Thursday 20 June 2019 5:00 am

Is Facebook's libra a step towards the legitimisation of crypto?

(Photo by Jaap Arriens/NurPhoto via Getty Images)

The “banking for the unbanked” narrative has long been the preserve of the bitcoin community. There are some 1.7bn people in the world today with no access to a bank account, and since bitcoin came into common usage, “financial inclusion” has been its mantra.

So what should we make of Facebook’s apparent incursion into cryptocurrency?

The launch of libra, a digital currency that will allow Facebook users to make financial transactions around the world, is described by some as a game-changer; others, as a money-maker, and a welcome distraction from Facebook’s recent woes.

The three central problems for any cryptocurrency are scalability, volatility, and regulatory uncertainty.

In the case of bitcoin, scalability has precluded the currency from being used as an everyday method of payment, while thanks to volatility, it cannot be used as a store of value.

Ongoing regulatory uncertainty has everyone from startup investors to large companies spooked.

Bitcoin has taken steps to resolve these problems. In 2016, when the currency reached its zenith, there were so many transactions made on the bitcoin blockchain that at one point it cost more than $70 simply to send a bitcoin payment.

The community was frustrated that, at a time of great exposure, bitcoin was in effect unusable. Bitcoin Cash came into being to address this problem of scalability, and it has gained traction, albeit slowly.

Facebook has a solution to scalability. By controlling the user’s ability to make payments, libra becomes a kind of conditional blockchain.

In other words, Facebook has the ultimate say as to whether or not you can use it.

Introducing an approach like this alleviates the problem of scaling experienced by “unconditional” blockchain currencies, such as bitcoin, but it obviously comes at the cost of full financial freedom.

As for the volatility problem, the libra project involves backing the currency with a basket of fiat currencies (government-backed).

We can predict that libra will be a more stable currency than bitcoin is or has been, to the extent that it may even approach the stability of the underlying fiat currencies themselves.

And we can be confident that libra will meet regulatory standards, too, backed as it is by some of the largest payment processors on the planet.

The impressive body of technology companies and venture capitalists assembled for the libra project unquestionably makes the cryptocurrency space a lot more interesting.

But despite all of these positives, there are some doubts – and the question remains: is libra a true cryptocurrency?

Facebook, after all, is using a basket of fiat currencies and securities to support libra, which some might argue answers the question in the negative.

What’s more, libra, though borrowing heavily from bitcoin and ethereum, it has neglected features which those in the space would suggest are the best qualities of both.

Proof of work, or “mining”, is absent. And it isn’t an anarchistic, free-for-all payment system in which computing power runs the show.

Libra transactions, meanwhile, aren’t final. The consortium of tech companies brought together for the project can blacklist entities.

Although this is a good thing for regulation, it strips users of the control that they have over their own finances, handing it over to those companies instead.

Facebook will have all of your financial data, if it haven’t got its hands on it already. And it seems highly unlikely that users will have the degree of control over their money that they anticipate they will have.

In other words, libra’s proposed wallet, Calibra, will not be in the pockets of those who own the money.

Without decentralised decision-making and a payment system governed by computers according to strict rules, libra seems quite clearly to exist outside the domain of the cryptocurrencies with which we are already familiar. The question – and only time will tell – relates to whether or not this is such a bad thing.

Libra has, at the very least, given authority and credibility to digital currencies. It has the potential to be the catalyst for a rapid closing of the “adoption gap”, something which we have all been waiting for.

Given its vast array of properties unrelated to cryptocurrency, libra is likely to position itself not as a competitor to bitcoin or any other digital currency, but as a disruptor in the space in which banks and ageing remittance providers such as Swift and Western Union operate.

This, we can be sure, is a hinge moment in the history of cryptocurrency. Digital currency has arrived.

More important, perhaps, and indeed worthy of attention, is what’s taking place behind the curtain: a seismic shift of power from the state to the tech company.