Facebook’s announcement of its much-awaited cryptocurrency Libra sent ripples across the financial world just a few weeks back. The announcement was celebrated by a large chunk of crypto and blockchain community in the sense that it has established a more credible reputation of this space among the masses.
But this seemingly winning situation for crypto lovers might just blow up in their own faces as Facebook has a mammoth decision to make: whether to decentralize completely or not. If it remains a centralized project, the overall effect might just turn detrimental to the crypto cause.
Facebook’s Libra has been facing quite a tough time before the U.S. lawmakers from the Senate and the House of Representatives in the recent hearings. The goal of the lawmakers is to devise an appropriate regulatory framework to channel the digital payment system that is being launched by the social media giant. Until now, clarity has not been achieved by the lawmakers as to how to classify this digital asset and under what restrictions should it fall.
The size of Facebook’s corporation and its influence on its giant user base of 2.7 billion people is the reason why lawmakers seem very cautious in proceeding towards Libra question. Giving a company such power to control the flow of money worldwide and regulating it under concrete laws across the globe is a daunting task.
Bitcoin has already established quite a negative image of cryptocurrencies due to the leverage that it gives to the negative elements in this space by decentralizing the network. So the question that arises for Facebook is: how much should it centralize its workflow to cancel out negative elements and how much should it decentralize to stay true to crypto’s decentralization vision?
Question Facebook hasn’t answered: can they stop someone from using Libra, and freeze what they own, because they violated Facebook’s Terms Of Service?
If Libra becomes widely used, do political dissidents risk being cut out of the financial system if a host country requested it?
— ERIK FINMAN (@erikfinman) July 21, 2019
The initial use-case of cryptocurrencies was largely led by their usage in illegal activities as they operate on decentralized networks. Since there are no concrete regulatory frameworks against this technological innovation, illegal activities such as money laundering and usage in illegal online marketplaces, like the dark web, seep in through the cracks in the current regulatory structure.
The lack of a central party controlling the network, making policies and standing answerable for the network’s activities is the reason why there is a stronghold of negative activities in the crypto space. The presence of regulatory loopholes is one of the reasons why official acceptance of bitcoin is low with people like U.S. President Donald Trump not being a fan of cryptocurrencies.
Facebook’s dilemma is the control over the network. It already has a user base of around $2.7 billion and allowing for unchecked transaction and money flows will incentivize negative factors to flood this space. If Facebook asserts a centralized control over its blockchain network, it will destroy the narrative advocated by the staunch crypto enthusiasts.
Cryptocurrencies are poised against the banking system and its centralized policy making. Facebook’s centralization will put it in the same league as the banks thus making it essentially a centralized network masquerading as a cryptocurrency hero.
Taking up the market of cryptocurrencies, it will then kill the innovation that has been going on in that nascent space ultimately proving harmful to the crypto cause. On the other end, decentralization will lead to increased negative usage putting pressure on a company that already has been engulfed in various scandals such as data leakage.
Libra is going to operate on a global level transcending the borders of countries. It has to comply with the regulatory requirements put forward not only by the U.S. but also the host country. Facebook also has to decide if it is going to let the network free by decentralizing or take full-ownership so that requests from various countries can be entertained.
At these hearings, Libra is in an impossible position:
It must be centralized enough to prevent illicit activity by freezing funds, but decentralized enough not to discriminate against participants based on the use of the funds. ?
— Marco Santori (@msantoriESQ) July 17, 2019
All in all, Facebook can centralize its framework with very much efficiency as it already has the background information of billions of people. It will be interesting to see how much Libra inclines towards decentralization while staying in the positive regulatory shade.