Libra 2.0: A global platform for the digital programmable EUR, USD, GBP & Co.

Authors: Philipp Sandner, Jonas Gross

Yesterday, the Libra Association — a consortium including 22 companies like Facebook/Calibra, Spotify and Uber — has announced its version 2.0 of the Libra project: Libra was initiated by Facebook and revealed in summer 2019 (v1.0). After tremendous criticism by regulators after the announcement of v1.0, the Libra Association clearly takes a step towards regulators with the recent announcement, changes its concept (v2.0), and complies with many demands from regulators and central banks. It is therefore reasonable to argue that, eventually, the Libra platform might be launched later this year. Admittedly, Libra has lost some important consortium members such as Mastercard, Visa, PayPal and Vodafone. In this article, we answer the following question: What are the key aspects of the new concept “Libra 2.0” and what are its implications)?

What could be potential implications of the new “Libra 2.0” concept?

Of course, it can be disputed to what degree Libra in its current design is a true distributed ledger technology (DLT)-based platform. We defer this question to future research.

What projects are competing with the new “Libra 2.0” concept?

● Chinese digital currency (DCEP): The Chinese central bank started to conduct the first test runs of their digital currency in April 2020. The goal is to replace physical cash with a digital version of the local currency.

● Celo, EOS, Stellar, Ripple (XRP): These projects seek to be platforms for tokenized assets, including tokenized currencies. They are — like Libra — also rather centralized and partly permissioned systems.

● JPM Coin: JP Morgan announced its JPM Coin a long time ago but not much development has happened since then.

● Ethereum: This project could also be identified as a competitor, but Ethereum already has a huge community, it is open source and rather decentralized. With these characteristics, it is not the closest competitor in comparison to the other projects.

What are the key aspects of the new “Libra 2.0” concept?

Figure 1: Overview of key aspects of the new “Libra 2.0” concept

Multiple single currencies such as EUR, USD, GBP

Figure 2: Architecture of the “Libra 2.0” concept

Libra Coin backed by multiple currencies

Smart contract functionality

Commitment to a permissioned blockchain system

Composition of the Libra Reserve and capital buffer

Compliance and cooperation with regulators

What kind of “digital programmable money” is Libra?

Figure 3: Classification of programmable money

Libra can be classified as programmable money issued by a regulated entity, as the Libra Association clearly commits to follow regulatory guidelines and to work hand in hand with the regulator. This holds for countries that provide stable currencies such as the EUR, USD, GBP etc. and is indicated by the yellow box on the left hand side of Figure 3.

However, Libra could also be seen as issued by an unregulated party, if the Libra Coin is used in developing and emerging economies, where the Libra Association is not regulated. Regulation happens on the country level. It might be that in countries where stable money is truly needed due to local inflation (e.g. Venezuela, Zimbabwe), Libra offers its Libra Coin backed by the basket of currencies. It is questionable whether Libra will follow such an approach or whether the Libra Association first files for local capital market licenses in these countries. If Libra is simply offering the Libra Coin to countries that do not provide a stable currency themselves and if Libra is not filing required licenses then, in these countries, Libra would be an unregulated entity issuing money backed by a basket of currencies. Therefore the second yellow box on the right hand side of Figure 3 also applies to Libra. Libra can therefore not clearly be classified which once again supports the argument that Libra is not just digital money, but a platform with multiple tokenized currencies.

To conclude, the Libra Association might comply with regulatory requirements in countries such as Switzerland, the USA, other European countries etc. but maybe not in every developing and emerging economy.

What are in general the benefits of a “digital programmable currency”?

Figure 4: Reasons for digital programmable money

Cross-border payments and trade finance

Automation

A programmable Euro enables automating all these processes with system breaks. This applies not only to “pure” Euro payments but also to more complex financial processes: Factoring, leasing, sales financing, loans, as well as interest payments can be handled automatically by “programming” the payment flows through smart contracts.

Integration of delivery versus payment (DvP) and digital representation of assets/rights (tokenization)

Another argument in favor of using programmable money is that delivery and payment, e.g. for a good or service, can be organized on integrated platforms. With today’s technologies, the time required for securities settlement, including the payment, can only be reduced to a minimum of two days. However, only blockchain technology allows the advantage of real-time settlement, e.g., of securities.

Micropayments and “streaming money”

Today, one Euro can only be divided into cents. Blockchain technology would enable transfering even smaller amounts of money efficiently. Such small amounts will be necessary in the future, for example, if an electric car consumes a fraction of a kWh after a few minutes of charging. Even if sensors could, in the future, sell their sensor data directly as autonomous agents, amounts in the sub-cent range need to be transferred efficiently for single data points. Due to the practically infinite divisibility of a blockchain-based programmable Euro, the choice of blockchain technology seems reasonable. These advantages also apply to the concept of “streaming money”, in which sums of money are not transferred on a discretionary basis but in a steady flow.

IT security

Conclusion

Remarks

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Authors

Jonas Gross is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His fields of interest are primarily cryptocurrencies. Besides, in the context of his Ph.D. at the University of Bayreuth, he analyzes the impact of blockchain technology on monetary policy of worldwide central banks. He mainly studies innovations as central bank digital currencies (CBDC) and other crypto currency projects as “Libra”. You can contact him via mail (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/), Xing (https://www.xing.com/profile/Jonas_Gross4) or follow him on Twitter (@Jonas__Gross).

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