Hong Kong’s return to the motherland on July

Since the handover, July 01 has been observed as a public holiday in Hong Kong to commemorate what is known as the ‘Establishment Day’. This year, instead of celebrations, it turned out to be a day of rebuking the Chinese rule, as anti-government protesters – displaying British era colonial flags – stormed and ransacked the City’s Legislative Council (or LegCo). Hong Kong’s Chief Executive Carrie Lam’s claims about the success of 22 years of Chinese rule sounded hollow. 1 Around a million of Hong Kong’s seven million population soon took to the streets.

The ongoing protests have also laid bare the stark reality of a deeply fractured Hong Kong society with the City Administration and political leadership towing the Chinese Communist Party line and condemning the protesters as separatists and extremists. The anger of the protesters is more than palpable as they decry police excesses, feel betrayed by the Government, and let down by the social institutions. While the root cause of the protests is political, Chief Executive Lam instead of offering a solution has attributed the crisis to the economic factors 2

The Genesis

Violent protests against the City Administration began towards mid-June this year, largely arising from fear of eroding freedom. The tinder was Hong Kong Government’s move to pass the “Fugitive Offenders and Mutual Legal Assistance in Criminal Matters Legislation Bill” (or the Extradition Bill) which would allow Hong Kong citizens and foreigners accused of crimes to be extradited for a trial to the mainland China. This was seen as a deliberate attempt by the government to undermine the independence of Hong Kong’s legal system. Two days after the record protests, Lam stated that the government won’t proceed with the bill until public anxieties and fears were properly addressed.

Not convinced, a week later, thousands of protesters marched on the streets of Tsim Sha Tsui, one of Hong Kong’s most popular tourist areas, in a bid to gain support from the mainland Chinese visitors. On July 09, Chief Executive Lam finally admitted that her administration’s attempt to introduce the ‘Extradition Bill’ was a complete failure and assured that the government would not seek to reactivate it in the parliament. She clearly stated that “the bill is dead”. 3However, she refused to give in to the demand for a complete withdrawal of the bill from the legislative agenda which led to a provocative response from the anti-government camp.

Hong Kong has been in a state of unrest for about eleven weeks now. Pro-democracy activists have also staged sit-in protests at the Hong Kong Airport which resulted in its partial closure as large numbers of flights were disrupted. In the latest weekend protests at Victoria Park on August 18, it was estimated that around 1.7 million flooded the venue. The daily rallies have been marked by increasing violence and confrontation with the police. Lam has refused to cave into the demands of the protestors which include a call for direct election to the City’s Chief Executive, currently chosen by Beijing.

Meanwhile, Britain’s criticism of China’s handling of the protests was countered by Beijing when its envoy in London, Liu Xiaoming, stated that Britain should “refrain from saying or doing anything that interferes or undermines the rule of law in Hong Kong”. 4 The US National Security Adviser John Bolton too has warned China against creating another memory like that of the Tiananmen Square in Hong Kong.5 The Chinese Ambassador to the US, Cui Tiankai, had earlier blamed “ill-intentioned forces” for using Hong Kong to attack China’s “One Country, Two Systems” and creating chaos across the country.6 Recently, President Donald Trump suggested to his Chinese counterpart to reach out to the protesters for peaceful resolution of the issue.  Li Bijian, Minister and Deputy Chief of Mission at the Chinese Embassy in India, also recently wrote that “What happened in Hong Kong is China’s internal affairs, and no country or organisation has the right to interfere. China will resolutely safeguard its sovereignty, security and development interests and Hong Kong’s prosperity and stability.” 7

“One Country, Two Systems” at Crossroads

 
Having been under the British rule for one and half-century, Hong Kong had acquired the status of a major global financial centre. Therefore, at the time of handover, in order to maintain Hong Kong’s prosperity, and its legal system and culture, the Chinese Communist leadership had agreed to a unique arrangement – “One Country, Two Systems” principle, envisaged by Deng Xiaoping. It implied that while Hong Kong legally will be a part of China but as a ‘Special Administrative Region’ free to enact its own laws (excluding foreign policy and defence), and with the right to freedom of speech and an independent judiciary for the next fifty years.

