02 Jul 2019
Since Facebook announced Libra, many politicians and regulators have raised their heads and said: Hold on, not so fast!
As Marshall Auerback put it very well in his recent Salon article: "Facebook is an Icarus flying too close to the sun." (link)
One thing is to walk on the line and avoid some regulations in the communications sphere, where the Federal Communications Commission (FCC) is not really that tough of an opponent.
But trying to become a private central bank (which Libra Association in effect is or intends to be) is a totally different weight class. And Facebook might not be as heavy as it thinks it is.
The European Central Bank (ECB), the Bank for International Settlements (BIS), the Financial Stability Board, the USA FED, the UK's Financial Conduct Authority and many politicians around the world have already expressed concerns over what Facebook is trying to do with Libra and started with investigations.
Libra threatens to take away one of the most important powers that governments have: the monetary policy. With monetary policy, governments control how much money there is in circulation, which comes very handy when the economy is in recession. In this case, a government would start printing money in order to fuel the economy and bring it out of the crisis.
If a government can't do that, it loses one of the biggest powers it has. So, do you really think governments will just hand out this power to some tech company?
Only two things are possible. If it succeeds, it's going to be a game changer. If it fails, it's going to flop hard, and it might take Facebook along. But there's no scenario where this could be something in-between. So stakes are pretty high for Facebook at this point.
Governments now have two choices. They can either react quickly and shut down the whole Libra experiment before it even starts. Or they can stand on the side and observe Libra taking more and more of their power. Of course, governments can still interfere later, but the Frankenstein will only get stronger and stronger (and harder to beat), the longer they wait.
No, not at all.
If governments take down Libra, it doesn't mean they will try to take down the whole crypto world (which they can't anyway).
On the contrary - taking down Libra would mean that governments would recognize there's a distinct difference between the fake crypto (which Libra definitely is) and the real crypto.
How to know if a cryptocurrency is real, or fake?
Easy. The real cryptocurrency cannot be shut down, because it's decentralized and censorship-resistant.
Fake cryptocurrencies are not decentralized (enough), and they would quickly comply with censorship.
Real cryptocurrencies cannot be shut down. If governments decide to take on Bitcoin, they can, of course, severely limit its usage, but they can never destroy it. Why? Because it's decentralized and censorship-resistant.
But governments don't really want to take on Bitcoin. Bitcoin has established itself as an asset class, sort of digital gold. It does not threaten governments. Moreover, central banks will probably soon add Bitcoin as one of the assets in their reserves.
But the fake crypto should be attacked by governments so that it is exposed as fake and untrustworthy. Basically, if your crypto can be successfully attacked and shut down - it deserves to be shut down. Period.
If governments shut down Libra, they will probably introduce legislation that will target fake cryptos. Two types of cryptocurrency would then face serious challenges:
These are mainly cryptocurrencies backed by some fiat currency or gold or similar hard asset. In each of these cases, there's a central institution (usually a private company) that holds these assets in their own storage.
This kind of cryptocurrencies are easy to attack - just shut down the company behind it, lock up the executives and seize the hard-assets (gold, fiat money etc). This cryptocurrency is now effectively dead.
Cryptocurrencies that allow the centralization of power are also fake cryptos. If a cryptocurrency is controlled by one entity, it can easily be shut down (I'm looking at you, Ripple).
Having a board of multiple institutions controlling the cryptocurrency (each running their own node) does not make it decentralized. Libra has this board and if governments interfere and order each of these institutions to cease or desist, the board members would quickly comply.
Another such type of cryptocurrencies are the ones that use PoA (Proof-of-Authority) consensus protocols. Since identity is the main part of PoA protocols, locating and identifying nodes would pose no challenge to governments.
The most prominent type of PoA protocols is DPoS (Delegated Proof-of-Stake). Its name may falsely lead you to believe it's a proof-of-stake protocol, but in fact it's a PoA (or a hybrid between PoA and PoS at best). These cryptocurrencies rely on voting to choose block producers, which necessarily means revealing at least part of their identity. This can then be used to track and shut down the block producers.
On one hand, taking down Libra would make a clear distinction between the real and the fake crypto, which has been so far quite blurred, unfortunately.
On the other hand, it would help steer companies (which are now considering using Libra) towards using truly decentralized and open source crypto protocols, such as Bitcoin and Ethereum.
If you feel strongly about decentralization, censorship-resistance and open-source software, you should hope that the regulators really do step up and shut Libra down before it even starts.