Juan Villaverde is an econometrician and mathematician devoted to the analysis of cryptocurrencies since 2012. He leads the Weiss Ratings team of analysts and computer programmers who created Weiss cryptocurrency ratings.
Facebook’s Libra is a massive challenge to governments.
For the first time in modern history, we are witnessing the emergence of a currency that’s not backed and sponsored by a sovereign government. And for the first time ever, multibillion-dollar corporations are taking the lead in its creation.
This is what has the White House and Congress so alarmed. It helps explain why Bitcoin surged with Libra hype and has since plunged with Libra fears.
Moreover, it’s why you need to fully understand what Libra really is … and is not.
Is Libra a true cryptocurrency?
Some say "yes," simply because it’s built on blockchain, the same basic technology that underlies most cryptocurrencies. But as I explained two weeks ago, it’s far from it.
By definition, true cryptocurrencies are fully or mostly decentralized. They are controlled by no one. They have no official owners. And they are governed by the communities that use them.
Libra is not decentralized. Nor is it likely to ever be decentralized in the future.
Watch the latest reports by Block TV.
This is fundamental. Decentralization is what allows these digital assets to be highly secure, resistant to censorship, unconfiscatable.
These characteristics can never be achieved or mimicked by any centralized asset.
If any company (or institution) has control over a currency or payment system, then, by definition, that system can ultimately be …
Any one of these scenarios is a far cry from the security and independence of true cryptocurrencies like Bitcoin. But before we jump to shutdown scenarios, let’s talk about one less extreme …
A government agency makes waves that it’s going to crack down on Libra. In response, the Libra team of execs and engineers calls a meeting at Facebook headquarters.
With pressure and guidance from the authorities, the team defines a certain category of users as “adversarial.” Maybe it’s because they live in a rogue nation. Or maybe it’s because they belong to a particular ethnic or political group that the government defines as “enemies of the people.”
Whatever the rationale, the team decides to make a simple, “business-as-usual update” in the currency’s Terms of Service. They get the consent of Facebook’s Libra partners. And it’s done.
For the overwhelming majority of users, nothing changes, and virtually no one bats an eyelash. But a small minority, directly or indirectly connected to the “adversarial group,” is blocked. Suddenly and without warning, their access to Libra ends.
Unheard of? Not at all. Historically, governments have done the same thing many times and in various different ways — with sanctions on rogue nations … sanctions targeting individuals … bank closures and holidays … even confiscations.
The big difference: Access to purely digital money is far easier to block. All it takes is a minor edit in the code and then a single tap on a keyboard.
Can this really happen? Recent news tells us it may be happening already …
In India, government officials are reportedly looking to ban the use of Libra in their country. Too bad. The people of India were supposed to among the primary Libra beneficiaries.
In the U.S. Congress, a bill has been introduced that would supposedly ban big tech firms from ever issuing digital assets. (We doubt the bill will become law in its current format. But it certainly could delay or limit Libra’s growth.)
Plus, in other countries, expect similar rumblings in the days ahead. We’ve already heard from the German government, for instance. They don’t sound too excited about Libra.
Surprised? You shouldn’t be.
Throughout modern times, governments have had a monopoly over the creation of money.
It’s this monopoly that has allowed them to pile up gargantuan amounts of sovereign debt and embark on a seemingly endless cycle of money-printing.
And it’s this monopoly that has allowed them to keep the lights on despite (or because of) their monetary madness.
So attempts by some of the world’s largest governments to block or ban “the competition” are not unexpected. They’re just foolhardy.
Sooner or later, all governments will have to face some basic facts of life:
Fact of life #1. Giant tech and fintech companies are financially powerful. Unlike governments of the supposedly “richest” countries, these companies are not swimming in debt or frozen in political gridlock. They have tremendous amounts of capital.
Their tech engineers run circles around their government counterparts. And they have more than double the user population of the world’s most populous country (China).
Fact of life #2. Libra backers have some good legal arguments. Libra is very similar to PayPal and Apple Pay. The primary difference is that there’s a new asset that would be issued, and it uses blockchain technology. And in the West, governments that mandate what kind of technology tech companies can or cannot use could be crossing some dangerous constitutional lines.
Fact of life #3. Sure, governments can take action against Libra. But it’s almost impossible for governments to enforce actions against true cryptocurrencies.
When dealing with Facebook and its partners, governments can get court orders and issue subpoenas. They can levy fines. They can even threaten the execs with jail time.
And in the end, Facebook & Friends may have underestimated the implications of challenging the government’s age-old game of Money Monopoly.
But guess who did not underestimate the implications?
The founders of Bitcoin.
The creators of Ethereum.
And all those who have developed myriad crypto assets built from the ground up with just one big goal in mind — decentralization and censorship resistance.
These folks saw it coming. The Distributed Ledger Technology they created is designed precisely for this situation. With no single point of failure. No company execs to go to. No board of directors. No one to sue.
That’s why these systems are virtually impossible to shut down. The only way the government could shut down these true cryptocurrencies is shutting off access to the internet itself. Or by throwing a giant kill switch on the country’s entire power grid.
Otherwise, there is no viable mechanism whereby government edicts or bans could be enforced.
Facebook’s Libra is not the only target
“But surely,” say some crypto commentators, “the only reason governments are targeting Libra is because of Facebook’s large user base.”
Not really. India has wanted to ban the trading of all crypto assets. So has China.
Even in the U.S. Congress, some extreme legislators have called for a ban of “all form of crypto-assets.”
But wanting a crypto ban is one thing. Actually achieving it is another.
Even those countries that have reportedly “banned” crypto have done little more than restrict or close their home-based crypto exchanges.
No country has been able to control the possession or trading of crypto. Heck, for the most part, it’s nearly impossible to even prove that you actually hold crypto assets.
Many people don’t realize how weak and limited the government bans really are. But the governments know. They’re already losing that war. And they’ve long understood that, in practice, banning Bitcoin is virtually impossible.
That’s why even the most aggressive of governments generally focus on exchange operators rather than the actual cryptocurrencies themselves. The most they can hope for is to delay or hinder their growth.
This is why decentralization matters so much.
This is why decentralization is a major component of our ratings model.
This is why I’ve been harping on it so relentlessly in my articles.
I will never underestimate the importance of decentralization. Nor should you.