Novi is a yet-to-be-launched digital wallet that is meant to facilitate cross-border money transfer via a standalone application, Facebook Messenger, and WhatsApp. According to Facebook, all Novi users must be verified by providing proof of a government-issued ID.
OKEx Insights takes a deep dive into the two white papers and highlights notable differences between the currencies and compliance procedures described in both versions. We also examine Libra’s vision to reach the “unbanked” and the latest state of the organization behind the payment system, the Libra Association.
Libra, version one: concerns over monetary sovereignty
In the first Libra white paper, “Libra coin” was described as a stable digital cryptocurrency. The white paper claimed that Libra was backed by a basket of low-volatility assets, such as bank deposits and short-term government securities in currencies from reputable central banks. This meant that Libra was not set to be pegged to a single currency. As the value of the underlying asset moves, the value of one Libra coin in other currencies would fluctuate as well.
As the white paper stated, the assets backing Libra coin’s value were to be kept by the Libra Reserve, which was held by a global network of custodians with investment-grade credit ratings. However, the composition of assets in the Libra Reserve was not specified.
The emergence of the Libra currency concept immediately came under regulatory scrutiny, especially in the United States. Regulators highlighted its potential to threaten the monetary sovereignty of different nations.
Friedrich Hayek, the Nobel-Prize winning economist, proposed the concept of Denationalization of Money in his book “ Denationalization of Money: The Argument Refined “ in 1976. This concept advocated a vision that money issuance is not solely controlled by the government and central banks. Instead, private institutions are encouraged to innovate and issue their own currencies, thereby the money issuance process is denationalized.
The enormous customer base of Facebook makes Libra a promising candidate to achieve the denationalization of money. As of Q1 2020, Facebook has 2.6 billion monthly active users — the majority of which come from the Asia-Pacific and the rest of the world, such as Africa and South America. Facebook’s subsidiaries, WhatsApp and Instagram, have 1.5 billion and one billion users, respectively.
Various leaders globally have expressed their concerns about Libra’s impact as a substitution to fiat currencies.
Just after the first white paper was released last year, U.S. President Donald Trump that Facebook’s Libra has little dependability and that the social media giant must comply with existing banking regulations if it wishes to launch Libra. Around the same time, Maxine Waters, the Chairwoman of the House Financial Services Committee and a skeptic of Facebook’s Libra, criticized its ambition to create a new global financial system that is intended to undermine the U.S. dollar.
“….Similarly, Facebook Libra’s “virtual currency” will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National…”
- Donald J. Trump (@realDonaldTrump) July 12, 2019
_“If Libra is widely used for cross-border payments, would it be able to function as money and have a large influence on monetary policy, financial stability, and the international monetary system?” “I expect to see the institutional interest in crypto assets increase over the coming months. This is not only due to macro developments, from CBDCs to Libra, but also important considerations like regulatory clarity and the adoption of best practices.”_Again, the initial Libra white paper had proposed a single digital cryptocurrency backed by a basket of low-volatility assets. This aroused concerns among regulators regarding monetary sovereignty, as well as potential illicit uses, such as money laundering.
To satisfy regulatory concerns, in mid-April 2020, the Libra team launched a new version of its white paper, with changes both to the system’s design and compliance practices.
Libra, version two: single-currency stablecoins
The second version of Libra’s white paper describes the project as a “global payment system” featuring both single-currency stablecoins a multi-currency Libra Coin.
The white paper acknowledges that “the key concern shared was the potential for the multi-currency Libra Coin (≋LBR) to interfere with monetary sovereignty and monetary policy if the network reaches a significant scale and a large volume of domestic payments are made in ≋LBR.”
As a result, the Libra team proposed the inclusion of single-currency stablecoins in addition to ≋LBR. The stablecoins would be, initially, denoted in USD, EUR, GBP and SGD. Further, ≋LBR is proposed not as a separate digital asset from the single-currency stablecoins. Rather, it is a digital composite of some single-currency stablecoins available on the Libra network.
