Facebook’s Libra project plans to run individual tokens representing national currencies — dollars, pounds, euros — in the hope of making financial regulators less unhappy with them. They also plan to run a native Libra token, calculated from the national tokens by “smart contract.” [Libra press release; Reuters; CoinDesk]

Today’s press release comes with heavy revision to the Libra white paper, explaining how this will all work. The new white paper still has the wild aspirations to crypto-fueled unregulated finance — but with extensive concessions to regulators, which mean none of that stuff can happen. [libra.org; archive, PDF]

David Marcus and Mark Zuckerberg alluded to Libra’s national currency token plan in October 2019, and I wrote it up when it hit the news again in March 2020.

Libra think this white paper is sufficiently developed to use it as part of an application to FINMA, the Swiss regulator, for a payment system license. FINMA note that this all has to work internationally too — “FINMA has been in close contact with the Swiss National Bank and more than 20 other supervisory authorities and central banks from around the world since the start of its dealings with the Libra project.” [FINMA]

What this means: Libra is being forced to turn into PayPal-but-it’s-Facebook — with the back-end system running on a blockchain, for no reason except to say it’s on a blockchain.

National currency tokens and the native Libra token

Libra plans to run dollars, euros and pounds on the network as tokens of fixed value — stablecoins, as we know them in crypto.

Functionally, a Libra-dollar will be a substitute dollar — at this point, Libra is just an e-money provider.

You can be sure that Libra’s backing reserve for each national token will be closely monitored and audited.

Libra also likes the idea of “seamlessly integrating central bank digital currencies (CBDCs) as they become available” — you know, the CBDC idea that central banks were panicked into taking seriously only because of Libra.

The native Libra token will be run by a smart contract — a small program, running right there on the Libra blockchain — balancing set proportions of national currency tokens.

The weights of currencies that will make up the Libra token are as yet undecided. Libra suggest punting oversight and control of the basket to “a group of regulators and central banks or an international organization” under the guidance of FINMA — rather than the Libra Association controlling its composition themselves, as per the previous plan.

The Libra Reserve(s)

The new white paper mentions “key concerns” — that is, every financial regulator in the world coughing up their own skulls in horror — and in particular, the October 2019 paper from the G7 Working Group on Stablecoins, where “stablecoins” means “Libra.” [BIS, PDF]

The national currency tokens will be backed by “a Reserve of cash or cash-equivalents and very short-term government securities denominated in that currency and issued by the home country of that currency.”

Each reserve will include a capital buffer, to deal with losses and liquidity problems — Facebook want to run a private currency so very much that they’ll put their own money into this. Negative yield on reserves will be covered by “transaction and other fees.” If economic conditions mean Libra dealers stop redeeming Libra tokens for actual money, the Association — that is, Facebook — will step in to redeem Libras itself.

The white paper lists various other emergency scenarios. These all look rather like stress test provisions for banks.

Libra plans to deal with the threat of Libra-isation — a country’s economy being taken over by Libras — after it happens, maybe:

In particular, if adoption in a region without a single-currency stablecoin on the network generates concerns about currency substitution, then the Association could work with the relevant central bank and regulators to make a stablecoin available on the Libra network.In particular, if adoption in a region without a single-currency stablecoin on the network generates concerns about currency substitution, then the Association could work with the relevant central bank and regulators to make a stablecoin available on the Libra network.

Regulatory compliance — and a permissioned-only network

The new white paper acknowledges that Libra will need a full regulatory compliance framework — the Association can’t just leave that to the Libra dealer network, as they were hoping to.

Pages 15–21 of the white paper PDF outline the planned compliance framework. [archive, PDF]

Libra’s original hopes to go permissionless aren’t happening — the Libra network will only be open to designated Libra dealers and regulated crypto exchanges (Financial Action Task Force-defined “Virtual Asset Service Providers” in FATF-compliant jurisdictions) and custodial wallet hosts.

(Though Libra’s original permissionless network plans did literally involve inventing new computer science — the June 2019 version of the white paper admitted that no solution existed “that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. “) [June 2019 white paper, PDF]

Libra still wants to make the network open to anyone to use (“Unhosted Wallets”) — because their whole solution to “banking the unbanked” is for people to run their own Libra wallets:

Unhosted Wallets enable financial inclusion, broad competition, and responsible innovation and thus facilitate the creation of services for the unbanked and underbanked. Since their activities may pose a greater risk, they will be subject to balance and transaction limits.

Realistically, there’s no chance of regulators letting anything of the sort happen — direct personal access to the blockchain means “channel to launder money.” You’ll deal with Libra through a provider with full Know-Your-Customer checks and compliance mechanisms in place, or you won’t at all.

Previous white paper revisions

The various Libra white papers have been revised multiple times. I found eight versions of the main white paper between June 2019 and February 2020, for example.

Most previous changes were minor tweaks — with the big change being the purge of the Libra Investment Token from all documentation between the June 2019 and July 2019 versions of the Libra Association white paper. [June 2019, PDF; July 2019, PDF]

What this means

Facebook is slowly being dragged, kicking and screaming, to running Libra like an ordinary, compliant payments processor — PayPal, but it’s Facebook — or Libra won’t be allowed to exist.

The only interesting things the blockchain parts could do is work around regulations — and there’s no way regulators will let Libra do anything like that.

Libra was founded on Bitcoin dreams — but none of those aspirations will ever happen, because they contradict everything about how finance works in the real world.

If you’ve looked over previous versions of the white paper, you’ll want to read this one afresh, closely.

Just focus on the bits about regulation. Ignore the wild crypto aspirations — because none of those are going to be allowed to happen.

Crypto dreams are tolerated when they’re put forward by weird small-time nutters — but not when they’re coming from a huge company with a continent-sized user base.