply if the new market entrant is a "BigTech". There is a risk that Facebook could transfer its market power from the area of social networks to the financial sector.
(-) With Libra, Facebook creates the possibility of combining data from social networks with payment transaction data. The possibilities to control and steer individual behavior are likely to increase considerably as a result.
What influence does Libra have on monetary policy and capital movements?
(-) Libra claims to create a global currency. However, if one considers the problems that arose with the introduction of a single currency in the comparatively homogeneous countries of the euro area, then this goal is likely to remain a utopia.
(-) If Libra should nevertheless be successful in the currency competition, then a private association would control the money supply in one country or even globally.
(-) Libra is a private global currency union. Libra can undermine the sovereignty of the individual national or euro monetary policy. However, this will only be the case if a large proportion of domestic payments and deposits would migrate to Libra and if loans can also be taken out in Libra and a diversified financial ecosystem based on Libra emerges.
(-) In addition, the central banks lose their profit from coins if Libra partially displaces the previous currencies.
(+/-) If Libra is more stable than the national currencies - this may be important for emerging countries - then Libra will not only be used as a means of payment, but also to store value. Libra thus becomes an element of capital flight. It remains to be seen how governments that introduce capital controls in such cases will defend themselves against Libra. To do this, the state authorities would have to be granted access to the personalized user data. A sanction could mean a restriction of freedom of expression (ban on Facebook, Messenger, WhatsApp, Instagram).
(-) In the competition with the world currencies US dollar, euro or yen, Libra will only be successful if national jurisdictions recognize this digital currency as legal tender. At the same time, it cannot be ruled out that users will accept them and lead to a disruption of the existing system.
Can Libra ensure the protection of private data?
(+) To protect users from data-based conflicts of interest, Facebook has founded a subsidiary called Calibra, through which all Libra-related financial services are offered.
(+) Libra ensures that customer privacy is respected and, unlike Facebook profiles, the number of wallet addresses that users can have will be unlimited.
(-) At the same time, the transaction chains are based on pseudonymous - not anonymous - data and are fully published.
(-) The historical experiences with Facebook (Cambridge Analytics and link Facebook / WhatsApp) with regard to data protection are not consistently positive.
What does Libra mean for banks?
(+) Libra will invest part of the Libra Reserve in bank deposits. This gives banks an additional inflow of funds.
(-) There is additional competition in payment transactions and increased pressure for cooperation between banks to introduce a European instant payment system including mobile and online access across the board. Libra thus poses the question of future payment infrastructure technology.
(-) Both customers and information about customers are lost when they withdraw their deposits from their bank and deposit them into their Libra wallet.
(-) Banks have expertise in the design of financial services. The fact that there is a new type of asset does not mean that banks are losing their relevance. However, any use of Libra by banks would strengthen Libra's position.
(-) If Libra is used beyond pure payment transactions, for example if loans are also granted through smart contracts, the banking business in its current form could be severely impaired in the medium term.
(-) If Libra were given access to the central bank through a central bank account (overnight deposits), Libra could bypass the banking sector completely. The banks' comparative advantage would be wiped out.
(-) Successful implementation of Libra would significantly increase and accelerate the pressure to consolidate in the banking sector.
(-) Without an alternative digital currency, which is borne by banks and states, the probability of success Libras is high.
The questions formulated and the answers given are based on our current level of knowledge and may be subject to change as the Libra project progresses.
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