To ease concerns over threatening monetary sovereignty, the latest white paper also acknowledged the development of CBDCs and stressed that they could be directly integrated into the Libra network. If central banks develop a CBDC denoted in USD, EUR or GBP, the white paper notes that the CBDC could replace Libra’s corresponding single-currency stablecoin. Furthermore, the currency composition of assets in the Libra Reserve will match the composition of outstanding single-currency stablecoins. This is expected to comply with the Swiss Financial Market Supervisory Authority’s (FINMA) payment system license that mitigates interest rate and credit risks.
Apart from the single-currency stablecoins, the new white paper also attempts to provide further clarity on ≋LBR’s design. ≋LBR will be defined in fixed nominal weights, such as the Special Drawing Rights (SDR) maintained by the International Monetary Fund (IMF) . For the assets held by the Libra Reserve, the latest white paper stated that the Reserve will hold at least 80 percent in very short-term government securities and the remaining 20 percent will be held in cash — with overnight sweeps into the money market funds that invest in short-term government securities.
The Libra team also stated that it welcomes oversight and control on its basket’s composition from central banks and international organizations under the guidance of the FINMA.
However, it appears that questions remained after the launch of Libra’s second white paper. Congresswoman Sylvia Garcia a statement the same day it was released, April 16, stating that the Libra team has still not addressed its intention to develop a cryptocurrency and concerns with Libra’s potential impact on the global economy.
Notably, the second version of Libra’s white paper has forfeited the original vision of a single global currency. The paper stresses that the Libra coin is a compliment to, but not a replacement of, fiat currencies — evidently attempting to ease regulatory concerns. The adoption of single-currency stablecoins will be dependent on how regulators classify stablecoins in various jurisdictions.
Apart from Libra’s design, the enhanced know-your-customer (KYC) procedures laid out in the second white paper also set it apart from the original white paper.
Libra KYC
The initial Libra white paper introduced the Libra Association — what is referred to as an “independent, not-for-profit membership organization” that will “govern” the Libra Blockchain and Libra Reserve. The Association was also described as being responsible for establishing policies and procedures on the compositional change of the asset basket in the Libra Reserve. However, no concrete compliance procedures were written in the first white paper. This sparked widespread concerns among regulators that Libra coin, via the originally named Calibra wallet, could potentially be used as a tool for money laundering or terrorist financing.
The second Libra white paper took a huge step towards compliance by addressing applicable laws and regulations. The second white paper set out a detailed proposal on compliance and safety programs based on the standards set by inter-governmental money laundering and terrorist financing regulator Financial Action Task Force (FATF) . The proposal laid out in the latest white paper provides guidelines for the four categories of participants on the Libra network:
- Designated dealers
- Regulated virtual asset service providers (VASPs)
- Certified VASPs
- Unhosted wallet
FATF-based compliance
As stated in the second Libra white paper, the proposed compliance program has listed both general and specific requirements for VASPs to comply with FATF standards. The proposed FATF-based compliance program extended to regulated and certified VASPs.
Regulated VASPs
As stated in the FATF guideline , VASPs include digital asset exchanges, wallet providers and financial service providers related to the issuance, offer or sale of a virtual asset.
“Regulated VASPs” refer to those registered or licensed as a VASP in a FATF member jurisdiction.
As the latest Libra white paper states, entities that would seek to be a “regulated VASP” in the Libra network would need to submit proof of FATF registration and demonstrate risk-based regulatory compliance programs to the Libra Association.
After successful verification, regulated VASPs are allowed to transact on the network without transaction and address balance limits. The paper also states that the status of regulated VASPs need to be recertified on an annual basis.
Certified VASPs
According to the white paper, a “certified VASP” refers to a VASP that does not qualify as a regulated VASP but has been certified under standards established by the Libra Association. The highest level of certified VASPs is expected to meet the requirements of both the Libra Association and FATF guidelines.
Certified VASPs, like regulated VASPS, are allowed to transact on the Libra network without transaction and address balance limits. Also, like regulated VASPs, they require annual recertification.
Off-blockchain travel rules
The Libra Association has stated in its second whitepaper that it will develop an off-blockchain protocol to facilitate compliance by regulated and certified VASPs. This protocol will facilitate information exchange by the VASPs to comply with travel rules and record-keeping requirements.
