By Dr Ernie Teo, CTO of JEDTrade and Professor David Lee Kuo Chuen is Professor at Singapore University of Social Sciences
Since the announcement of the Libra cryptocurrency by Facebook in June 2019, it has garnered much attention. The blockchain community, in particular, was quick to offer their critic. There may be much contention on whether Libra is on a real blockchain or if it can be considered a true cryptocurrency, but there is no doubt that blockchain adoption by the world’s largest social media company is a significant event for the industry.
Libra was announced with 28 founding members (with the aim to reach 100 by their launch date in 2020). Founding members will contribute funds to make up the underlying fiat financial instruments that will act as a stabilising reserve as the network grows. In return, they will be issued a separate Libra Investment Token (LIT) that is likely to earn returns.
With the large prevailing network of users of Facebook, and founding members such as Mastercard, eBay and Uber, the network will enjoy immediate critical mass. This is an attribute which many blockchain use cases need and lack. The externalities generated from such a network will ensure stickiness with extended e-commerce functionality, thus making Libra become the de-facto internet currency. Facebook and its group of products like WhatsApp and Instagram are adopted globally. The Libra wallet, Calibra, once integrated into these applications will make the currency scale quickly.
Although China e-wallets currently top the number of mobile payment transactions globally, this may quickly change with the adoption of Libra. Chinese wallet apps such as WeChat have found it hard to move globally due to government restrictions, differences in culture and language barriers. Wechat Pay and Alipay have recently gotten their biggest break into Europe with several partnerships, but their celebration was short-lived. For many Internet companies, especially the Chinese, it either joins in or be excluded from the Libra project. The fact that Chinese tech giants are put into this dilemmatic situation shows the advantage of the US in global financial innovation.
Successful internet projects are Low margin, Asset-light, Scalable, Innovative and Compliance easy. Libra adhere to these LASIC principles[1], in particular, it is extremely scalable. It is borderless with the financial inclusion business model targeting more than 2 billion underserved customers through mobile phones. With global adoption, the Libra blockchain network would be host to a large amount of data consisting of its users’ internet financial activities. Being a permissioned blockchain (at least in the beginning), Libra’s founding members’ nodes would be privy to such data. This will create opportunities for these organisations to understand their customers beyond their current scope. With many notable cases of data leaks and misuse in recent years, it is important for Libra to consider users’ data privacy. Data privacy should not be an afterthought for Libra and should be embedded in its very design. However, the word ‘privacy’ is only mentioned once in the Libra whitepaper.
Libra’s critics have commented that growth hacking is the key agenda for a majority the Libra founding members that seek profit maximisation, and financial inclusion is just a way to penetrate countries with low enforcement ability, thus weakening the ability of those countries in controlling their money supply. Libra will become the de-facto central bank of emerging markets that for years have been trying to access cheap capital for growth. But such a growth path is at the expense of privacy invasion of perhaps unwary and willing customers.
When it comes to financial transactions, most regulation will require some form of KYC. Regulators’ need to track transactions and blockchains designed to provide anonymity is a natural conflict. It is technically challenging for decentralised blockchain platforms which are replicated databases by nature and ideally online identity needs to be de-linked from real world identity to provide some form of privacy. To address this, there has been much research effort in different methods to enable privacy on a decentralised blockchain environment.
Notably, zero-knowledge proofs are much explored, it started from the privacy coin Zcash privacy cryptocurrency and is now being adopted by corporates such as Ernst and Young. Secure execution environments are another area where one can potentially compute encrypted data in a “black box” environment, ensuring privacy yet allowing for the data to be analysed. The Enigma project from MIT media labs is one effort to utilise the secure execution environment provided by Intel SGX processors. In Singapore, there is much exploration in this area. Nanyang Technological University together with data protection provider Acronis are working on a secure multi-party computation platform for sharing of encrypted data between multiple untrusted parties for business transactions. JEDTrade, a Singapore blockchain company is working on deploying such privacy enhancing methods on blockchain applications for their clients with their platform, Jupiter Chain. The beauty of cryptography technology is the detailed data analysis from raw data without revealing it. Libra has not made use of the most powerful attribute of a blockchain or even mention the potential of such technology, a huge miss in an otherwise well thought through whitepaper.
Governments globally are increasing regulations for personal data protection like the EU’s GDPR and Singapore’s PDPA. The integration of such technology with blockchain will make it a truly powerful tool which will create a democratic and open data platform where all data owners have control over their data while keeping it private. This is the way forward in enabling data driven technologies in a highly regulated world. It will also be a platform which allows for fair competition, where all entities big or small have access to data. This will ensure continuous innovation and prevent the unfair accumulation of market power.
Libra may have the vision to become independent decentralized blockchain to serve the underserved, it may help financial institutions in emerging countries comply with international standards, it may even have a superior programming language (MOVE). It may even help non-compliant banks in emerging markets conform to international standards for financial transactions. But, the weakest link is its link to fiat, that makes it seem stable but unpredictable and at the mercy of the fund manager. Every additional fiat in the reserve is a regulatory challenge.
Without privacy protection in whatever form, the risk of information (at such a scale) in the hands of profit seeking corporations is a disturbing thought that will not only keep cypherpunks awake at night. The consequences of hacking and privacy invasion must be kept as high as possible if the likes of Libra is allowed to scale globally.
About the Authors
Professor David Lee Kuo Chuen is Professor at Singapore University of Social Sciences, Adjunct Professor at the National University of Singapore, external advisor to Distributed Trust Initiative and Visiting Fulbright Scholar (2015) at Stanford University, He is the founder of several entities including LeftCoast in Silicon Valley, Libai.io for Chinese wealth management education, and BlockAsset for Fintech and Blockchain. His current interest is in decentralised technology for financial inclusion. He writes widely in the area of blockchain and financial technology, this includes being the author/editor of the American Library Association Outstanding Award Reference Book titled “Digital Currency” by Elsevier. He graduated with BSc, MSc and PhD from the London School of Economics and Political Science in Econometrics. David serves as an independent director on several boards including one of the world’s largest FinTech companies. He was also the Group Managing Director of OUE and Auric Pacific.
Dr. Ernie Teo is CTO of JEDTrade and Adjunct Senior Lecturer at the National University of Singapore. He has over a decade’s experience in economics and technology research. At JEDTrade he leads project Jupiter Chain which is focused on providing for data privacy and allowing for data analysis. Prior to JEDTrade, he was a Research Scientist at the IBM Center for Blockchain Innovation, and was involved in blockchain projects covering provenance, finance, transport and logistics. Ernie is an economist by training and specialises in the areas of game theory and applied microeconomics, with applications to high tech industries. He received his PhD in Economics from the University of New South Wales, Australia. He has also held academic positions in Nanyang Technological University and Singapore Management University.
[1] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3084048