After two years of speculation, Facebook has finally unveiled “Libra,” a cryptocurrency that it says will empower billions of users around the world by giving them access to financial services, while providing an easy to use form of digital cash for everyone else.

The software is being released today on a testnet, under an open-source license that Facebook hopes will encourage a community of developers to grow around the currency. If all goes well, it could be released to users early next year.

“I want this thing to be around hundreds of years from now,” David Marcus, a former PayPal executive who oversaw the project, told Decrypt.

Facebook, and its partners—two dozen so-called “validators” that will run the proprietary blockchain network—will govern a reserve of assets, on which they will be able to accrue interest. In addition to releasing details about the Libra via a white paper and other explainers, Facebook revealed that its involvement would be handled through a software “wallet” subsidiary called Calibra, which will store user funds and act as an initial on-ramp to the Libra cryptocurrency.

As has been rumored during the past few months, the network will be built on the Libra Blockchain, which will support the Libra—a stablecoin whose day-to-day value is engineered to be relatively flat and not volatile like other cryptocurrencies. That, it’s believed, will encourage people to use the Libra for all manner of things, from buying goods to sending money across national borders.

The stablecoin’s value is pegged to a group of low-volatility national currencies including the US dollar, the Japanese yen, and the euro.

If we want this to succeed we can’t make it the network of choice for criminal activity of any kind. David Marcus

Unlike previous stablecoins, Libra will not be issued by a central party. Instead, Facebook has drafted in 27 heavily vetted collaborators—drawn from big tech (Spotify, Uber, and eBay), the charity sector (Mercy Corps, Kiva), the VC world (Andreessen Horowitz), and the financial services industry (PayPal, Visa, and Mastercard)—to operate as preliminary “validator nodes” who will each share a transparent copy of a vast ledger of transactions reflecting all the activity on the network.

These collaborators, each of which pitched in $10 million for the privilege of joining the network, are the so-called “Founding Members” of the Libra Association, a Switzerland-based not-for-profit that will oversee the development of the Libra network. A Byzantine system of “governance”—with each node participating in regular votes on key proposals—is intended to hold them accountable.

Facebook hopes that the system will be able to onboard billions of users, over the next five years, into a more efficient monetary system, accessible to anyone, without rent-seeking middlemen.

How Libra works

A blockchain is a system whereby data is distributed across an array of devices instead of on a central database. Each device, or “node,” holds a copy of a ledger of information that can only be updated when each participant in the network agrees to it. The technology underlies cryptocurrencies such as Bitcoin and Ethereum, neither of which rely on a gate-keeping third party to admit new participants.

Because there is no central point of control, anyone with an internet connection can participate in a (traditional) blockchain network. A “permissionless” system, many think the technology can serve the billions of “unbanked” people who, through no fault of their own, are shut out from the traditional banking infrastructure.

Facebook espouses the same conviction in the technology, yet seems to think that most have done a bad job at actually implementing it. Marcus, who helms the Libra Project, told Decrypt that many of the decentralized digital currencies that have attempted to use the technology, including Bitcoin, have failed to live up to the singular promise of being “scalable”—they can’t be rolled out to billions of people without slowing down or collapsing.

As the Libra white paper argues, “the existing blockchain systems have yet to reach mainstream adoption. Mass-market usage of existing blockchains and cryptocurrencies has been hindered by their volatility and lack of scalability. Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts to improve the effectiveness of anti-money laundering.”

Blockchain also serves as a useful PR distraction, and Facebook—tarred as it is by two years of ceaseless scandal—might find better luck in beginning a project to which it will only be held partially accountable. In a decentralized system, said Marcus, “you can’t have more than one company decide who are the winners and losers.”

But why will Facebook's blockchain fare any better?

Facebook's secret sauce

At first blush, the white paper reads like that of a typical blockchain startup—replete with odes to "banking the unbanked", gestures at "financial freedom" and sideswipes at other, less scalable projects.

Software engineer and crypto expert Jameson Lopp, who’s familiar with Libra, said the project actually resembles Ripple, which also governs a consortium of validators. Similarly, many of the ideas discussed in the technical paper are popular among Bitcoin developers.

But Ripple and the hundreds of other cryptocurrency systems have been slow to reach mass adoption; most likely never will. “If anything, it will render Ripple useless,” bitcoin pioneer Charlie Shrem tweeted.

Libra’s particular strength is that it has several multi-billion-dollar companies backing it and two billion users who, Facebook hopes, stand ready to use the coin. This, really, is Facebook’s gambit—introducing the cryptocurrency to the intended users (read: everybody on earth) via the tools that are already deeply ingrained in their lives.