The Libra Association says it will also maintain a public directory of regulated and certified VASPs for status tracking.
Matthew Unger, CEO at compliance management firm, told OKEx Insights that the roles of regulated and certified VASPs in Libra’s proposed compliance program are indeed able to satisfy the travel rule requirements of the FATF:
“In the first stage of Libra, now Novi [sic], I would be surprised if they had any issues with the FATF travel rule. The structure of Novi is a single financial institution that runs a network shared by operating members of the foundation. A key component of the travel rule is the transfer of funds from one VASP to another VASP on behalf of their clients. In the case of Novi, there is only one VASP and all funds stay in that network at all times. Currently, regulated payment processors appear to be the only means of getting funds in or out of the network.”
Non-FATF-based compliance
The latest Libra white paper also listed compliance criteria that aren’t based on the FATF guidelines. The other criteria is applicable to designated dealers and unhosted wallets.
Designated dealers
According to the latest Libra white paper, designated dealers are entities with the right to purchase or sell Libra coins in the Libra network. They can transact on the Libra network without transaction and address balance limits if they meet the entry standard set by the Libra Association.
The Libra Association states that it will conduct sanctions screenings, check beneficial owners and generally perform due diligence on designated dealers in the Libra payment system.
Regulated designated dealers are the only channels to distribute Libra coins that are minted by the Libra network, according to the latest Libra white paper. As described, designated dealers will be the entities that purchase and sell Libra coins to exchanges and over-the-counter (OTC)%20refers%20to%20the%20process,to%20on%20a%20centralized%20exchange.) desks to facilitate the liquidity of Libra coins for end users.
Unhosted wallets
The Libra Association repeatedly acknowledges the importance of financial inclusion in the latest white paper. Thus, the project created a way for all other users that don’t fit into the categories described above to use the Libra network. Individuals and entities can use the Libra network via so-called unhosted wallets.
However, these users are subject to some restrictions: The Libra protocol will impose a transaction limit and a maximum address balance on each unhosted wallet address. The unhosted wallets would need to work with regulated or certified VASPs if they wanted to transact beyond the set limits.
What about taxation?
Despite the introduction of single-currency stablecoins and enhanced KYC procedures, the second Libra white paper does not make any attempt to tackle taxation issues or address the privacy concerns of the Libra network.
For single-currency stablecoins, like LibraGBP, if the value fluctuates in GBP terms, this will lead to additional complexity to determine the potential for taxable capital gains and losses — which may hinder the widespread adoption of LibraGBP.
“Consumers and businesses transacting in non-native LBR stablecoins (e.g. UK users transacting in EURLibra) also face tax liabilities and tax reporting obligations. Every time they use a non-native LBR, the consumer or business will need to compute their capital gain/loss expressed in their home currency. That user’s aggregate gain/loss will generally need to be calculated and reported to their home tax authority, and if there is a gain then the user will often have to pay tax. This will often be a worse tax outcome than if the user had simply transacted in the foreign currency directly, since many countries’ capital gains tax rules include an exemption for foreign currency gains (but cryptocurrency gains are rarely exempted).”
For ≋LBR, as the value of ≋LBR will fluctuate against any single currency over time, every transaction on ≋LBR incurs a capital gain or loss — something that also applies to Bitcoin and other cryptoccurencies already in some jurisdictions, such as the U.S. Sharpe elaborated on the tax liabilities of transacting in ≋LBR:
“The key tax problem for users is that a multi-currency LBR will fluctuate in value against the user’s home currency, meaning that a capital gain or loss will often occur when they use it. If a U.K. user buys a multi-currency LBR for GBP 10, but when they spend the LBR a few weeks later the multi-currency LBR is worth GBP 12, then the user has made a potentially taxable capital gain of GBP 2. Users will need to keep track of their capital gains/losses on each and every transaction they make, which means a potential tax cost at the worst and a compliance headache at the least.”
Privacy issues remain
Apart from ambiguity in taxation liabilities of Libra, the notorious past privacy scandals of Facebook present another challenge before the Libra network can be launched.