The ‘Hong Kong Special Administrative Region’ (HKSAR) arrangement was not without scepticism, vindicated by several protest movements since the handover in 1997. In 2003, the HKSAR Government made a bid to introduce legislation redefining the scope of ‘treason’ that would have drastically curtail the freedom to criticise the Chinese Government. In 2014, there were large scale pro-democracy protests demanding an end to China’s surreptitious encroachment on citizen’s liberties. These protests went on for months and came to be known as the ‘Umbrella Movement’. The Movement, however, fizzled out due to the government’s unrelenting stance on making any concession to the protestors.

The basic character of Hong Kong has also steadily changed over the last two decades due to ‘Mainlandisation’ – a process of integrating Hong Kong with the People’s Republic of China (PRC) through various means. Mandarin has been promoted at the cost of local Cantonese as also to reduce the usage of English. Numerous infrastructure projects have been implemented to integrate Hong Kong with the mainland; case in point being the Hong Kong-Zhuhai-Macau Highway. Even the local media has increasingly resorted to self-censorship in reporting on issues about which the communist leadership is sensitive. The chief executives over the years have become more responsive to the efforts of the mainland leadership to gradually impinge on the civil liberties of the Hong Kong residents. There have been instances of people being frisked out of Hong Kong onto the mainland for detention and torture.  

In economic terms, Hong Kong’s clout has diminished over the years. In 1997, its gross domestic product (GDP) was almost one fifth that of China while at present it is down to three per cent. With Chinese companies and financial institutions having a significant presence in Hong Kong, HKSAR’s dependence on the mainland has increased over the years.  Further, Shanghai given its rapid growth as China’s financial capital is emerging as a viable alternative to Hong Kong.

Since President Xi Jinping assumed power in 2013 as the fifth generation leader, the Communist Party rule has become more authoritarian and assertive, both at home and abroad. This does not augur well for Hong Kong as its speedy integration with the Mainland by gradually eroding the “One Country, Two Systems” is in sync with President Xi’s “China Dream” of a ‘prosperous and powerful China’. Yang Jiechi, Member Politburo, Communist Party of China (CPC), has blamed the United States and other Western countries for stirring the trouble, whereas the movement appears to be indigenous. The ‘Hong Kong and Macau Affairs Office’ in Beijing has strongly condemned the protests terming them as riots and ‘near terrorism criminal actions’. 

Today, China’s security concerns are primarily internal as it faces virtually no external threat. Hence, sovereignty and stability stand out as its key national objectives; implying ‘zero tolerance’ to any kind of dissent. As per the latest White Paper “China's National Defence in the New Era,” China retains the option to use force to unify Taiwan which it considers to be a renegade province and the one claiming to be an independent country. 8 As for Hong Kong, its political status as an undisputed part of PRC stands settled and the issue is not of independence but of autonomy.

Given the current situation, Beijing wants the ‘City Administration’ to halt the protests and deal with the pro-democracy activists sternly. The protesters may have forced Chief Executive Lam to yield ground on the ‘Extradition Bill’ but in the long run, Beijing envisages the protest movement to peter out as it steadily tightens control over HKSAR. To this end, the communist leadership will increasingly resort to disinformation war, sabre-rattling by upping the ante and quelling dissidence through the well-orchestrated phenomenon of paid proxies. However, young activists like Joshua Wong, a Noble Peace Prize nominee who was convicted and jailed in 2017 and released recently are proving tough nuts to crack. 

On August 06, massive drills involving some 12,000 soldiers of the Chinese People’s Armed Police (part of People’s Liberation Army or PLA) along with armoured vehicles were staged at Shenzhen, a city in southern China adjacent to Hong Kong. It was meant to convey a veiled threat to the protesters of a possible intervention. The PLA garrison in Hong Kong so far has remained confined to the barracks. Going by the past precedence, should the situation take a turn for the worst, the communist leadership has the will to put down the protests by force, catastrophic consequences notwithstanding. However, Global Times, a state-controlled English daily, in a rare reference to ‘Tiananmen’ has insisted that the country has more sophisticated methods than those employed thirty years back to handle the Hong Kong crisis.9

The current impasse in Hong Kong poses the most serious challenge to the Chinese leadership since the territory’s integration with the mainland.  The “One Country, Two Systems” arrangement appears to be at crossroads, set to be consigned to the archives well before 2047 – its expiry date.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

