By Arslan Shahzad

Over a month ago, Facebook has announced its own hugely controversial digital currency called “Libra” as well as a wallet to keep that currency in called “Calibra” everyone from banks to financial regulators and privacy advocates are very concerned about this project. So let’s talk about what exactly Libra is and why it is so controversial. It is easiest to explain Libra by walking you through what it would be like for you to use Libra and then explaining what happens in the background as we go. So, let us do that.

Let us say, in a year or two from now, when Libra is out, you want to get some Libra, how do you do it? You have two options: you buy from a random person who already has some Libra that is just a currency that anyone can theoretically trade with or you go to an officially appointed Libra exchange, of which Facebook says there will be many around the world. If you pay them regular money (let’s say US dollars), this exchange will start the whole process. First, they will create new Libra that they will give to you. They are the only ones who will be authorized to do that by the way, and second they’ll take your money and invest it into something that is known to hold its price, probably government bonds, gold or stocks from Multinational Companies. Basically, they throw your money on to a big pile with all of the other money they have collected and promised to keep it safe somewhere and so you end up with some Libra.

Selling it would work in the exact same way as well: you could either sell it to someone privately or go to an exchange which Facebook promises will give you real money for it they will take your Libra and destroy it and they will take a part of their big pile of money and give it back to you in form of regular money. So, that is how you buy and sell Libra.

Now notice some important implications. The Libra Association has complete control over how much Libra there is unlike with Bitcoin, where they have to be created by mining. The Libra Association is basically like a central bank that can just print and destroy Libra whenever it wants to. The association controls also control how much Libra is worth. They will use their exchanges to literally set a buying and selling price for it worldwide and the Association will have a reserve to make sure that they have enough money to pay back anyone who wants to take their money out of the system giving the currency a sort of trust and stability that most cryptocurrencies don’t have.

Now that you know how to buy Libra you probably want to store it somewhere and that is what a Libra account is for. An account of Libra is basically just a Public and a Private Key which are just two very long strings of characters. Think of them as a login and a password.

Essentially, Facebook says that these accounts would be “Pseudonymous”, which means that they’re not directly tied to your name, and you can have theoretically as many of them as you want so that’s an account.

For the next step which is starting to pay for goods with it, your transactions of course have to go through the system and somebody has to process and validate them, unlike in so-called permission-less systems like with Bitcoin. So theoretically, anyone in the world with a computer can validate your transactions. In this system, your transactions are validated by “trusted” authorities, only who are of course, the members of the Libra Association. Facebook says that they eventually want to move to permission-less morale as well meaning that anyone can join the network and do validations as well.

Apparently, they don’t know how to do that at scale yet efficiently and quickly enough so at least for the next five years they say that the Association will have to do all of the validations. May be, they’ve never want to move to permission-less model and it’s just a fake promise, but at least for now that’s what we know.

Basically that is how Libra at its core works you have a simple account and then the Libra association takes care of everything else including creating and destroying Libra as well as processing all of the transactions it’s really a hybrid between cryptocurrencies like Bitcoin and regular currencies like US Dollar as it uses cryptographic technologies similar to those Bitcoin but it’s currently managed much like a regular currency with a strong central authority, taking all the decisions.

I would like to focus on the implications of Libra and I’ll start with the positive aspect. If Libra really comes to the market as envisioned, which is a huge if, there is no guarantee that government regulators will let it pass or that Facebook will even be able to build all the things that it says it will be able to build but if it happens Libra could make payments go across borders basically instantly at very low cost reliably and securely for anyone who has access to the Internet without a need for a bank, which would be huge. Just imagine! A worker from Philippines, earning money in Europe and being able to send it back home from their phone safely without any significant fees. Facebook estimates the average cost of remittances at 7% globally.

Libra could also be a safe way for people to store money in countries were walking around with a lot of cash is dangerous or where the local currency is going through hyperinflation for example like what’s happening in Venezuela right now people could put their savings into Libra freely and not have to worry about it losing much value or getting stolen and finally Libra will be built into every conceivable Facebook product ever allowing for easy peer-to-peer transactions. They will be accepted by eBay, Uber and Lyft all of which are Libra Association Members, as well as many other vendors and users will be able to convert Libra to local currency at an exchange easily without having to worry about getting ripped off. In other words, if everything goes according to plan, Libra could theoretically become functionally far superior to our current payment methods.