While the second Libra white paper provides clarity on the currencies offered and the role of network participants, iComply’s Unger believes that the project needs to tackle other existing regulatory challenges around privacy:
_“The project has other regulatory challenges — most notably, Facebook’s track record for user identification and strong client authentication is abysmal. One estimate suggested that up to 25 percent of Facebook accounts are fake, which is a terrible foundation to serve as a regulated financial service provider. While Facebook has acquired a bunch of identity and KYC providers in the past 4 years — all of these companies were limited by single jurisdiction workflows. Until Facebook finds a way to improve user privacy, security, and identity — it is likely this project will continue to see more PR headlines than acquiring new users.”_With Facebook’s previous privacy scandals, building a trusted digital identity system on the Libra network can be challenging — as the Libra network involves different categories of participants. In comments to OKEx Insights, Hans Lombardo, chief operating officer at , acknowledged the importance of open identity standards and the key regulatory areas that the Libra team should be aware of:
“We always believed that an open identity standard is important to achieving safe interaction necessary for Web 3.0, as is evident in W3C’s DID protocol. However, it is very important that the digital identity standard should enable control over identity and the data with the user, approaching the level of self-sovereignty and zero-knowledge capabilities. In regard to regulations, there is a conflict between regimes like GDPR, which requires data privacy rights, and those put forward by the FATF, namely the ‘travel rule’ and transparency on those trading and transferring digital assets. This is still compatible with a user-centric identity standard, as long as the user has the freedom to choose to trade and send & receive assets.”### Banking the unbanked
Both the first and second versions of Libra’s white paper share the same vision to reach the unbanked and facilitate financial inclusion. In the latter version, the Libra team listed two tools to achieve this goal: ≋LBR and unhosted wallets.
As stated in the latest Libra white paper, ≋LBR can serve as a neutral and low-volatility asset for countries that do not have a single-currency stablecoin on the Libra network. The Libra team claims that ≋LBR can be used as a settlement coin in cross-border transactions, where users can convert ≋LBR into their local currency to purchase goods and services.
The Libra team introduced unhosted wallets to provide direct access for the unbanked and underbanked populations, which may not have access to a regulated or certified VASPs.
A by Oxford Economics and San Francisco-based FinTech project Juvo published in November 2019 acknowledged the potential economic growth brought by the unbanked population. The study indicated that, by identifying and resolving the needs of the unbanked population, global gross domestic product (GDP) is expected to increase by $250 billion, with the potential increase of global household savings by $512 billion and a six percent average increase in GDP per capita in low-income countries.
The unbanked population presents enormous growth opportunities from the potential adoption in mobile phones and the internet. For people who do not have a bank account, mobile phones and the internet enable them to access financial services. Statistics from the Groupe Speciale Mobile Association (GSMA) highlight that mobile phone penetration rate for sub-Saharan Africa regions is only 45 percent in 2019 — which is far lower than the global average of 67 percent.
This rate is expected to increase to 50.2 percent by 2025. It is expected that 4G connections will be the core source of growth in sub-Sarahan Africa, from 10 percent in 2019 to a forecasted 27 percent in 2025, according to the GSMA report.
For internet penetration, GSMA expects that the sub-Saharan Africa region will grow from 26 percent in 2019 to 39 percent in 2025. Mobile internet users in the sub-Saharan Africa region are expected to 483 million by 2025. For the Middle East and North Africa (MENA) region, the internet penetration rate is expected to increase from 41 percent in 2019 to 50 percent in 2025.
With the enormous growth potential in mobile and internet penetration, coupled with 63 percent of adults being unbanked, it seems sub-Saharan Africa is the core region for Libra to “reach the unbanked.”
Libra is for Facebook, too
Aside from the enormous potential for Libra to reach the unbanked, the Libra Coin can be viewed as a tool for boosting Facebook’s massive Ads business. During Facebook’s annual shareholder meeting held on May 27, 2020, Mark Zuckerberg, CEO of Facebook, that Libra is crucial to enabling fast and seamless payments within the Facebook e-commerce ecosystem.
As of Q1 this year, advertising revenue accounts for 98 percent of Facebook’s overall revenue — making it the core of the internet giant’s business model.
The Ads business is an auction model in which businesses can bid for ads at their targeted price. This means that Facebook can offer the lowest possible price for businesses to participate in the auction of Facebook ads.
