LIBRA:THE ORIGINAL CONCEPT

This blog is written by SANSKRITI, a 1st Year BALLB student AT DAMODARAM SANJIVAYYA NATIONAL LAW UNIVERSITY , VISHAKHAPATNAM

INTRODUCTION

In the world of digital economy and payments, CRYPTOCURRENCY is a well-known name among the plethora of other options to make payments online. It has rampant its sphere in recent years by reaching out to every corner of the world. So before moving to Libra digital coin, let me brief you about some basics of cryptocurrency.

When we talk about various mode of payments,nowadays, the first thing that comes to our mind is the digital mode of transaction and payments like using UPI to transfer cash online or the other digital wallets like Paytm, Amazon Pay or net banking. And all the present mode of payments, whether it is digital or not,are regulated by the centralized authorities of government and banks. So, for example, Person A tries to pay Person B via digital medium through (debit /credit) card or by net banking then there is a chance that the payment may get declined because of several reasons ranging from a minor technical glitch to the user's account getting hacked and so on.That’s why we see the future of currency lies with cryptocurrency.

“The cryptocurrency is a digital or virtual currency that is meant to be aninternet-based medium of exchange and is encrypted as well as decentralized. It uses cryptographic functions to conduct financial transactions.”[i]The most distinctive factor of the cryptocurrency is that it does not come underany central association or authority to manage and maintain its value and that is why it is immune to any governmental interference. “Instead, the cryptocurrency users themselves conduct these tasks via the internet”[ii]Therefore, it removes all the problems related to bank and there is also no limit to the funds that a person can transfer and no central point of failure during transactions.

The other prominentadvantages thatcryptocurrency carries are: it eases the verification process of the funds transfer and operates independently which make transactions even faster than usual.Unlimited purchase and withdrawals of digital coins is also possible. Today, we have more than 1500 different digital coins in circulation. E.g., Bitcoin, Ethereum, Ripple etc.

In May 2019, Facebook came up with the idea of its cryptocurrency named Global Chain or Facebook Coin. Then in June 2019, Facebook made an official announcement regarding the same and named its digital coin as Libra and was initially presumed to be launched in late 2020. But due to several repercussions and regulatory issues, it got extended and then recently on 2nd Dec 2020 the social media giant rebranded its digital coin name from Libra to Diem and now expecting to launch it in 2021.

THE CONCEPT AND PURPOSE OF LIBRA

Libra is a cryptocurrency project pioneered by America’s social media giant Facebook.The whole idea of Libra started back in the year 2017 with Morgan Beller, who is now the co-founder of this digital coin, started working on this Facebook’s ambitious project.

“Facebook intended Libra to be used as a simple, low fee medium of exchange around the world”[iii].It was specifically designed in a way so that it can be used easily by everyone. It was essential to be used as digital money in a person's phone that can be used to make purchases wherever cryptocurrency is accepted. Expectations were high as it was backed by someprimemarketing and financial companies like eBay, VISA, Mastercard, PayPal, and also by some popular apps like Spotify, Uber as well as government debt agencies and instruments

And to handle the cryptocurrency and its partner associations, The Libra Associationwas formedwith its 28 founding members and headquartered it in Geneva, Switzerland. “It was an independent not-for-profit organization made up for the coin’s founding partners.” [1][iv]

HOW DOES LIBRA WORK?

Its main idea was to work as simple cash just like local currency dollars. For example, a person can exchange its local money through the walletand can get almost equivalent number of Libra coins. And for this, they were going to launch a wallet app named Calibra that will send you Libra token from its reserve called as Libra Reserve. It would consist of several stable international currencies or paper money like US dollars, Japanese yen, pound Steller, Singapore dollar etc. “This was announced by the Facebook in September 2019 that the reserve basket would be made up of 50% U.S. dollars, 18% Euro, 14% Japanese Yen, 11% Pound Sterling and 7% Singapore dollar.”[v]The idea behind this is even if one of the above-mentioned paper currencycauses fluctuation in its value, there will be no effect on the value of libra coin. And in that way, it will be convenient for everyone to use Libra without worrying about irregularity of the other currencies. And apart from this,Libra coins can be used for online shopping like in Uber, Spotify and will also get some heavy discounts because both these companies have joined hands with Facebook to make libra a desired wallet for all its users since it is almost free to useLibra unlike other digital coins and wallets present in theplatform.

HOW IS LIBRA DIFFERENT FROM OTHER CRYPTOCURRENCY?

