Facebook’s revamped Libra shows fiat-crypto middle ground

Libra 2.0 takes a couple of paces away from crypto and towards fiat, finding a new middle ground as a result.

Facebook's initial plans for the Libra currency were, in hindsight, a little immodest.

It was envisioning a new single global currency that could be used for peer to peer transactions anywhere, pegged to a basket of major national currencies and backed with a pool of safe, interest-earning assets.

Those plans have now been scuppered, in favour of a more general stablecoin system as laid out in the Libra Whitepaper 2.o.

The news first broke about a month and a half ago but now it's been publicly confirmed by Facebook, so score one for those anonymous "people familiar with the matter."

The main thrust of the changes is to make Libra more centralised, controllable and easily-regulated, says eToro CEO Yoni Assia.

The three main changes are that it will run on a permissioned network initially, that it will host a range of different stablecoins rather than one big new extra-national currency, and that the network nodes will be regulated virtual asset service providers.

"We believe these changes make significant progress in enabling Libra to potentially launch. They are now taking a more regulated approach, as we discussed in our position paper, published in November last year, where we recommended a shift towards working with local regulated institutions in supporting transactions in national currencies," Assia said.

"We are pleased to see the Libra Foundation take an initial step in this direction, by supporting multiple currencies on-chain. We believe that this marks another milestone in the journey towards the adoption of distributed systems in global finance."

“The main downside of these changes is that the system is less open, and less decentralised, therefore the Bitcoin community will probably disregard this as another centralised project."

In particular, it means random third parties will not be able to build infrastructure like wallets, at least initially. Only licensed third parties will be able to do so.

Libra is still aiming for a 2020 launch date, and plans to accommodate central bank digital currencies (CBDCs) if and when the time comes - a slightly poetic turn seeing as how Libra was the main catalyst for those CBDCs in the first place.

Overall, the new Libra is sliding into an interesting spot in payments, somewhere between traditional fiat payments and crypto payments.

That old familiar feeling

The initially-envisioned multi-currency coin will still be present in the Libra ecosystem, but its role has been downgraded from primary currency to intermediary currency, to grease the wheels as people send money and exchange currencies.

The end role for the Libra currency, as an intermediary currency, is vaguely similar to how Ripple and Stellar pitch the role of XRP and XLM respectively.

A digital intermediary currency is an essential ingredient if you're trying to create a system that simultaneously has direct peer to peer money transfers and a range of different currencies in play, the way Libra now does.

This is because, when you need to make an international payment that involves a currency conversion, you can't always count on finding an affordable counterparty for the type of conversion you need.

This is how the existing international payments system works, except currently the US dollar is acting as the main intermediary currency.

Because it's old fashioned non-digital currency it can only be held as physical cash or in a bank. This means international transfers by necessity have to involve one or more banks somewhere in the process, putting a bottleneck in the payments process.

While the front end of international payments has now been streamlined by money transfer services and services like PayPal, the back end remains a tangled web of correspondent banks, nostro/vostro accounts and other Latin finery.

And that's why the global payments system is both a marvel of human ingenuity and a pile of outdated rubbish.

Old Libra was about people making direct transfers to each other with cryptocurrency in an open, decentralised network.

New Libra is about using crypto as that intermediary currency to streamline payments made in fiat stablecoins on a closed, controlled network. Unlike other crypto projects that attempt it, Libra's intermediary currency will be a collateralised stablecoin in its own right, which solves some of the problems that Ripple in particular has faced.

It's a solid step from the crypto side of things towards the fiat side, while still presenting a practical and valuable solution to a significant problem.

Of course, it raises problems of its own. Right now, one of the shorter term ones might be whether Libra's collateral can earn enough safe interest to sustain the project in an increasingly negative-yield world.

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Disclosure: The author holds BNB, BTC at the time of writing.

Picture: Shutterstock