• 1. “Protesters expose a fractured Hong Kong, but China’s grip only tightens,” The Economist, July 06, 2019 (accessed August 22, 2019)
• 2. Mary Hui, “Mired in Anger and Hatred, Hong Kong’s ‘Radical’ Protesters Are Seeking a Way Forward,” Quartz, August 14, 2019 (accessed August 22, 2019).
• 3. “’The Bill Is Dead.' Hong Kong's Leader Vows to Kill a Controversial Extradition Plan after Weeks of Protest,” Time, July 09, 2019; and “Hong Kong chief executive Carrie Lam says extradition Bill is ‘dead’,” Channel NewsAsia, July 09, 2019.
• 4. “Hong Kong protests: UK should not interfere, says Chinese ambassador,” BBC News, August 15, 2019.
• 5. Brett Samuels, “Top Trump adviser warns China over Hong Kong crackdown,” The Hill, August 14, 2019.
• 6. Cui Tiankai, “One Country, Two Systems is the Best System for Hong Kong, China and the World—Including America,” Opinion, Newsweek, August 02, 2019.
• 7. Li Bijian, “Hong Kong: Law and order must be upheld,” Hindustan Times, August 11, 2019.
• 8. “China’s National Defense in the New Era,” The State Council Information Office of the People’s Republic of China, July 2019.
• 9. “Futile for Washington to play HK card,” Global Times, August 15, 2019.

India’s defence relationship with America has steadily deepened since the mid-2000s. Will this trend culminate in an alliance between the two countries? No, is the answer of a number of scholars and policy makers, who contend that India will never enter into an alliance because of its commitment to the principle of strategic autonomy.1 There are at least three problems with this contention. One, it is premised on a restrictive and ahistorical definition of what an alliance is. Two, it overlooks the fact that nonalignment and its post-Cold War offshoot, strategic autonomy, have not been conceived of as inviolate principles that have to be adhered to at any cost and in all circumstances. And three, the obsession in the discourse on India’s sense of self as reflected in the principles of nonalignment and strategic autonomy has led to the complete neglect of crucial issues that are likely to determine whether the two countries would enter into an alliance or not.

Restrictive And Ahistorical Definition Of Alliance

Analysts and scholars who argue that India will not enter into an alliance with America have in mind a restrictive and ahistorical definition of what an alliance is. An alliance, in their view, ought to possess three features: 1) institutionalised military cooperation between the parties, 2) a firm commitment to use force under defined conditions, and 3) a high level of synchronisation of foreign policy positions. In other words, an alliance must resemble the type of relationship that America fostered with its Asian and European Asian allies during the Cold War. This is, however, a narrow definition that excludes other types of inter-state agreements dealing with the provision of military assistance.

Commitments of military assistance in alliances have assumed different forms. These include:

• unilateral guarantees extended by one state to another;
• pacts that call only for consultations if one party to the agreement were to find itself at war with a third country;
• pledges of non-aggression or neutrality when one party is engaged in war with a third country;
• commitments to come to the defence of the other party when it comes under attack from a third country; and,
• promises to fight alongside the other party even if the latter were to initiate war against a third country.

Given this broader range of alliance agreements that states have entered into during the last few centuries, Professor Bruce Russett defined an alliance as: “a formal agreement among a limited number of countries concerning the conditions under which they will or will not employ military force.”2

India’s 1971 Treaty of Friendship with the Soviet Union squarely falls within the ambit of Russett’s definition of alliance. The crux of that treaty lay in two key provisions. One, India and the Soviet Union undertook not to participate in any alternate alliance aimed against the other, and not to militarily assist a third country that is engaged in war with the other. And two, they undertook to consult each other if one of them came under attack “in order to remove such threat and to take appropriate effective measures to ensure peace and security of their countries.”3

Nonalignment Not an Inviolate Principle

Nonalignment was devised as a policy to navigate through the Cold War. It was not conceived of as an inviolate principle to remain committed to at any cost. Even the originator of that policy, Jawaharlal Nehru, averred after the 1962 War that “there is no nonalignment vis-à-vis China.”4 Further, according to Selig Harrison, Nehru envisaged the Soviet Union as India’s second front and India as the Soviet Union’s second front in the event of either country finding itself at war with China.5

If nonalignment did not preclude Nehru from envisaging the Soviet Union as India’s second front, Indira Gandhi from taking India into an alliance with the Soviet Union, and the Janata Government from discarding the alliance with the Soviet Union during the late 1970s, there is no reason to conclude that strategic autonomy, which is a post-Cold War offshoot of nonalignment, would prevent India from allying with America if a need for such an alliance were to arise.

