From the beginning, cryptocurrency was about trust. “The root problem with conventional currency is all the trust that’s required to make it work,” Satoshi Nakamoto wrote in the first public announcement of the bitcoin system. “The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust.” Most of what we associate with cryptocurrency – the dense technology, the mining gold rush, the alarming price swings – is the direct result of that basic refusal to trust a central financial authority.
Now, that power is in Facebook’s hands. This morning, Facebook announced an ambitious new cryptocurrency called Libra, to be managed by an association of tech and finance companies including Facebook alongside more conventional banking companies like Visa and Mastercard. It’s a hugely ambitious project, basically Facebook’s take on what a global financial blockchain could be. On a technical level, Libra is broadly similar to bitcoin and Ethereum: it has the same anonymity properties, and the same support for smart contracts and independent apps. In theory, it’s everything good about cryptocurrency, only bigger and faster.
If you don’t trust the Federal Reserve, why would you trust Visa and Mastercard?
But while Libra plays at decentralization, it’s still basically a Facebook project. Facebook employees designed the blockchain and recruited the partners that will manage it. Libra wallets will be embedded in Facebook apps like Messenger and WhatsApp, which means Facebook products will be the primary way people experience it. Using Libra means trusting Facebook, which is a hard sell in 2019. And where cryptocurrency initially meant decentralizing power, Libra means further entrenching one of the most powerful companies on Earth. If the project succeeds, it could mean the end of the decentralized era of cryptocurrency.
While many of the technical aspects are similar to bitcoin, Libra breaks from the model in important ways. The currency runs on a permissioned blockchain, which means that only companies in the Libra Association can mine it. As the developers describe it, it’s a necessary concession to stability, allowing Libra to avoid the power use and transaction lag problems that have plagued bitcoin. But it also makes the Libra Association a de facto central bank, actively managing the currency for stability backed by a reserve of bonds and liquid currency. As a blockchain business, it makes perfect sense: you need a blockchain that can clear transactions quickly, and won’t plummet in price after you buy it. But as a question of trust, it’s a bizarre choice: if you don’t trust the Federal Reserve, why would you trust Visa and Mastercard?
Libra doesn’t plan to stay permissioned forever. A separate document lays out the association’s plans to open to more members, ultimately moving to a permissionless model after five years, when the scalability problems have presumably been solved. This plan is entirely possible, but there’s reason to be skeptical. No blockchain has ever moved from permissioned to permissionless, and there will be significant political hurdles to clear – not least of which are the companies in the association, which may want to hold onto their privileged position in the network. At best, the five-year timeline seems like kicking the can down the road, hoping that the technical problems seem less insurmountable in the future. At worst, it seems like a feint. Knowing that a centrally managed blockchain wouldn’t be trusted, the Libra team promised it was only temporary, planning to come up with a fix later.
“a private global International Monetary Fund run by techbros”
In the meantime, anyone worried about Facebook (which means just about everyone) is assessing Libra as a potential threat to the financial system. Open Markets’ Matt Stoller – one of Facebook’s leading antitrust critics – described the ideas as “a private global International Monetary Fund run by techbros.” Uber whistleblower Susan Fowler put it in even harsher terms: “Facebook: we are one of the largest platforms on which damaging, disease-causing, life-ending misinformation is spread, but here’s a global currency!” European regulators are already looking at ways to rein in the new currency, seeing it as a threat to national sovereignty.
It comes back to the question of trust. In theory, spreading the material control over Libra across a dozen other tech companies was supposed to address issues of trust, making the currency seem like something that dozens of companies were involved in. But Facebook’s role in drafting the system is hard to wave away. If you don’t trust Facebook to manage the News Feed, why would you trust it to construct a financial system?
More importantly, if the new system is just as centralized as the old one, Libra starts to look like more of a power grab than a move away from fiat currency. Getting into the central bank business could be great for companies – just look at the stock prices skyrocketing in the wake of the announcement – but it’s not clear why the average user should be excited.