Libra 2.0: Changing Tack in the Face of Headwinds

Since Facebook announced project Libra in mid-2019, the topic has been divisive. The Libra Association has faced regulatory scrutiny and pushback, and arguably added impetus to the scramble to establish central bank digital currencies (CBDCs). A number of high-profile consortium members including Mastercard, Visa, PayPal and Vodafone abandoned ship last year.

Now, a mid-April announcement by the Libra Association has put fresh wind in the sails of the Good Ship Libra: A recent paper (Medium 2020) authored by Philipp Sandner and Jonas Gross of the Frankfurt School Blockchain Center (FSBC) says the new and improved Libra 2.0 is considerably more likely to find favor than Libra 1.0 — and is possibly equipped to overcome regulatory and central bank opposition. The digital asset experts even go as far as to suggest that the Libra could be launched within this year.

The Libra consortium, which currently comprises 22 companies including Spotify and Uber alongside Facebook/Calibra, has indeed taken significant steps to comply with many demands of regulators and central banks. Sandner and Gross put forward the view that Libra has the potential to serve as a platform for digital programmable currencies.

In contrast to version 1.0, which was conceived as a means of payment backed by a basket of fiat currencies, Libra 2.0 is designed to support single-currency stablecoins such as a digital euro, digital US dollar and digital British pound. In its updated whitepaper, the Libra Association says it plans to increase the number of supported stablecoins over time(Libra Association 2020). It also pledges to introduce a capital buffer to cope with crisis situations and commits to a permissioned blockchain system.

Sails set for regulatory compliance

Importantly, the new Libra is to be designed not to interfere with monetary sovereignty and monetary policy — a primary concern raised by the original project. On the contrary, the whitepaper states, it should now “integrate smoothly with local monetary and macroprudential policies and complement existing currencies by enabling new functionality, drastically reducing costs and fostering financial inclusion” (Libra Association 2020). This last point, financial inclusion, is based on the above-mentioned plan to support quick and easy transactions using a variety of single-currency stablecoins as well as the Libra Coin itself.

The Libra Association says it will incorporate a robust compliance framework to prevent illicit activities like money laundering and terrorist financing. The paper continues to say it would welcome oversight and control of the Libra Reserve by a group of regulators, central banks or global bodies like the IMF, headed by the Swiss Financial Market Supervisory Authority (FINMA). This would indicate that Libra could be classified as programmable money issued by a regulated entity, provided the Libra Association remains true to its commitments to follow regulatory guidelines.

This is clearly a significant change of tack compared to Libra 1.0, suited to win the confidence of financial authorities. And yet, as Sandner and Gross point out, “The Libra Association might comply with regulatory requirements in countries such as Switzerland, the USA, other European countries etc. but maybe not in every developing and emerging economy.” In other words, the Libra Coin in its original form could still be issued in developing and emerging economies, where the Libra Association is not regulated. In countries plagued by hyperinflation and in need of stable money such as Venezuela or Zimbabwe, the Libra Coin could find rapid adoption — as a digital currency issued by an unregulated entity and backed by a basket of (fiat) currencies. Such a development would increase default risk and raise questions about how watertight the new Libra concept really is.

In any case, the Libra Association must still navigate a number of regulatory obstacles before it can get up to speed. As a possible indication of the consortium’s good intentions to put the opposition and controversy behind it, it has just renamed its digital wallet: Calibra is now Novi.

Bibliography

Philipp Sandner. 2020. “Understanding Libra 2.0: A compliant global platform for the digital programmable EUR, USD, GBP & Co.” Retrieved from https://medium.com/@philippsandner/libra-2-0-a-compliant-global-platform-for-the-digital-programmable-eur-usd-gbp-co-67e1b8a2c0cb

Libra Association. 2020. “Official Libra Whitepaper”. Retrieved from https://libra.org/en-US/white-paper/?noredirect=en-US#cover-letter

Facebook. 2020. “Welcome to Novi”. Retrieved from https://about.fb.com/news/2020/05/welcome-to-novi/What Potentials do STOs offer to Investors?

Originally published on www.area2invest.com at June 5th 2020.

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