Factors in Alliance Decisions

If so, what factors are likely to influence India’s decision to enter into an alliance with America? An alignment of interests and ideology already exists between India and the United States (US). They are both democracies, which are moreover committed to a liberal, rules-based order in the Indo-Pacific region. And they face challenges to their security and interests from the same source, namely, China. But affinities of interest and ideology have never been sufficient conditions for the formation of alliances. India and America were democracies during the Cold War years as well, but they were estranged democracies throughout those decades. Even when they agreed in the late 1950s and the first half of the 1960s about China as a source of threat, they failed to forge an alliance due to various factors including their inability to come to an understanding on how India should tackle the threat posed by China.6

Ultimately, the crux of the alliance question lies in the extent to which each side is willing to make a military commitment to the other. Whether a state decides to make a stronger or weaker or no militant commitment to the other depends on two factors: 1) the extent to which it shares with the potential ally interests that are in conflict with those of the adversary, and 2) the extent of mutual military dependence with the potential ally.7

With respect to shared interests, India does share with America an interest in promoting a rules-based liberal order. It also shares with America an interest in preventing Chinese hegemony in Asia, but would also ultimately prefer a multipolar Asia rather than reinforce and perpetuate the US primacy. For its part, America views Arunachal Pradesh as an integral part of India, but has not taken a position on Aksai Chin. Moreover, it was lukewarm during the Doklam crisis and may not fully support India on all territorial and security issues relating to China. All in all, while there may not be a complete harmony of interests between the two countries, there is a degree of alignment in their positions when it comes to their respective issues in conflict with China. But, as yet, the degree of convergence does not appear sufficient to make an explicit alliance possible to envisage.

The other determinant of alliance decisions, which is military dependence, is a function of four other factors: 1) the intensity of threat posed by the rival, 2) the state’s need for military assistance from an ally to tackle the threat, 3) the ally’s capacity to provide military assistance, and, 4) the availability of alternate allies.

There is no denying the fact that India’s threat perception vis-à-vis China has not diminished in any significant manner in recent years. In fact, there is a certain degree of consensus among analysts that the threat posed by China to India’s security and interests is likely to increase in the years to come as China’s power grows, its ambitions expand, and its ability to project power beyond its borders increases. Even the authors of Nonalignment 2.0 stated categorically that China constitutes “the single most important challenge for Indian strategy” because of its increasing ability to directly impinge upon India’s “geopolitical space” in Asia.8

Does India need military assistance from allies to cope with the China threat? In terms of sheer numbers, the military balance is indeed in China’s favour. China’s development of infrastructure in Tibet has considerably enhanced its ability to mobilise a greater number of forces in a faster timeframe. However, China’s continued preoccupation with security challenges along its eastern seaboard and the constraints imposed by terrain, weather and distance in projecting power through and from Tibet limit the scope and intensity of the military challenge that China can generate against India. That means India is unlikely to need direct military assistance from America or any other potential ally during a limited India-China war. What India might need instead are: diplomatic support including in the United Nations Security Council, continued supply of weapons and spares, intelligence about the adversary’s military dispositions, etc.

While diplomatic and limited material support might suffice in the context of a limited India-China border conflict, India’s military needs and dependence on allies are bound to be considerably higher in the event of a two-front war, irrespective of whether it is China or Pakistan that joins the fray. While the scope and intensity of Chinese military operations would probably remain the same because of the geopolitical and geographical constraints highlighted earlier, the territorial and security consequences of fighting China in a two-front war are likely to be rather high.

America does have the capacity to provide greater military support for India under these circumstances. Given Russia’s increasing dependence upon and growing partnership with China, it is no longer a likely alternate alliance partner for India. In effect, India’s military dependence on America is likely to be higher in the event of a two-front war with China. But would America be willing to come to India’s assistance? What kind of military assistance and the risks associated with it would America be willing to undertake? Would the kind and extent of assistance America may be willing to offer be sufficient for India to tackle the threat from China? Answers to these questions would be a key determinant of India’s decision to ally or not with America.