Here I'll try to explain the differences among other cryptocurrencies and Libra by taking Bitcoin as a primary example from mainstream digital coin against Libra. Like other cryptocurrencies, bitcoin is also decentralized means which allows people to exchange money without the interference of banks and government reserves, therefore no single entity controls it but in case of Libra, there will be a huge amount of control over the asset and its usage by the Facebook and Libra association.

It means there is a big difference in the mechanism of both currencies, for example, “Bitcoin uses public ledger known as blockchain to record its transaction. Blockchain is essentially a database maintained by a network of computers on which transactions are secured in such a way that makes it virtually impossible to tamper with”. “Whereas Libra also uses blockchain but unlike other cryptocurrencies,Libra's blockchain is permissionable”.[vi]It means that execution of Libra can only be recordedwhen a specific group of confidential parties will list it. The group of confidential parties will be elected by the Libra association and to become the party of this association each member needs to invest minimum 10 million dollars into the project.

Further,Librais supported by various international currencies that are backed by the government agencies as well as backed by other assets, so it can easily avoid the volatile swings that other cryptocurrencies are bound to face. That is why Libra is also known as a Stable Coin.

The most significant difference among them is that, several cryptocurrencies like Bitcoin have a definite number of virtual coins which exist right now and cannot be generated beyond that limit but Libra will be subjected to demand and supply.

Therefore, we can say that there are some major differences among libra and other cryptocurrencies that make Libra stands out in the race of other digital coins. Bitcoin and other digital coinsare permission less, fully decentralized, deflationary and volatile. Libra is permissioned, more centralized, governed by supply and demand and pegged to fiat currencies.

HOW WILL FACEBOOKGENERATE PROFIT FROM ITS DIGITAL COIN?

“Facebook and the other members of the Libra association can cover their expense and make a profit based on the interest that will be earned on the assets will be held in the reserve. As the currencygradually becomes more mainstream, more assets will be held in the reserve that will generate larger interest income.” [vii]

Secondly, as Facebook is a platform for millions of sellers to advertise their product on the platform and this can help Facebook to make a profit by the advertisement of Libra on its site with help of the sellers and businessmen who will voluntarily agree to support the Libra cryptocurrency.

CHALLENGES FACED BY LIBRA

Libra was set to be launched in 2020 but due to some major regulatory concerns and legal issue that surrounded it, making it difficult for the company to launch it in 2020. And many partners like PayPal, VISA and Mastercard that were party to the Libra Association also left the association due to these concerns. There was also the concern regarding privacy as FACEBOOK itself said that it will keep the financial data of the users of libra separate from their social data. But the history of Facebook’s keeping privacy data secured is not pleasant (Cambridge Analytica case).

CONCLUSION

In the end, due to all these concerns and backlash by several governments regarding Libra’s

[i]What is cryptocurrency and how it works, NEWS18 BUSSINESS (Dec.15,2020,1:00 AM), https://www.news18.com/news/business/what-is-cryptocurrency-and-how-it-works-2525071.html [ii]Kate Ashford, What is cryptocurrency, FORBES ADVISOR (Dec.14,2020,6:34 PM), https://www.forbes.com/advisor/investing/what-is-cryptocurrency/ [iii]Libra Cryptocurrency ,THE CORPORATE FINANCE INSTITUTE (Dec.15,2020,7:13 PM ), https://corporatefinanceinstitute.com/resources/knowledge/finance/libra-cryptocurrency/ [iv]Carl Engelking, What is the difference between Libra and Bitcoin, NORTHWESTERN MUTUAL(Dec.18,2020,6:40 PM) https://www.northwesternmutual.com/life-and-money/whats-the-difference-between-libra-and-bitcoin/ [v]Colby Smith, What exactly is Facebook’s Libra Reserve, FINANCIAL TIMES,(Dec.20,2020,4:12 PM), https://www.ft.com/content/7884a51a-c3bf-3740-9739-9e933e2e8471 [vi] Ryan Browne, Bitcoin VS Libra, Key differences between them, CNBC TECH,(Dec.18,2020,5:33 PM), https://www.cnbc.com/2019/07/19/bitcoin-vs-libra-how-facebooks-cryptocurrency-is-different.html [vii]Saeed Elnaj ,Will Facebook’s Libra overtake Bitcoin cryptocurrency, FORBES (Dec.20,2020,7.19 PM), https://www.forbes.com/sites/forbestechcouncil/2019/09/30/will-facebooks-libra-overtake-bitcoin-cryptocurrency-and-the-ethereum-blockchain-how-will-it-work/?sh=2aede14b6c26