After months of speculation, on June 18th, Facebook officially confirmed it will launch its own cryptocurrency in 2020. Originally dubbed GlobalCoin, it was announced that the new cryptocurrency will be named Libra, Latin for balance. Now, before you rush to transfer your hard earned euros, dollars, pounds, etc. into Libra coins with the anticipation that it will be the cryptocurrency market’s next lucrative asset, you should continue reading.Much like bitcoin, whose value has recently risen above $11,000 for the first time in over 15 months upon the release of Facebook’s news, Libra will use blockchain technology. Thereafter, the similarities between both cryptocurrencies begin to part ways. For starters, unlike bitcoin, Libra was not created to be a speculative asset. Despite what bitcoin’s creators originally intended, for many, the world’s first cryptocurrency has become a financial asset to purchase and sell on the whims of the alternative currency market, in the same way that gold and silver are bought and sold on commodities markets.
Libra is different. It is meant to be a low-volatility cryptocurrency that will enable users to easily make purchases or send money to people for very low fees. To control value fluctuations, Libra will be backed by financial reserves managed by a nonprofit organization called the Libra Association.
Despite its name, the Libra Association has more in common with a board of directors than a not-for-profit entity. The organization is comprised of corporate members who have paid a minimum of $10 million to join. This entitles each of them to one vote on the governing council and a share of dividends from interest earned on Libra’s currency reserves. Currently, the association comprises 28 partners who will oversee Libra and its continued development. The partnership includes venture capital firms, nonprofit organizations, cryptocurrency firms and large financial, telecommunications and technology service providers. These partners will also contribute to Facebook’s Libra Reserve, an asset pool that will ensure every unit of Libra currency is backed by genuine fiat currency.
Despite developing the original idea, Facebook will not control Libra. Like its association partners, the social media giant only has one vote on the council. This raises an important question: what does Facebook hope to achieve with the launch of Libra next year? Many industry experts see Libra as the start of an ambitious plan to dominate the world’s payments systems and challenge the power of sovereign currencies. Clearly, such an assertion should be met with skepticism, after all, this is Facebook we’re talking about, not Google.
Nonetheless, the project is highly ambitious. Using the scale and networking powers of Facebook’s 2.2 billion users, Libra would permit anyone to use the currency to pay for goods and easily send money within and across territorial boundaries. This could positively transform the lives of the 1.7 billion people who currently do not have access to banking services due to poverty.
Setting aside the rosy vision of a future world where every inhabitant has access to financial services, many worry that Libra could also be used to engage in money laundering and terrorism financing. Additionally, Facebook and its partners could use Libra as a bottomless source of financial data. Facebook is notorious for being careless about its users’ private information and the anonymity of the blockchain loses traction if account holder’s addresses are tied to real identities at transaction end points. A user’s financial data would be invaluable in determining their spending habits and open the doors to relentless customized advertising.
Libra has the potential to profoundly disrupt how we pay for goods and services online and transfer money. It may also be the first step towards the creation of a truly global digital currency immune from the price fluctuations that plague bitcoin. On one hand, concerns about Libra from the global banking consortium and numerous international financial ministers could prove to be a standard reaction of established powers to a new industry disruptor, much like Uber and Airbnb disrupted the taxi and hospitality industries.
Nonetheless, the creation of a new global currency controlled by corporate managers who are mandated to enrich their shareholders should raise concerns. Perhaps most importantly, no one yet knows for sure what Facebook hopes to achieve from project Libra. All that we know for sure is the willingness of Mastercard, Visa and PayPal to be a part of the Libra Association provides evidence that large financial players see potential in Libra. If Facebook’s foray into the cryptocurrency market is successful, we may witness a veritable gold rush of financial service innovation.
Will you use Facebook’s Libra cryptocurrency when it becomes available early next year? Please let us know in the comments section below. If you enjoyed this post, please subscribe to our Blog and follow us on Facebook and Twitter for news, updates and more helpful content!