Libra was the first name of a new payment system project initiated by Facebook in partnership with payment, technology, telecommunications, blockchain, venture capital companies and nonprofit organisations. The system is built on blockchain technology but differs from cryptocurrencies such as Bitcoin, as it is not designed to be a decentralised asset (it will have its own management), which makes the currency it will support purely digital rather than crypto.
Libra was first positioned by its creators as the new currency ‘for the everyday online consumer, backed by one of the largest companies in the world.’ This positioning, however, faced serious critiques from politicians and regulators alike, which resulted in important changes in the vision and the White Paper of the new payment system.
Facebook officially announced the creation of Libra in June 2019 following the incorporation of a new financial technology company focused on blockchain and payments in Switzerland – one of the friendliest regulatory environments for cryptocurrency projects. As indicated in the Commercial register of the Canton of Geneva, the new undertaking, Libra Networks S.à.r.l. (1) was registered on 2 May, with Facebook Global Holdings and Libra Association as stakeholders.
Libra Association (the Association), founded by Facebook and other tech and finance companies to create a global private currency is the independent membership association responsible for the development of the digital currency project, as well as for the governance of its network of financial products and services, facilitating the access to and use of the new payment system. Libra Association is governed by an Association Council, composed of representatives of the Association Members – currently 27 geographically distributed and diverse businesses and nonprofit organisations, including Novi – Facebook’s wallet app built on blockchain technology. According to the Association’s website, it “continues to welcome new members that meet the membership criteria and support the Association’s mission”.
The main task of the Association Members is to coordinate the network’s technical roadmap and development goals. In this regard, it is important to note that even though Facebook played a key role in the creation of the Libra Association and the Libra Blockchain, the social networking company has announced that once the Libra network launches (i.e. once it receives a license to start its activities), Facebook, and its affiliates will have the same commitments, privileges, and financial obligations as any other Founding Member.
This is why Facebook has created a regulatory subsidiary of its own to ensure separation between social data, which it already collects, and financial data, which it would collect once Libra is launched. The subsidiary is called Calibra (2) - a digital wallet, which ‘will help people send and hold Libra digital currencies’. Calibra, or as it was recently rebranded, Novi, will be available as a standalone app, but it will also directly integrate into the WhatsApp and Messenger apps, making ‘sending money as easy as sending a message’. However, over the past few years, Facebook has been continuously criticised for not being sufficiently responsible with its users’ personal data. In this regard, it is unclear whether potential Libra users would trust the new payment system with their financial data.
Initially, the Libra Association wanted to attract 100 members before the launch of the new digital currency and it appeared to be on this path when it was first officially announced with founding members including Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa Technology, Booking Holdings, eBay, Spotify AB, Uber Technologies, Inc., Vodafone Group and other blockchain, venture capital and nonprofit members, but things radically changed after the release of the Association’s first White Paper.
The announcement of the Libra project by Facebook in June 2019, was accompanied by the release of its first White Paper published on the official Libra Association website and stating that “Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people”. The document also stated that new digital currency would be built on the Libra Blockchain and fully backed by a reserve of real assets called the Libra Reserve, containing a basket of bank deposits and short-term government securities for every Libra that is created “with the objective of preserving the value of Libra over time”. In addition, the first White Paper stated that the new currency would be “supported by a competitive network of exchanges buying and selling Libra”.
The Association gave a high degree of assurance to potential Libra holders that they could convert it into different fiat currencies based on an exchange rate. This would make Libra a multi-currency coin based on blockchain technology, and therefore not under the control of a centralised entity such as a central bank or a government. Consequently, in the scenario outlined by Libra’s First White Paper, its launching would have laid the foundation of a whole new financial system, where the Libra digital cryptocurrency would have practically played the role of ‘global money’.
Libra faced substantial criticism from politicians and regulators soon after the release of its first White Paper. Some of the main concerns were the following:
► a multi-currency Libra Coin (≋LBR) has the potential to interfere with monetary policy and sovereignty if its network reaches a high volume in domestic payments made in ≋LBR;
►there is a lack of standards for Anti-Money Laundering Prevention (AML), Combatting the Financing of Terrorism (CFT), and the prevention of illicit activities as well as of a comprehensive framework for financial compliance and network-wide risk management;
► as the Libra network is open-source, there is a high risk of unknown participants taking control of the system and removing key compliance provisions.
Following the wave of criticism, important Libra Association Founding Members such as Mastercard, Stripe, Visa, eBay, PayPal decided to opt-out from the project.
On 16 April 2020, the Swiss Financial Market Supervisory Authority (FINMA) confirmed that it has received Libra Association’s application for a payment system license under the Financial Market Infrastructure Act (FMIA) on the basis of an updated White Paper. In addition, it announced that the provided documents are sufficient in order to start a formal licensing process, but that no information will be disclosed until the completion of the procedure.
The updated Libra White Paper, which was sent to FINMA, contains several amendments, including:
► the payment system supports single-currency stablecoins in addition to the multi-currency coin, initially starting with some of the currencies in the proposed Libra basket (e.g., LibraUSD or ≋USD, LibraEUR or ≋EUR, LibraGBP or ≋GBP, LibraSGD or ≋SGD);
► the Libra payment safety is enhanced with a robust compliance framework;
Along with changing its original White Paper, the Libra Association undertook two other very important actions before applying for a license. Firstly, as stated in the Commercial register of Canton of Geneva, Facebook Global Holdings terminated its participation as a stakeholder in Libra Networks S.à.r.l., ceding its shares to the Libra Association. A move, which serves as proof of the social networking company’s attempts to distance itself from Libra. Secondly, on 1 December 2020, Libra’s name was changed to Diem, aiming to provide both the coin and the Association behind it with a rebranding, which further accentuates on the updated White Paper.
During the virtual conference “Future of Payments in Europe” held on 27 November 2020, Bundesbank President Jens Weidmann mentioned that the European Central Bank (ECB) is considering the introduction of the digital euro. Furthermore, the ECB has recently published a comprehensive report on the possible issuance of the digital euro, prepared by a working group chaired by Fabio Panetta – member of the ECB’s Executive Board.
Regardless of FINMA’s final decision on the issuance of a payment system license, toLibra Association, digital and crypto assets are paving their way into everyday life and regulators need to react quickly and adequately in order to address the challenges of these fast-paced changes. Understandably, there are legal gaps in the existing financial services legislation which need to be filled. The European Commission’s proposal for a Regulation on Markets in Crypto-assets (MiCA), introduced in September this year, is a good example of this, but there is still a long way to go.
(1) Renamed DIEM Networks S.à.r.l. on 27 November, 2020.
(2) On 26 May, Facebook rebranded ‘Calibra’ to ‘Novi’ in order to distance it from Libra.