Last Updated: August 24, 2020
In June 2019, Libra announced their mission:
“enable a simple global currency and financial infrastructure that empowers billions of people.” — Libra v1 whitepaper
After 10 months of regulatory scrutiny in Congress, Switzerland, the EU, and around the world, Libra today launched an update to its whitepaper. The new whitepaper outlines significant updates to Libra, scaled back to make it more tenable for regulatory approval, however with notable trade-offs against an open, decentralized, and global financial system.
The first major update to Libra is that instead of one global Libra Coin (≋LBR), there will instead be several stablecoins for local jurisdictions, starting with a few of the currencies proposed for the Libra basket:
- 🇺🇸 LibraUSD (≋USD)
- 🇪🇺 LibraEUR (≋EUR)
- 🇬🇧 LibraGBP (≋GBP)
- 🇸🇬 LibraSGD (≋SGD)
Libra plans to add more stablecoins over time, and eventually support central bank digital currencies if and when they come to exist. Each of the local stablecoins will be fully backed by the Libra Reserve, consisting of cash and short-term government securities denominated in the matching currency. ≋LBR will now be a digitally weighted composite of the various local stablecoins.
🔑 Key takeaway: a single global currency undermines the monetary policy of government-controlled central banks. Instead Libra will support myriad stablecoins.
Per strong regulatory pressure, Libra has introduced a Financial Intelligence Function to push for strong compliance with Anti-Money Laundering (AML), sanctions rules, and the prevention of illegal activities. The result is that the centralized players and wallets where you can hold, transact, and trade Libra coins will be heavily regulated. Self custodied wallets will be subject to balance and transaction limits.
🔑 Key takeaway: Libra will offer a digital-native infrastructure for payment (e.g. PayPal 2.0), but if you want to be your own bank, you’ll have to stick to bitcoin.
Removing a permissionless system
Originally, one of the key parts of the Libra rollout was to — over time — transition from a permissioned blockchain system with a few select Libra Association members, to become fully permissionless. Due to strong regulatory-pushback, Libra has axed this transition and solidified its position as a fully permissioned system. Instead, they have laid out a high level framework for how to decide who gets to be a new member of the Libra Association:
- Compliance due diligence
- Technical capability to run a validator node
- Economic performance
- Financial contribution
🔑 Key takeaway: If you want a permissionless system, stick with bitcoin. If you have influence, money, and resources, then you might be able to become a Libra validator.
Regulators also brought up questions about how Libra Reserve would deal with extreme economic circumstances. In response Libra has updated their Reserve design to hold assets with very short-term maturity, low credit risk, and high liquidity in the event of a “bank” run. In addition, in this scenario, they have built circuit breakers in the form of redemption delays in periods of high withdrawal demand, and early redemption “haircuts” or penalties for instant withdrawals.
🔑 Key takeaway: when there are runs on liquidating Libra coins, the Libra reserve will slow down your withdrawals or charge you redemption fees to remain solvent.
The new Libra whitepaper doesn’t mention or address taxes. CoinTracker remains committed to being your trusted cryptocurrency portfolio assistant and tax solution, and we will continue to update the Authoritative Guide to Cryptocurrency Taxes as more information becomes available about the rollout of Libra.
Over the past 10 months, regulators have pushed back on Libra’s bold initial proposals to create something in between a decentralized cryptocurrency (e.g. bitcoin) and a centralized digital payment system (e.g. PayPal). The result is something closer to PayPal 2.0 than to bitcoin. To borrow Ben Thompson’s framework:
Expect Libra 2.0 to have a more frictionless digital payment experience — not a privacy-focused open global payment system.
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