But it raises questions. How, for instance, can a supposedly permissionless system be run by a powerful conglomerate largely concentrated in the same Bay Area tech hub?

Becoming permissionless

Marcus recognizes that the Libra network, incomplete as it is, has a long way to go before it will be able to inspire confidence as a decentralized system. He acknowledged that a close-knit group of Big Tech incumbents could collude and that Facebook’s guiding role in the project could arouse suspicion. “As the initiator of this project, naturally the gravity comes back to us,” he said.

In light of this, Facebook aims for the project to be fully “permissionless”—rather than permissioned, where membership of the Association is only granted to a select few—after five years and transition to a proof of stake network. That network will admit “investment-grade” validators from other parts of the world, making it harder for bad actors to collude. (33 percent of nodes can fail or be compromised without affecting the system, according to the white paper.)

The aim, then, is to get to 100 new validators by 2020, and achieve something close to 1,000 transactions a second—roughly 200 times the sum Bitcoin can currently handle, and around half the capacity of Visa.

But there’s a problem. Facebook doesn’t exactly know how to become functionally permissionless, because great expansions in node distribution often come at the expense of performance and efficiency. The hope is that by releasing the software under an open source license on a testnet—as well as offering lucrative research grants—Facebook will be able to convince developers to help it come up with solutions.

Privacy

Much has been made of Facebook building a cryptocurrency that will allow all comers to see transactions, at the same time as deepening privacy scandals erode trust in the company’s core product. A particular gripe has been the $10 million fee required of the Founding Members who bought into the network, which some have speculated is a trade for users’ transactional data.

On the first point, Marcus said that Facebook is enforcing a strict separation between users’ social data—their Facebook likes, photos, etc—and the financial data that will be available on Libra’s network. There will not, he insisted, be a readily available data trove connecting users’ transactional data to their Facebook profiles, and users’ funds themselves will be cryptographically secured. “We don’t want financial data and social data to be commingled,” he explained.

He added that users would be able to remain anonymous or pseudonymous, at their own discretion—including the ability to keep their digital wallets separate from their Facebook profiles. Indeed, that’s why Calibra, the wallet software that will hold Libras, was made a subsidiary of Facebook—“to ensure appropriate separation between social and financial data and to build and operate services on its behalf on top of the Libra network,” as the white paper explains.

Moreover, Marcus insisted that the $10 million buy in would not grant validators exclusive access to users’ transactional data, which will be publicly viewable anyway. “A big strong, powerful, categorical no,” he said. “The reason there’s investment is to align everyone in a long-term ecosystem, and ensure its success.”

He nevertheless added that third party services built atop the Libra protocol, like exchanges, will be able to do what they want with users' data.

How will Libra be run?

The buy-in price also leads to potential profit. Companies forking up $10 million get in return a place on the founding members’ roster. The money invested supports the network’s “operational costs,” according to spokeswoman Elka Looks. The more money is invested, the more users will (hopefully) use the network, and then, finally, when a critical mass is achieved and the reserves are flush, the Libra Association will be able to reinvest some of that reserve cash into low risk securities, like treasury bonds, to eventually yield a return—resulting in profit for the founding members.

How much money Facebook will make from the venture is also opaque. Accruing interest on reserves and then, further down the line, investing in low-risk securities doesn’t suggest explosive profits. But, if there’s one thing we know about Facebook, is that it isn’t letting anyone ride for free.

The Libra Association will afford its members the right to vote on which securities it invests in. The Association, in essence, functions as a company board, with each member receiving a single vote. A representative of each founding member then casts votes on proposals brought forth by other members, and a supermajority is required to pass any upgrades to the network. A smattering of nonprofits, which didn’t have to pay the $10 million entry fee, also occupy places in the consortium—to make sure not everyone can be corrupted by financial incentives.

Ostensibly to ward off “denial of service” attacks, validators on the so-called “base layer” will also extract fees from traders. Facebook claims the transaction fees are merely to offset network costs and will not generate a profit for itself or the validators. Marcus didn’t give a precise figure, but said fees would be low. “If anyone can send millions of transactions for free, we’ll be grinded to a halt,” he said.

Participants, and indeed anybody, will also be able to generate profit by setting up "services" atop the Libra protocol—Facebook, with its in-built user base, will have an advantage here, especially if users end up lingering on its cryptified website long enough that it can sell them ads. And the wallet, Calibra, could function similarly to a mobile banking app, generating a revenue of its own.

A lot of “could,” you’ll notice—as Facebook itself admits, it has no idea whether this will work. That, presumably, is what the testnet is for.