While India is likely to become more militarily dependent on America in the event of a two-front war with China, India’s capacity to undertake reciprocal commitments in support of the US in the event of a China-US conflict is limited. India does have the capacity to contribute to the common effort in the Indian Ocean Region, but its role in the primary theatre of a potential US-China conflict is likely to be rather limited. Further, India’s capacity to undertake diversionary military action along the land border is highly constrained by geographical factors as well as by a lack of sufficient offensive military capability. Even if the mountain strike corps gets raised with its full complement of weapons and equipment, India’s offensive capability along the China front is likely to remain limited.

In sum, it is not the commitment to the hoary principle of strategic autonomy that will determine whether India enters into an alliance with America. Instead, it is more likely to be a function of two main factors: the degree to which Indian and American positions align or diverge on their respective issues of conflict with China; and, the extent to which each needs the military assistance of the other and is willing to contribute to the other’s military effort.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.

• 1. See, for example, Ashley J. Tellis, “Unity in Difference: Overcoming the U.S.-India Divide”, Carnegie Endowment for International Peace, Washington D.C., January 2015, p. 33 and Dinshaw Mistry, “Aligning Unevenly: India and the United States”, Policy Studies,74, East-West Center, Honolulu, 2016.
• 2. Bruce M. Russett, “An Empirical Typology of International Military Alliances”, Midwest Journal of Political Science, 15 (2), May 1971, pp. 262-63.
• 3. See Articles VIII, IX and X of “Treaty of Peace, Friendship and Cooperation Between the Government of India and the Government of the Union of Soviet Socialist Republics”, Ministry of External Affairs, Government of India, August 09, 1971.
• 4. Hindustan Times, December 06, 1962, as cited in Cecil V. Crabb Jr., “The Testing of Non-Alignment”, The Western Political Quarterly, 17 (3), September 1964, p. 539.
• 5. Selig Harrison, “Troubled India and Her Neighbors”, Foreign Affairs, 43 (2), January 1965, p. 325.
• 6. Tanvi Madan, “With an Eye to the East: The China Factor and The U.S.-India Relationship, 1949-1979”, Ph.D Dissertation, The University of Texas at Austin, May 2012, p. ix.
• 7. Glenn Snyder, “The Security Dilemma in Alliance Politics”, World Politics, 36 (4), July 1984, pp. 471-74.
• 8. Sunil Khilnani et al., “Nonalignment 2.0: A Foreign and Strategic Policy for India in the Twenty First Century”, Centre for Policy Research, New Delhi, February 29, 2012, pp. 13, 16-17.

The Indian Navy recently conducted the third ‘Annual Joint Humanitarian Assistance and Disaster Relief (HADR) Exercise’ at Chennai from August 02-04 2019, under the theme ‘Cyclone and Urban Flooding Relief Operations’. The exercise saw participation by multiple central and state agencies and included a seminar, table top exercise, exhibition, skill demonstration and final exercise in the coastal districts of Tamil Nadu and Puducherry. It also saw participation by ‘Naval Observers’ from eight countries, viz. Sri Lanka, Bangladesh, Seychelles, Australia, Kenya, Singapore, Somalia, Nepal and also the Association of Southeast Asian Nations (ASEAN) Secretariat.

The HADR series of exercises are conducted by the Indian Navy with a view to “develop interoperability in terms of doctrines, procedures, organisational and logistic systems and operational processes, so as to promote the development of regional naval capacities for speedy, responsive and effective HADR throughout the IOR”. This is enunciated in the Charter of the Indian Ocean Naval Symposium (IONS), of which India is the Chair for the IONS Working Group on HADR. This is also in consonance with Prime Minister’s vision of ‘Security and Growth for All in the Region (SAGAR)’, which envisions strengthening relationship with our partner littoral nations in the Indian Ocean Region (IOR), in a mutually supportive and cooperative manner.

