By Steven J. Grisafi, PhD.
Stephen Williamson, an erudite economist of the Federal Reserve Bank at St. Louis, has provided a thoughtful analysis of how he perceives the incipient cryptocurrency, known as the Libra, will develop. Although it appears to nobody that sufficient information has been provided within the press release document called a white-paper by the Facebook corporation, Professor Williamson’s assessment appears to associate the attributes of the financial system underlying the Libra cryptocurrency as most similar to that of an unregulated, or “shadow”, bank. Markus Ferber, a member of the European Parliament, has voiced his concern regarding this apparent nature of an unregulated bank in an opinion article echoing similar concerns voiced by members of the United States House of Representatives. Mr. Ferber’s primary concern appears to be the breach of trust possibility between client and provider that could result from deceptive use of a Facebook account. Not only is there concern that users may falsely identify themselves but also that corporate malfeasance of financial information pertinent to the user may occur. After several years of maintaining several cryptocurrency wallets. and monitoring the stability of their valuations, I too became interested in the news regarding the soon to be release cryptocurrency. So, I tried to read its so-called white-paper.
For someone who is accustomed to reading technical documents, this was a frustrating experience. As someone who can wade through the most dense and arcane mathematics, what I cannot tolerate is being required to click some hypertext link every other paragraph, taking me to a new web-page, in order to read the details regarding what is so blithely described using programmer’s prose. The white-paper reads like an undergraduate essay in Computer Science 101. Never are we told who are to be the “nodes,” presumably the wallets that are to confirm all transactions. So my assumption is that each and every Facebook account is a potential node. I tend to think that most persons who have become interested in Bitcoin have never themselves tried to maintain a Bitcoin core wallet. One need never attempt to mine the cryptocurrency in order to maintain a wallet. The burden of merely recording all Bitcoin transactions places upon the computer resources of a home user such a heavy load that maintaining a core wallet, even without any attempt at mining, quickly discourages any curiosity the user may have regarding cryptocurrency wallet mechanics. What happens then is that the user switches to a publicly maintained ledger node such as Electrum. In so doing the user entrusts all privacy concerns to the maintainer of the public node. This is what Facebook seeks to do.
Facebook is to become the maintainer of a public ledger of a unit of account that they define. My assessment of the Libra proposal is that Facebook seeks to enter upon the business model first created by Pay Pal while modifying it such that they introduce a unit of account, which they call the Libra. As a user of the Facebook Libra, imagine yourself as a Pay Pal client who acquires the right to conduct financial transactions within the Pay Pal network by first purchasing a cryptocurrency that becomes the unit of your financial account. This explains why we can be certain of Facebook’s assertion that there will be stability of the valuation for its cryptocurrency. That stability is to be achieved through the purchase of the basket currencies whenever a user buys into the Libra financial network though a purchase of Libra. The distinction to be made against the Pay Pal financial network is that Pay Pal does not require a purchase of its own unit of account in order to use its services. A client of the Libra financial network would have the illusion of maintaining a node in the public ledger of the network. But in actuality the Libra client is only the possessor of an Electrum-like account. The gory details of the public ledger are maintained solely on the servers belonging to Facebook. What the Libra client has in his or her Facebook account are only the private keys belonging to the wallet.
I found no adequate explanation regarding the quantity referred to as “gas.” This quantity is what a Libra user would choose to pay in order to have his or her transaction incorporated promptly into the block chain of the public ledger. Although it is no stated explicitly, presumably this fee is received by the nodes that confirm the transaction. Since the white-paper makes no mention of the Proofing Mechanism, the manner determining which nodes get the privilege of adding a block to the block-chain, we can only assume that this fee is absorbed by Facebook as payment for the service. The holders of an Electrum-like wallet have no capability to add a block to the block-chain. Consequently, unless we are told otherwise, we must assume that only the Facebook servers will have that capability. In summary, while I see the potential for corporate tyranny regarding the financial affairs of its users, the Facebook Libra financial network will not be the disruptor one may imagine. It will not provide anything new that Pay Pal does not already provide. But, it will also instill a fear of corporate tyranny, a specter that does not spook the users of Pal Pal.