Stablecoin

How will Libra remain stable? The Association will approve a “basket” of various fiat currencies whose collective market price the Libra will closely track to achieve “intrinsic value” and a “narrow spread” across exchanges—meaning it will be bought and sold at roughly the same price, and its value should remain free from big crests and dips. Parity with this basket of currencies will be reached via a redemption mechanism similar to other stablecoins such as Tether, the cryptocurrency affiliated with the troubled cryptocurrency exchange, Bitfinex.

Libras are minted when licensed resellers, such as exchanges, buy them up for their fiat amount. A dollar goes in the Libra Reserve, a dollar’s worth of Libra comes out. The resellers are the only agents who can “interface” directly with the Libra nodes—i.e., buy Libras directly—and the users must obtain them through the resellers. If the reseller pays back the Libra, the token is “burned.” A dollar comes out, a dollar’s worth of Libra goes up in smoke.

Facebook asserts that this system ensures that the asset is “non-deflationary” and that the relationship between the Libras and the underlying reserves will remain one to one. And if one of the underlying fiat currencies collapses? The Libra Association will deliberate on whether to throw out the compromised tender altogether and replace it with a more stable one.

Regulatory approval

Marcus said that Facebook was working closely with regulators to ensure that the cryptocurrency complies with regional laws. The coin is not being positioned as a security; as a stablecoin, its value is engineered to remain flat.

Likewise, he confirmed that the Libra Association would work with law enforcement to combat criminals attempting to siphon funds through, say, the dark web—and would give up know-your-customer data (passport photos, proof of residence, etc.) if warranted. Normally this sort of surveillance takes place on “layer two," the infrastructure built atop the core protocol, but since Libra’s “base protocol” is run by a collection of law-abiding corporations, the monitoring will necessarily bleed into the very heart of the project.

“If we want this to succeed we can’t make it network of choice for criminal activity of any kind,” said Marcus.

He also acknowledged that some countries would, indeed, ban Libra. That, it appears, is where the promise of “permissionless” ends.

Nevertheless, Marcus insisted that a lack of access to banking services was more a technological problem than it was a regulatory one, and that tech fixes—funding the development of digital infrastructure, working alongside NGOs in remote communities—would ultimately broaden access to Libra.

“The problem with people unable to access financial services isn’t regulation,” he said. “If you look at the unbanked, the reason they don’t have access to the world economy is because of price and technology. Financial networks are not operating in an open way. The costs are prohibitive.”

Yet the prospect of hewing to government censorship still unnerves some in the crypto community. To Ameen Soleimani, the CEO of crypto-porn startup, Spankchain, Libra resembles an ungodly concoction of the cryptocurrencies DAI and Ethereum, but, he said, "instead of credible censorship-resistance, it is designed for maximum traceability and data reporting to the members and authorities."

Worse, Soleimani believes Libra poses an existential threat to other, more censorship-resistant cryptocurrencies, because of its disarmingly simple UX and in-built userbase.

"The Libra will let Facebook and their cohort of tech megacorps disruptively enter the banking space from the bottom up, starting with individual users," he said, hypothesising at length and comparing Libra to the IMF's Special Drawing Right, a "paper gold" pegged to a basket of fiat currencies that was intended as a bulwark against global economic crises.

"Each user who joins will sell their local currency in exchange for the Libra, which becomes a sort of everyman's SDR," he said. "This will fuel a globally distributed citizen-led speculative attack most intensely targeting countries on the brink of hyperinflation where the liberators are most plugged in. All economies will need to respond to this. If the Libra is successful and widely used, the prospects for 'mass adoption' for BTC and ETH, while accelerated, are likely to be lower in absolute terms than in a world without the Libra."

"Crypto is underestimating the Libra because it lacks technological sophistication, but the reality is that it is well designed for its business requirements."

Is the goal to ultimately usurp, say, Bitcoin, which itself was (arguably) conceived as a permissionless, spendable digital currency system? “This is comparing chicken wings and oranges,” said Marcus. In his view, Bitcoin is useful only as a store of value—a cryptoasset. “It is an investment asset that is completely decorrelated,” he said. “It serves a really good purpose, but it is really not a good medium of exchange.”

Regulatory compliant or not, in some ways, Facebook is competing against every government and country that issues its own fiat currency, and will likely face challenges as the system rolls out. More locally, it’s facing competition from Apple, Amazon or Google — the three Silicon Valley companies big enough to challenge Facebook’s dominance. People familiar with the matter said that each declined to participate.

Facebook wouldn’t comment, and Google demurred, linking us to its own "approach to payments," which appears to involve partnering with banks.

But perhaps Google is just being coy. As Cameron Winklevoss, co-founder of bitcoin exchange Gemini tweeted late Monday, “Prediction: every FAANG company will have its own coin within 24 months.”