The IOR is one of the most disaster prone regions in the world. This coupled with the fact that the maritime capacities of most littoral states are not strong enough to individually address these challenges, necessitates collaborative solutions for disaster relief among like-minded nations in the IOR. The existing maritime cooperative initiatives in IOR, like the Indian Ocean Rim Association (IORA) and IONS, have shown great promise and are being actively engaged by the Indian Navy. Further, the Bay of Bengal Initiative for Multisectoral Technical and Economic Cooperation (BIMSTEC), another important construct in the IOR, has also identified ‘Environment and Disaster Management’ as one of the high priority areas of coordination and cooperation for BIMSTEC partner nations.

Navies world over have had to balance their more traditional roles with involvement in irregular security missions, which included anti-piracy, anti-trafficking, counter-terrorism, etc. with the most prominent being HADR. The Indian Navy has over the years gained considerable experience in rendering HADR assistance to the IOR littorals. Since the Tsunami of December 2004, the Indian Navy has emerged as one of the first responders including in the more recent ‘Operation RAHAT’ in April 2015, wherein hundreds of Indian and foreign nationals were evacuated from Yemen; Cyclone Roanu that effected Bangladesh in May 2016; flood relief operations in Sri Lanka in June 2017; Cyclone Mora in Bangladesh in June 2017; shipment of relief aid to Bangladesh during the Rohingya Crisis in September 2017; the tsunamis that struck Indonesia in September and December 2018; and also Cyclone IDAI in Mozambique in March 2019.

The Indian Navy’s deployment pattern has more recently shifted to the more dynamic ‘Mission-Based Deployments’. This involves deploying mission-ready ships and aircraft along critical sea lanes of communications (SLOCs) and chokepoints, always ready to meet any eventuality across the spectrum of operations ranging from acts of maritime terrorism and piracy to HADR missions. Accordingly, Indian naval ships always carry the minimum HADR material required for immediate relief. This provides the required flexibility and speed for the ships to be diverted anywhere at the shortest possible time to provide HADR assistance in its area of operations.

The Annual Joint HADR series of exercises, conducted by the Indian Navy, also help in proactively preparing participating nations with tools for developing standard operating procedures (SOPs), streamlining interoperability and practicing procedures for collaborative participation when necessary. The first of the series, named Karavali Karunya (Assistance to the coast of Karnataka), was conducted at Karwar in Karnataka in May 2017 and was set on a Tsunami disaster scenario. This saw participation by ‘Naval Observers’ from four countries, viz. Sri Lanka, Myanmar, Maldives and Bangladesh. The second was conducted at Kochi in Kerala in April 2018 and was named Chakravath (Cyclone).  The exercise projected the dynamic capabilities and swift mobilisation of the Indian Navy and other relief agencies during a calamity. ‘Naval Observers’ from six countries, viz. Sri Lanka, Myanmar, Maldives, Bangladesh, Seychelles and Mauritius participated in the exercise.

One of the main challenges towards effective collaboration in HADR operations is information sharing, the lack of which leads to poor coordination among relief agencies. Also, having incomplete perceptions of a disaster situation can lead to inefficient responses. Towards mitigating this, the Indian Navy launched the Information Fusion Centre – Indian Ocean Region (IFC-IOR) on December 21, 2018 at Gurugram in Haryana, with a view to build a common coherent maritime situation picture and to act as a maritime information hub for the IOR. The information exchange at the IFC-IOR is being initially undertaken by virtual means, using telephone calls, faxes, emails and video conferencing over internet. Subsequently, to enable better interconnection, quicker analysis of information, and to provide timely inputs, the IFC-IOR would host liaison officers from partner countries. This would ensure better liaison with partner governments and agencies of the effected region, ensuring a coordinated response to a HADR situation.

While naval forces worldwide are not specifically designed for HADR, the related activities capitalise on many of the enduring attributes of navies, viz., mobility, adaptability, scalability and interoperability. The ability to use the seas as manoeuvre space and project power ashore means navies are able to respond rapidly with relief supplies and personnel, anywhere they are needed. The Annual Joint HADR series of exercises thus allows the Indian Navy to share skills and build partnerships with government organisations and their international counterparts, while providing immensely valuable training for its own personnel.