While that is true I think basically everything else about Libra is incredibly worrisome. For a start the management structure of Libra is in my opinion pretty insane. One of the core promises of cryptocurrency, especially the original ones like Bitcoin, is that there is no management there is no governance anyone can join the network and make payments. On Bitcoin anyone can verify every transaction that has ever been made on Bitcoin, which is true personal freedom. But that creates new problems like how do you block people from paying for things like guns and other contraband items.

Even though Libra is very much a managed and centralized currency, but unlike traditional currencies, the authority managing it is not a central bank which is a government agency that citizens have some level of control over, which is at least theoretically appointed to serve the people of a country. Rather, an association of self-appointed big private companies that regulate themselves only. This Association is headquartered in Switzerland, which makes it extra difficult for any national law enforcement to target it and it is actually even more powerful than a typical central bank as it cannot only create and destroy currency at will as well as manipulate its value, but it’s also the sole payment processor in the system, at least for now. In other words, an organization that has zero accountability to anyone has absolute control over all major functions of the currency.

Let us actually explore this association a bit. Its current twenty eight members are mostly large US based private companies which were literally handpicked by Facebook. It is an invite-only system, so Facebook and the other members decide who gets to join later and the entry criteria appears to be that members for the most part have to be extremely large and rich companies. Facebook (ironically) calls this a “diverse set of organizations” because they’ve thrown in a token charity or two to look good.

I guess there currently no clear answers given to many of the most important questions like why these companies are uniquely well-suited to run the world economy in the first place? What happens to these companies if one of them is behaves unfairly? How the public can hold them accountable if anything bad happens? But that is by design.

Now there are two more aspects that experts seem to worry about. How much control Facebook has over the system and privacy because the default assumption would be that Facebook wants to have all of the control and the norm of the privacy so it is kind of surprising them that according to the currently released plans Facebook seems to be voluntarily relinquish the control over Libra see if they could have done all of the payment processing themselves but they chose to share that responsibility with other companies and they chose to make Libra relatively private by using pseudonymous keys for accounts of course they do have a plan for controlling the system and for gathering as much data as possible but to understand how that would work we have to take a look at Calibra their newly announced wallet a cryptowallet is basically an app that lets users access cryptocurrencies think of it like a specialized banking app showing users a balance and enabling transactions developers can play around with Libra using the command-line interface but 99% of the population will use a wallet and while Libra is technically an open system that anyone could build competing wallets on Facebook is betting big on Calibra becoming the dominant one. For one, Calibra has a head start of at least one or two years so it will likely be more feature-rich than competitors, plus it will be built into every conceivable Facebook product ever likely making it the default solution for peer-to-peer transactions over Whatsapp and Messenger as well as purchases over Instagram new commerce platform or Facebook Marketplace.

Long story short, Facebook is perfectly positioned to make Calibra the default way most users around the world access their Libra of currency and that’s really all it needs, because Calibra of course is everything but private. They have openly declared that they will follow standard banking procedures including verifying the identity of every Calibra user with identity checks as well as learning where they live. That information is mandatory for banks to collect to avoid money laundering and stuff and you can bet that Calibra will also closely monitor your payments to learn about your habits to offer you loans and insurance or just show you helpful tips around what you spend your money on.

In other words, Calibra is a company that is owned 100% by Facebook can have all of the payment data once the Facebook has promised that they are not going to mix Calibra payment information with Facebook, Whatsapp and Instagram. But then again, they have made similar promises like that in the past before and they broke them.

So should you care about that promise, probably no. They promised that they would never mix Whatsapp and Facebook data after the acquisition but then they changed their minds and started merging the two together and even add Instagram into the mix as well. Despite regulators suing them multiple times for it, and Whatsapp founders leaving the company over it promises are easy to make but typically do not last very long within Facebook when breaking them appears to make them massive amounts of money and I think that is a pretty good place to wrap it up.

The writer is Masters in International Relations from National Defense University, Islamabad. Kindly like my Facebook page “The Basement Journal” and follow me on Twitter @Journalbasement for any queries or suggestions.