Once Libra is launched, the CEO explained, users can click on an ad in Facebook and purchase-related goods and services directly with Libra Coin. Zuckerberg also stated that he expects that Libra’s integration will lower the costs in currency conversion and encourage businesses to bid higher in the ads — which, in turn, boosts Facebook’s revenue.
The launch of Libra could boost the social media giant’s advertising revenue in the “unbanked regions,” such as sub-Saharan Africa, in particular. Facebook’s current advertising revenue from users in the “rest of the world” (outside of the U.S. and Canada, Europe, and the Asia Pacific) only accounts for nine percent of the total advertising revenue from Facebook users by geography, as of Q1 2020.
Given Facebook’s claim that the launch of Libra Coin could open up financial access to unbanked populations in Africa and South Asia, Libra could potentially lower the revenue share dominance of the U.S., Canada, and Europe in advertising.
The Libra Association’s road ahead
Since its establishment in June 2019, the Libra Association has experienced several key changes in its membership composition. Following the first formal withdrawal of PayPal in October 2019, Mastercard, Visa, Mercado Pago, Booking Holdings, eBay and Stripe followed suit. The loss of these payments and e-commerce giants left only 21 companies signing the Libra Association charter.
The wave of withdrawals continued in 2020 when Vodafone announced its withdrawal from the Libra Association in January, citing its intention to focus on its own mobile payments platform. The Libra Association has since digital commerce platform Shopify in February 2020. Heifer International and Checkout.com joined the association in April 2020. Temasek, Paradigm and Slow Ventures are the recent additions of the Libra Association in May 2020. There are to date.
The Libra Association also recently Stuart Levey as its CEO. Levey was a U.S. Treasury Department official and has served in HSBC Holdings Plc since 2012 as the chief legal officer.
The same day the new white paper was released, the Libra Association also announced that it had a payment system license application with FINMA.
Libra: Alternative or traditional finance?
The second Libra whitepaper has made notable sacrifices to Libra’s original ambition: a simple global currency. With concerns about monetary sovereignty and financial stability, the Libra team intends to issue a few single-currency stablecoins on the Libra network.
As the second version of white paper states, “[t]he Libra network is designed to be a globally accessible and low-cost payment system — a complement to, not a replacement for, domestic currencies.”
This also means that if Libra wishes to survive, it needs to be part of the international financial system, instead of serving as an alternative. Frances Coppola, a CoinDesk columnist, her thoughts in a recent opinion article, stating that Libra can only succeed if it becomes a quasi-government project:
_“The Tower of Babel project is over. Libra will comply with everything that governments demand, and in return, it will be absorbed into the existing international financial system. The lesson from Libra’s capitulation is that if you really want to challenge government authority, you don’t tie yourself into the existing system. You set up an alternative to it, and you defend it to the hilt.” “The original vision for Libra was one with wild crypto dreams of private money, free of regulation. This was never going to fly. Facebook is a real, touchable company. You can abuse people’s private information — but governments take the money very seriously.”_However, despite the concessions made in the new Libra whitepaper, the Libra project’s stated goal of “achieving mass adoption” is still alive — for now. One of the members in the Libra Association, Bison Trails CEO Joe Lallouz, that the second version of Libra’s white paper is “one step closer” to Libra’s goals:
_“The most important thing to achieve a goal of mass adoption is to get the project out the door and into the hands of people that need it most.”_In a recent interview with Bloomberg published on June 1, Katie Haun, a general partner at Andreessen Horowitz, that Facebook’s Libra represents a new era of internet money and its case can be a precedent for other similar projects to follow:
“We are still in the early innings of the internet money category. Extremely early innings. Think about those early dial-up days of the internet. Facebook Libra had a great technological breakthrough, but it’s not yet ready for prime time, but it’s getting there. And you can’t put it into the hands of the public until it’s ready and performing.” OKEx Insights presents market analyses, in-depth features, and curated news from crypto professionals.Originally published athttps://www.okex.comon June 5, 2020.
Libra 2.0: Has Facebook’s cryptocurrency lost its soul? was originally published in OKEx Blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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