The publication of Satoshi Nakamoto’s paper "A Peer-to-Peer Electronic Cash System" in October 2008, as part of his effort to invent a digital cash system without an intermediary such as a central bank, had led to the development of Bitcoin, which today is one of the leading cryptocurrencies in circulation. Prior to it, in the 1990s, a series of attempts to create a decentralised digital cash system, proposed later by Satoshi in his 2008 paper, was made by the Cypherpunks  - an activist group advocating the adoption of secure encryption algorithms and privacy-enhancing tools for safe and private value transactions, without any authority exercising control over it. Satoshi's paper subsequently led to a proliferation of cryptocurrencies such as Bitcoin, Ethereum, Ripple, Monero, Litecoin, and even a meme in the form of Dogecoin.

Libra - The New Cryptocurrency

The co-founder and chief executive officer of Facebook, Mark Zuckerberg, in his 2018 New Year post on Facebook, spoke about his ambition to develop counter-trends in the form of encryption and cryptocurrency that will facilitate its transition from a centralised system to a decentralising force. 

The alacrity in the announcement of Libra Coin, a Facebook-based cryptocurrency that is likely to be unveiled in 2020, however, took everyone by surprise especially as it is likely to have a centralised system, to begin with. Libra is expected to be the new stable global currency which will allow the 2.38 billion Facebook users to shop and transfer money overseas while paying negligible transaction fees. The coin is expected to work in tandem with a new Facebook-centric blockchain system. Notably, Libra can set the standards of a stable coin by virtue of being pegged to a basket of sovereign currencies like the dollar, pound, euro, swiss franc and yen. This is likely to insulate it from high volatility in the exchange rates of the coin. In comparison, Bitcoin’s extreme volatility can be attributed to it not being anchored to any sovereign currency. 

Facebook's Libra announcement came with a 29-page white paper describing their new global currency. However, there are a few key points to be examined when discussing Libra's potential.

• The Libra blockchain will be pseudonymous and not an anonymous system.  It allows users to interact and transact with each other, but not with their real-life accounts. However, the system will be public such that the transactions, when required, can be scrutinised by international regulators and law enforcement agencies.
• The Libra coin will be launched within a permissioned blockchain, because of the governance structure under the authority of Libra Association. Nevertheless, the white paper explains the transition towards decentralisation over time.
• The Libra Association currently constitutes 28 members but anticipates around 100 members to be part of the association before the launch of the Libra coin in the second quarter of 2020. These members will hold Libra Investment Tokens that would give them voting rights on the network, where they can make decisions about managing the Libra coin and letting new validators join the Libra ecosystem.
• The Libra blockchain, unlike the previous iterations of other cryptocurrencies, will differ in its framework. While others see blockchain as a chain of blocks of transactions, the Libra blockchain will be a single data structure documenting the history of transactions over time.  It will make it simpler for applications accessing the blockchain to examine and validate any data from any time using a unified framework.

A Unique Cryptocurrency

Underpinned by a permissioned blockchain, with control in the hands of the Libra Association and government regulators, Facebook’s Libra is a unique coin that is not entirely decentralised as opposed to other cryptocurrencies which are generally decentralised without a hierarchical authority possessing control over the cryptocurrency. 

What primarily differentiates Libra from Bitcoin and other cryptocurrencies is its emphasis on Proof-of-Stake consensus in its blockchain network vis-à-vis the latter’s Proof-of-Work consensus. In Proof-of-Stake consensus, validators of every single new block in the blockchain network would verify their legitimacy depending on their stake in the system (ownership of coins), whereas in Proof-of-Work consensus, validators verify each new block based on their computational power.

The announcement of Libra has once again put the focus back on cryptocurrencies vis-à-vis the fiat currencies, and its potential to financially incorporate the 1.7 billion unbanked population of the world. Multiple non-governmental organisations (NGOs) have been co-opted into the Libra Association as its founding partners with the objective of aiding small businesses, especially in the developing markets where 70 per cent of the micro, small and medium enterprises (MSMEs) lack access to credit. This can propel the establishment of a more inclusive and accessible financial ecosystem. These NGOs can also help Libra reach out to a wider audience by virtue of its lower costs. In doing so, millions of hitherto unbanked customers would likely get a verifiable identity and credit history.

Source: Josh Constine, “Facebook Announces Libra Cryptocurrency: All You Need to Know”, TechCrunch, June 2019.

