Is it time to sell your BTC and invest in Facebook’s new Libra cryptocurrency? Facebook has a pretty huge user-base, so it seems almost irrelevant what Libra will be or how it will work, people might just have to use it. Like Telegram’s Gram token, who cares about the tech when you have the users?

But there’s already been government resistance to Libra, and Facebook is obviously not the most popular data warehouse, so perhaps you’re thinking it’s a tough call whether to go all-in or wait it out. Unfortunately it doesn’t matter, because unless you have $10 million and run a name-brand company, you can’t invest. That’s right, Facebook is announcing what could be the biggest cryptocurrency yet, and even if it beats Bitcoin to the top, everyone who has ever invested in crypto will just have to sit there and watch.

But this post isn’t investment advice, it’s my overall take on Libra. I’m sharing personal views here but many of my Reserve teammates agree with these points.

Our take:

Facebook recognized the biggest mission in crypto right now: providing a ubiquitous stable currency. That’s our mission too.

Their approach amounts to “a more open Venmo,” compared to Reserve’s approach of “a more stable Bitcoin.”

It really seems like they are trying to do things the right way, including allowing users to hold the Libra token pseudonymously, and keeping control of Libra out of Facebook’s hands.

However, they don’t have a way of keeping power over Libra out of government hands. Control of the assets that will back Libra will be centralized to a single legal entity, making the whole system easy for governments to co-opt.

This likely spells a future of increasing restrictions and terms of service, not open, anonymous, censorship-resistance. Libra could still be a bigger and better WeChat Pay, but it probably won’t be able to reach countries where currency and banking is broken.

Libra really could be extremely good or extremely bad for all of crypto depending on how regulators respond. Facebook just raised the stakes and now it’s time for the hands to be played. They could end up setting the laws for all of us, so they had better have some good cards.

Getting to know Libra

Here’s the basic plan:

You will be able to hold Libra coins pseudonymously, and send them to third-party wallets! You will be able to trade them on exchanges! (At least this is the stated plan; I will analyze this below.) Facebook and its new subsidiary Calibra will help you buy and sell Libra in smartphone apps, which will require full KYC. Transactions in the permissioned database are processed by a pretty small set of servers, operated by corporate and non-profit partners. They hope to decentralize more over time, but they say there are unsolved technical challenges in the way of doing that. The Libra coin is intended to be 100% backed by the same kinds of assets as Reserve will be backed by — a basket of major currencies and liquid, short-term government debt. We approve of this choice! But the mechanism for handling these assets is very different — they are managed by a single legal entity in Switzerland. More on that entity in a second. The business model is also the same as Reserve — yield on the collateral assets + small transaction fees. Profits go to Libra Investment Token holders pro-rata, and at least for now, these are just the corporate partners that invest $10 million to join. They aim to raise about $1 billion up front, and use most of it as an adoption incentive to get people to switch. This is also similar to the Reserve plan, where future sales of Reserve Rights tokens are intended to pay for massive adoption incentives. You will be able to write smart contracts on the platform, with a language they are developing called Move. Move is cool because it helps developers avoid introducing bugs into contracts by simply not allowing some kinds of operations that you would never want to instantiate anyway. Everything is held together by the Libra Association, a Swiss non-profit. The Libra Association is governed by the set of ≈100 companies and non-profits that run the nodes. It’s the issuer of the token, so it controls the backing assets legally, and decides when to allow Libra tokens to be redeemed and when not to. It selects which parties are allowed to redeem, and it’s explicitly stated that it will be a small number of designated liquidity providers.

Libra is pretty likable, I think. I know crypto Twitter is hating on it, but I think Facebook has designed something that will really appeal to both the liberal-millennials and crypto-curious nocoiners that will make up their main initial audience. Their mission is essentially the same as ours, so we feel some kinship and some competition.

If you haven’t watched the brilliant intro video, check it out. I was really impressed.

Power dynamics

Decentralization is important for multiple reasons. In addition to reducing the need to trust third party administrators, it serves the key purpose of stopping governments from shutting things down or forcing changes when they don’t like what’s going on. Would Bitcoin really have survived in its current form this whole time if it had been administered by a single company that the government could control?

Facebook understood that they needed to hand control away in order to have a fighting chance in the court of public opinion — a “cryptocurrency” owned and operated by Facebook would have been a joke. And until the announcement, it often was:

Their pseudonymous key-pair plan and legally decentralized governance setup took many by surprise. Facebook will be one of about 100 equally-weighted voters in the Libra Association, and will retain no special powers.

But they seemed to miss the need for applying decentralization to fending off governments.

The Libra Association may be governed democratically by its members under normal conditions, but legal entities can be ordered to take actions by courts. So it’s incorrect to think of the association’s governance mechanism as the only political structure that matters. If a powerful government can legally compel the association to take actions, then the future of the Libra protocol is up to that government, regardless of the official voting structure within the organization.

One might wonder whether the Libra Association actually has the power to make changes to the protocol though — perhaps the node operators could choose to not accept a rogue change?

This is where the management of the backing assets is so crucial. The association decides when to allow liquidity providers to redeem Libra tokens for fiat money. So if a hard fork is created, it’s entirely up to the association which version of the token to support the value of. Thus a government that is piloting the association can dictate that a new protocol is produced, and that the new fork is the real one. The value of the unpegged tokens in the old copy of the ledger will plummet once the market learns what has happened, and the deed will be done. (By the way, this is true of all normal fiatcoins.)

What does this mean? It means that Facebook, Calibra, and the Libra Association can’t really make any promises about how their technology will work in the future. PayPal was founded with the same vision that Libra has just announced, and due to its centralization became more and more restricted over time. Here’s PayPal co-founder Luke Nosek talking about this original vision and how regulators got in the way:

When we started on this journey, we sought out the co-founders of PayPal because we thought they may have some lessons for us. They did, and this was one of them. You might be thinking “Didn’t the leader of Libra work at PayPal? And isn’t PayPal one of the members of the association?” Yep, both true, and yet we don’t see how Libra is going to avoid the same fate. Maybe you had to live through the early days to take this seriously.

The upshot

On the first day after Facebook’s announcement, US and EU regulators immediately spoke up to ask them to stop developing Libra until the governments could review the plan. This reflects the reality that regulators have had the luxury of mostly ignoring cryptocurrency— it’s been small––and Facebook is now making it real for them. The same narrative that excites investors (“2 billion users!”) scares governments.

For a long time now the Reserve team has been arguing that fiatcoins will be forced to do KYC on all key-holders as soon as crypto gets big enough to matter. We couldn’t figure out exactly how long that would take. We’re pretty sure it’s going to happen much faster now that the world has been given the first easy-to-believe story for massive stablecoin adoption.

So on the one hand, Libra may catapult crypto into the minds of everyone on the planet, fuel the next big crypto bubble, inspire lots of effective competitors, and heck, maybe it will even work. On the other hand, the conversation with governments about building real economies on top of stable crypto may be led by––of all possible parties––Facebook 🤦🏻‍♂️. Let’s make damn sure they are working with Coin Center.