Pedro Birindelli

Digital transformation manager and blockchain specialist at Cosin Consulting

The cryptocurrency theme inaugurates another polemic: the Libra project. Recent statements by U.S. President Donald Trump on his Twitter attack bitcoin and Libra, a new virtual currency recently announced by Facebook. Trump's commentary happened days before the hearings that occurred this month in front of the Senate Banking Committee and the American Chamber that discussed legal aspects of the project. To give you an idea of the lively nature of the discussions, a bill was presented after Trump's statements under the title "Keep Big Tech out of Finance". Certainly, this will still be a subject that will be a long time in evidence.

But, after all, what is this project? What has to do with bitcoin? Or the US dollar? What are the possible reasons that lead the United States government to attack the cryptocurrencies?

In the official website of the organization, it is possible to find an introductory video that makes explicit the objective of the project to create a new global monetary system, designed for the digital age and that is simple and fast, being used as a means of payment and transfer of values between people from all over the world, empowered by the use of blockchain technology, which will give the system security and accessibility.

It is important to highlight two other factors of this project: the first, the intention of backing Libra (name given to cryptocurrency resulting from the project of the same name) to a structured reserve of assets so that there is the preservation of capital and liquidity. In a direct way, we are talking about a fund of government bonds issued by stable governments that have a large daily volume of business, with the sole objective of providing very low volatility for the Libra monetary system, thus ensuring that today's value is the same in one week, a fundamental property for use as a means of payment.

The second relevant factor is the organizational model, based on the association of several companies and private agents from around the world, i.e., although Facebook is at the forefront of the project, through the subsidiary Calibra, created for this purpose, is very well monitored, with giant members who operate in markets such as: means of payment (Mastercard, Visa and PayPal), technology and telecommunications (Vodafone, eBay, Spotfy, Uber), and also venture capital companies, international and non-profit organizations and finally academic institutions.

It is worth noting that Facebook, despite being leading the project, will have the same privileges and obligations as the other founding members during the operation of the system. The current network already has a very important weight, but it is expected that this group will grow even more, reaching about 100 organizations by the launch of the platform, expected for the first half of 2020.

Many operational factors of this new digital currency system have not yet been clarified, mainly because it is still under development. However, based on the technical document available on the portal, we were able to design the basic operation of the network.

The best way to understand how this system will work is by naming the agents integrating this complex operation and the role that each one plays:

Libra Association, formed by the founding members
This agent plays an important role in the development of the entire ecosystem, including the creation of all technology, dialogue with authorities, such as regulatory bodies and governments, the design of the business/operation model and the contribution of capital, both for the investment in the project and for the initial formation of the fund, which will be the ballast for issuing the first currencies.

During the operation of the system, the association will have the function of issuing the currencies, validating the transactions, managing the fund and ensuring the governance of the entire system. As the network matures, a reduction in the influence/dependence between the system and this agent is expected, through changes in network design, especially in terms of permission.

Two other key agents for the transaction to occur are:

Payers and receivers who will interact from a transaction

The payer shall be responsible for obtaining the pound by means of purchase by fiduciary currency, exchange for another cryptocurrency or receipt from another transaction, in addition to the possession of a virtual wallet, software responsible for storing the currencies and making the payment and receipt.

Service Providers - Exchange

- The authorized exchanges will be responsible for distributing the currencies and directing the capital to the association Libra invest in the fund ballast.

- They will also be responsible for settlement, acting as a marketplace between those who want to buy and those who want to sell Libra, and ultimately between those who want to sell and the Libra association as the buyer.

Service providers - Portfolio

A second service provider is the provider of the wallet, which will initially be the role of Calibra, belonging to Facebook, allowing transactions from WhatsApp and Messenger, promising fast transactions with very low costs.

Once we understand how the Libra project ecosystem works, we can analyze the main differences between the Libra currency and the bitcoin, or any other existing cryptocurrency.

Two main factors make Libra a unique system in the universe of cryptocurrencies:

1. Today's cryptocurrencies are still very restricted to the means of payment, whether due to complexity, lack of confidence, volatility or technical scalability restrictions. The fact is that no cryptocurrency has a significant volume of users compared to more mature means of payment. Libra relies on ballast to reduce volatility and on the design of technological architecture to solve scalability problems.

Some may say that there are other cryptocurrencies that are theoretically backed, such as Tether and solutions such as bitcoin lightning networks that seek to increase network scalability. Therefore, a more in-depth analysis is needed.

Libra's ballast differs in the absence of parity with any fiduciary currency, since it is made from a reserve of assets issued by governments, with emphasis on the "s", as said before. And this makes all the difference, the diversification of the fund is fundamental to reduce the influence of one or another economic group, giving flexibility to the association to manage the fund in order to ensure the maintenance of capital and stability even in the face of crises, thus making the pound, theoretically, the most stable currency in the world and reducing the power of influence of any government in the system, which is fundamental for it to be a currency at the global level.

In relation to scalability, I believe that the main factor is linked to trust in the system and not to technology. Libra's mass adoption is more than expected; after all, this system is the result of an organization that already has 2.2 billion people interacting through its platforms, not to mention the tens of millions of merchants spread over more than 200 countries in the Visa and Master networks and the 180 million active buyers of eBay. It's a beautiful start towards a resounding adhesion.

2. The second differentiating factor is that current projects have sought to interrupt the existing system and/or circumvent the regulations, which adds greater complexity to the adoption of cryptocurrencies, with numerous cases of discussions and friction in the legal sphere related to cryptocurrencies. According to a technical article, Libra seeks to innovate on the compliance and regulatory fronts to improve the effectiveness of the fight against money laundering by working in collaboration with regulatory agencies and experts.

Other aspects differentiate this platform from other cryptocurrencies, such as the establishment of a global identity standard, necessary for the system to work within the existing regulatory terms of money laundering and the delivery of a new application development platform, or smart contracts, which allows the possibilities of applying this technology to be endless.
Should the Pound Association's plans materialize, the impact will be huge, starting with the break in the hegemony of the US dollar pattern as a global currency. I don't believe in a replacement, but in a new option, which is enough to irritate a government.

The Pound is not the first and will not be the last initiative related to cryptocurrency to be discussed at the government level, but it stands out for the power and influence of its founding members. The simple discussion of the issue contributes to the maturation of the system with the authorities, boosting the entire ecosystem of cryptocurrencies. However libertarian the original idea of cryptocurrency may be, the regulation of cryptocurrencies is fundamental for the adoption of technology.

It is impossible to measure the impact on the global banking market, but we can compare it to the impact caused by technology companies when they start operating in traditional markets such as transportation, retail, communication, press and media. The immediate consequence will be a drastic drop in the prices charged by the sector, accompanied by an explosion of new services.

In the medium term, we will see an enormous synergy between financial services and other services consumed by people during their daily journey. This evolution will be due to the better use of financial data generated by transactions, the possibilities are unimaginable.

For the above reasons, I believe that the main challenge for the implementation of the Libra system is a political one, while at the same time I am convinced that the simple discussion of the subject with governments and authorities will be the main benefit of this project, opening more and more doors for the implementation of technology in relation to the monetary system.

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