The Other Side of the Coin: Risks of the Libra Blockchain
Libra was presented as a cryptocurrency on June 18, 2019 by Facebook. On the same day, Facebook announced plans for Calibra, a subsidiary in charge of the development of an electronic wallet and financial services. Here is a summary of our recent paper analysing the main risks emerging from this project: political, financial, economical, technological and ethical risks. We focus on the two levels of the project governance: the classical governance of the Association and the technological governance of the Blockchain. We emphazise the difficulty to regulate such a project as it will depend on several countries whose legislations are very different.
To avoid a regulatory confusion around this project, the different banking and financial institutions, along with public actors, quickly reacted and created several task forces. They also asked Facebook to work with the appropriate regulatory authorities. Thus, as the host of the G7 and the G7 Finance Ministers meeting of Chantilly, France put a task force in place. The goal of this task force is to create a regulatory framework encompassing crypto assets like Libra: drawing the first conclusions from the status report of the G7 working group to better assess the opportunities but also the risks associated with this class of assets, particularly in terms of financial stability, transmission of monetary policy, consumer protection, money laundering and terrorist financing.
A major lesson that can be drawn from both the reaction of the different actors and our analysis is that regulating Libra will be a hard task. First, the double governance of the system must be taken into account: there is an organisational aspect through the Libra Association and a technological aspect through the consensus protocol. Hence, the technical aspect must not become a barrier for non-expert regulators who already possess the competences to regulate the Libra Association. However, the technology will also have to be taken into account in a second time. This will represent a significant endeavor for the regulators, given the extent of the confusion brought along by the Libra project, but even what seems to be details can prove to be crucial to assess the risks. For example, the anonymity of the nodes who validated a transaction is a consequence of the cryptography used in the Quorum Certificates, and will make impossible to establish the liability of a single actor in the event of fraudulent transactions.
Most worryingly, the vagueness of the non-technical aspects of the project is without precedent. Up to now, Facebook seems to have focused on the technical complexity of their project and overlooked the absence of clear rules for the governance of the network. Notwithstanding the political, economical and ethical aspects, the biggest technological risks are not internal dysfunctions of the Libra Blockchain but lie in its interactions with the outside world that are not specified: consumer protection, KYC/AML, authorized resellers, etc.
Nevertheless, an open question is the desirability of a "synthetic hegemonic currency" replacing the dollar in international payments, as described by Mark Carney, the outgoing Governor of the Bank of England. Indeed, the currently dollar-dominated international monetary system raises concerns regarding the dependence of any international exchange on the dollar, the ensuing liquidity shortage, the pressure on falling interest rates on government bonds and the uncertainty of the Central Banks which are dependent on the US Federal Reserve. What stable currency could replace the dollar? Probably not the Libra that is backed by national currencies and that will not be able to provide liquidity in times of crisis. It will be up to the national banks to solve this last problem. In addition, an international currency also has the property of being backed by a fiscal authority able to collect taxes, which will never be the case of Libra. The issuance of CBDCs might prove a solution to this problem.
Louis Abraham - École polytechnique; ETH Zurich
Dominique Guégan - University of Paris 1 Panthéon-Sorbonne ; LabEx ReFi, France ; Ca' Foscari University of Venice, Italy