Libra: Already a victim of fraud
“Move fast and break things” may no longer be the official motto at Facebook, but on the evidence of its proposed cryptocurrency, Libra, its appetite for controversy has hardly mellowed with age.
Libra is a cryptocurrency anticipated for launch in 2020. It will operate on what could be termed a private blockchain. Permissioned members of the Libra blockchain, who can confirm transactions on the ledger, are a select group of multinationals known as the Libra Association. This distinguishes it from well-known public blockchains, such as Ethereum, where anyone can in theory join the network as a validator node.
Facebook has stated that its aim with Libra is to create a global currency that will allow easier access to financial systems for the 1.7 billion ‘unbanked’ adults worldwide. If achieved, this may also generate very substantial revenues for Facebook.
Libra is plainly built for scaling. It has a limited number of nodes, which should mean that it can process far more transactions a second than a public blockchain. It is pegged to historically stable asset classes, which should mean that its value does not fluctuate wildly. Perhaps most significantly in the long-term, it has a programming language aimed at allowing users to create their own smart contracts (self-enforcing contracts whose terms are automatically performed upon satisfaction of agreed criteria).
This in theory could allow the Libra blockchain to become a global business environment where contracts are agreed and enforced, as well as a global currency.
Despite the scale of this ambition, many recent press reports about Libra have focused on more prosaic matters, such as fraudsters seeking to lure unwary victims into purchases of fake Libra via spoof advertising on Facebook itself. Certainly, there have been good reasons for scepticism about cryptocurrency in recent years. Among other things, scams involving Bitcoin and other cryptocurrencies have proliferated, with cyber-criminals often preying on victims’ lack of technical or financial sophistication to steal from them.
However, while there is no immediate technical fix for some people’s willingness to lie for personal gain, it is worth noting that the anti-fraud architecture of private blockchains such as Libra appears more robust than the current alternatives. Generally, blockchains lend themselves to asset tracing. Reviewing the transactions on the Libra ledger (assuming you could obtain disclosure from a Libra Association member) should allow victims to ‘follow the money’ in a simpler manner than a traditional tracing exercise, where victims have to go from bank to bank seeking disclosure of information. In addition, Libra is due to be obtained and stored via a digital wallet that can only be obtained following identity verification. This should make it harder for criminals to hide, compared to public blockchain cryptocurrencies (Bitcoin, Ethereum, etc.), which can be obtained anonymously.
This may hint at a more fundamental potential problem with Libra, which paradoxically may lie in its efficiencies. Its potential for helping out with tricky real-world problems, such as payments fraud and cross-border transaction charges, is liable to make Libra the first cryptocurrency to achieve true mainstream popularity and near universal adoption. That would make Facebook and the other members of the Libra Association a quasi-central bank.
If its smart contract functionality progressed to a level where business agreements could be concluded without having to worry about contractual performance (admittedly a big ‘if’) the Libra Association could achieve a level of influence over the world’s economic affairs without obvious precedent (outside of James Bond movies). Needless to say, there are some potential legal issues associated with this (regrettably beyond the scope of this article).
It is of course still possible that Libra could go down in the footnotes of history as a bit of a gimmick that never worked out for anyone, except a few grubby fraudsters flogging fake crypto on Facebook. However, it is also worth noting that the European Commission is investigating whether the Libra Association could be in breach of EU competition law by unfairly shutting out rivals, notwithstanding the fact that Libra has yet to come to market.
“Steal a little and they throw you in jail” Bob Dylan observed. “Steal a lot and they make you a king”. No doubt, some believe it was ever thus. But arguably this cynicism is out of step with these sophisticated, entrepreneurial times. According to the Facebook model, you steal a little and they bank the advertising revenue from that fraud and put it towards taking over international finance. While unlikely to become the company motto any time soon, it is just the sort of thing that could plausibly go on to make Facebook an enormous amount of everything.
By Michael Cumming-Bruce,senior associate at Cooke, Young & Keidan