Privacy Concerns and Operations

Since the Cambridge-Analytica scandal of 2018, the spotlight has been on Facebook for guarantee of user-privacy and data-security. Anticipating a backlash due to its poor track record, it has established a subsidiary called Calibra - a digital wallet to manage the Libra coin - under the authority of Libra Association which is an independent consortium based in Switzerland. The Association will be the repository of all transactions within the network, separate from the individual's social data, and will oversee the currency's development and network maintenance. In order to increase its presence in the e-commerce arena, Facebook has also introduced a new programming language - Move - which the company expects would be used on a larger scale to create smart contracts for goods and services to be sold on its platform.

Being end-to-end encrypted, Libra can facilitate transactions anonymously to the outside world, but within the Facebook platform. Libra will be a closed-loop system where the consumer can only buy and sell products that are available on the Facebook marketplace (introduced in late 2016) and its associated apps. This would prevent dangerous transactions including illegal trade in drugs and weapons, thereby overcoming the tainted reputation of other cryptocurrencies which have minimal checks and balances to prevent such transactions from being carried out.

Besides Facebook, there are 27 other founding members in the Libra Association - each having invested at least US$ 10 million - sharing control of the Libra coin. They include Mastercard, PayPal, Visa, Uber Technologies, Vodafone Group, and eBay among others. Each member gets a single vote on the Libra Association Council, making it extremely difficult for Facebook to monopolise the coin's governance. The Libra Association will also have the authority to determine the value of a Libra coin.

Several global financial regulators have expressed concerns about the proposed cryptocurrency. The United States Federal Reserve along with the United Kingdom's Financial Conduct Authority (FCA) have expressed apprehensions about consumer protection and privacy. Meanwhile, Japan and France have set up a working group and a task force, respectively, to discuss its impact on the global monetary and financial system. Similarly, the G7 Finance Chiefs recently discussed its potential ramifications at their meeting held in France on July 17-18, 2019.

India and the Cryptocurrency

According to recent reports, Libra will not be launched in India due to the current Indian regulation of not endorsing private cryptocurrencies.  A draft bill, proposing a 10-year jail term for holding, selling or dealing in cryptocurrencies, has muddied the waters for crypto-traders in India. Termed as the “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019”, the proposed draft bill could halt the future of cryptocurrencies in India. After India's central bank, the Reserve Bank of India (RBI), issued a circular in April 2018 instructing banks to withdraw support in dealing with any cryptocurrency transactions, the Supreme Court of India too refused to put a stay on the circular after a public interest litigation (PIL) was filed against the RBI's decision.

The size of the Indian market, however, offers enormous business opportunities for Libra. Given the growing proliferation of digital technology in India, it is estimated that more than 61 million new internet users will come online by the end of 2019, which means 627 million active internet users by the end of this year. Today, an estimated 270 million active users of Facebook are from India, and this number is growing.

While Libra is likely to have a massive impact on global e-commerce, it is in the money transfer space where it could be a potential game-changer. The World Bank Brief of 2018 highlights India’s position as the world’s largest recipient of remittances, worth US$ 78.6 billion. However, the transaction charges of seven per cent and above through formal channels make these remittances expensive. The cheaper informal alternatives such as the hawala networks are illegal. Libra on its part can practically reduce the transaction charges to negligible or even zero.

Facebook seeks an opportunity to grow through the accretion of Libra in India, but the onset of government regulations on cryptocurrencies could impact the future of the coin. For Libra to gain credence, it would need to ensure secure and efficient person-to-person fund transfer on the Facebook platform. It would also need to address India’s regulatory concerns by assuring the legitimacy of the project and working in tandem with the government to bring about changes in the cryptocurrency trading laws of the country.  

Future Prospect

The Libra Association aims to gradually decentralise their permissioned blockchain over time, thereby ensuring lower barriers of entry into the Libra ecosystem. While Libra has a tremendous potential to connect the global market within the Facebook’s social media platform, it is likely to run into multiple headwinds in the form of government regulators and privacy advocacy groups. The Libra white paper paints a rosy picture, but the implications both positive and negative can only be known after the release of the coin in 2020. Consequently, only time will tell whether Facebook's cryptocurrency plan would go ahead or the Libra would die in its infancy.

Views expressed are of the author and do not necessarily reflect the views of the IDSA or of the Government of India.