Project “Libra”, Facebook’s cryptocurrency, is a mix between Mark Zuckerberg’s attempt to become more present in our lives and an honorable goal of giving over a billion people access to a bank account for the first time.
Little reminder on “crypto”
The shortest and easiest definition would be: “cryptocurrency is decentralized digital money”. With internet development in the 1990s, a few smart entrepreneurs called “cypherpunks” attempted to create the first digital money system. Initially, the project was gaining popularity with users that believed governments and corporations had too much power over our lives. Then, in 2009, the first fully decentralized digital cash system was created. The first cryptocurrency was called …. yes, it’s the one you’re thinking of… Bitcoin!
Another purpose of cryptocurrency is removing third parties from the money system. Unlike banking, the purchase of crypto is done without intermediation: users buy or sell digital money directly with other users. The data are encrypted (protected) and no one is required to give personal information to participate in the process. The secret of cryptocurrency’s transaction is the “blockchain”.
Fun fact: a programmer in early 2010 bought pizzas for 10,000 BTC (one of the first real-world bitcoin transactions). Cryptocurrency has become so popular that today, in November 2019, 10,000 BTC is equal to roughly 8.5 Million Dollars. The promising market is growing so fast that its capitalization represents 224 billion USD. A great incentive for giants like Facebook.
Libra in a nutshell
Libra’s mission is to reinvent money so people everywhere can live better lives. After all, as the organization points out, 1.7 billion people do not have access to a bank account. The Libra association believes moving money around the world should be as easy and cheap as sending a text message. No matter where you live, what you do, or how much you earn.
It will be :
- Accessible to anyone on a smartphone with data connectivity.
- Stable since backed by a reserve, unlike other cryptocurrencies like Bitcoin and Ether.
- Fast & Worldwide transactions.
- Secured by the blockchain.
Libra is not exactly like other cryptocurrencies. The difference being that crypto coins have volatile price swings since they are not backed up by any other currency. Their value is determined by what people are willing to pay for it. It follows the same principle as other traded instruments and relies on supply and demand. However, libra tokens will be based on the strongest currencies like the US dollar, the Euro and the Japanese Yen which means its value will remain stable.
Supposedly, anyone will be able to purchase libra coins through Libra wallet apps on smartphones. The Libra association also wants its users to buy tokens from some local grocery and convenience stores. The cash in the local currency will be exchanged in nearly the same number of libra coins.
The Libra Association
The non-profit organization is independent and has its headquarters located in Geneva, Switzerland. It is made up of diverse businesses, nonprofit and multilateral organizations, as well as academic institutions around the world. Each member gets an equal say, Facebook isn’t more powerful than others. There were 28 founding members or “primary investors” at the beginning of 2019. The goal was to attain 100 members before it launched in 2020. However, instead of going up, the number of partners is decreasing. Major players left like PayPal, Mastercard, and Visa. Stripe, eBay, Booking Holdings and Mercado Pago also said goodbye to the project.
To separate itself from being the creator of the Libra project, Facebook has created a subsidiary called Calibra. This branch makes a digital wallet for users to store and exchange libra tokens. Facebook will not have any information regarding users’ purchases.
Uber, Lyft, Spotify and other companies and organizations loyal to Facebook are the remaining members crazy enough to chase this “dead project” according to the Financial Time.
Why is it a problem?
First, like any other impactful innovation, existing rules are the issue. Rules are made for things to stay the same and changes are hardly welcomed in society.
The impact of this project could simply be enormous. With more than 2.7 Billion users, Facebook could completely transform the world of finance. This large potential is also the cause of many worries since Facebook has been in the spotlight due to many scandals over users’ privacy (see The Power of Data for more info). Let’s not forget that Facebook business model is based on selling personal data for advertising purposes. This makes the giant look untrustworthy of its users’ financial data. .
Now if we decide to take a look at the bigger picture, the banking system as we know it is not ready for digital money yet. It heavily relies on the KYC principle (“know your customer”). With a population of approximately 1 billion people without proof of their identity, Libra opens its doors to everyone making money laundering quite simple. An ID is required to open a Calibra account but Libra plans to move away from this formality. Is it really safe to allow users to use a phone number, selfie or social media profile like Facebook to sign up? Finance officials do not think so.
Most governments are also on team “no Libra”. France and Germany’s financial ministers both railed against it earlier this September. Libra was informed that it failed to address the risks around financial data protection and fraud. It was also said that as it is, the digital currency would not be allowed on European soil. Cryptocurrencies like Bitcoin have been scaring central banks and big governments recently, Libra isn’t alone in this fight … Decentralized digital money systems have the power to break the monopoly of money printing and to impact the economy as well as interest rates.
Governments around the world refuse to let Libra or other private companies become major players in the digital money industry simply because it would compete with their national currencies. For that reason, China has announced it will defend its sovereignty by creating a digital version of the Yuan. Germany is moving towards the German Blockchain Strategy and the eurozone also called for a Central Bank Digital Currency.
Once again, innovation is moving faster than laws. Governments are behind and afraid of this new technology. By scaring investors and stopping companies from a legal standpoint, institutions are only buying themselves time. Digital currency is not going anywhere. But for now, Mark Zuckerberg will have to wait on the sidelines for the game rules to change before introducing Libra.
Forbes.com / ft.com / libra.org / bitdegree.org / medium.com / thepowerofourdigitalworld.com