The rumours and semi-leaks have been doing the rounds for months now but on June 18th Facebook made an official announcement – the social media behemoth would release its own cryptocurrency – Libra.
To many in the West, Mark Zuckerberg’s ambition might seem surprising. Why would a social media platform get involved in the world of finance? But Facebook is actually following a precedent set by China’s Tencent-owned WeChat messenger app. It’s been facilitating payments and transfers for years already and as a result has a stronger monetisation ecosystem than Facebook does.
Facebook’s plans for Libra, an actual currency rather than just a payments platform, are even further reaching. The company itself has made the somewhat bombastic claim that it believes Libra can revolutionise the world of finance. The PR offensive also focuses heavily on the fact that Facebook claims that the use of Libra will offer a solution to many of the world’s millions who are still without convenient access to basic financial services.
Here we’ll look at exactly what Libra is and isn’t, how it looks like it will work based on what we currently know, if it really might be a game change for those living in parts of the world where access to basic financial services is still limited and the concerns there might be around Facebook getting involved in finance.
Will Libra Be Like Bitcoin And Is It Actually A Cryptocurrency?
Libra has been predominantly described as a ‘digital’ rather than cryptocurrency. But it is actually a cryptocurrency in so far as it will be built on blockchain technology, which uses cryptography to verify and secure ownership and transactions. But otherwise Libra won’t look much like Bitcoin.
Bitcoin’s value is based on supply and demand – or scarcity. There’s a cap of 21 million Bitcoin that can ever exist so the original cryptocurrency also resembles a commodity in some ways. Bitcoin has a few major weaknesses that have hindered it actually being used much as a currency and Libra will hope to solve those through both more advanced blockchain technology, which is still being built, and other key differences.
Libra’s blockchain system will not be fully decentralised like Bitcoin’s, which relies completely on a P2P network and ‘mining’ to verify transactions and ownership. Mining is the term given to the process of members of the Bitcoin network dedicating computing power to solving the cryptography that validates transactions. Bitcoin’s mining mechanism limits how many transactions can be processed over a short period of time which is a major issue for a cryptocurrency that has ambitions to became a genuine alternative to fiat currencies. It’s also a very energy intensive process. That leads Bitcoin to stand accused of being environmentally unsustainable as well as impractical on a mass scale.
Libra will not be mined which will theoretically allow for as many transactions per second as would be practically required for mass adoption. Facebook also says that the problematic volatility in value that today’s cryptocurrencies contend with will not be an issue for Libra. This will be achieved by the currency being guaranteed by a reserve of real world assets. These will, in the first instance, be provided by corporate partners that join its proposed ‘Libra Association’.
Some of the names already confirmed as having signed up to that association include the card payments giants Visa and Mastercard, Spotify, PayPal, ride-hailing app companies Uber and Lyft and big names from the NGO sector. There are unconfirmed rumours that corporate partners have been charged $10 million each to join the Libra Association. Facebook has said that it plans to involve at least 100 such contributors to the Libra reserve.
The Libra Association is planned as an NGO that will be independent of Facebook itself with members carrying voting rights. Facebook itself will have two de-facto votes on the Association’s board. Its own and that of Calibra, the new subsidiary it has set up to create the user-facing digital wallet and different apps and plug-ins that will enable Libra’s suite of services. That has already raised concerns among financial regulators and watchdogs.
Could Libra Be A Force For Social and Economic Good By Helping Financial Inclusion?
While many neutral observers might be sceptical, Facebook’s stated raison d’etre for Libra is to provide basic financial services to the developing world and other regions where people find it difficult to access a bank. The Libra overview, which is something like the ‘white paper’ that explains how and why different cryptocurrencies work, states:
“People with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualized interest rates of 400 percent or more, and finance charges can be as high as $30 just to borrow $100”.
If that is how it works out, financial inclusion on a global scale, enabled by Facebook’s financial and technological resources as well as its huge user base would indeed be something that would have a positive impact on the world. Access to convenient, cost efficient financial services would be expected to have a significant impact on economic development in some of the world’s poorest and most remote regions.
Using Libra would of course still require access to either a computer or mobile device and an internet connection but the numbers of people who do have such basic access, even in the poorest parts of the world, is growing quickly. The Pew Research Centre says more than 5 billion people worldwide now have some kind of access to a mobile device and the number is quickly growing. Libra services being compatible with more basic mobile handsets and not requiring a more sophisticated smartphone would, if that turns out to be the case and there is still a lack of clarity on that question, be a major boost for the credibility of Facebook’s financial inclusion mission claims.
There are, however, a number of questions still to be answered around Facebook’s claims of altruistic motivation for Libra. Accusations of digital colonialism have already been made and there are concerns Libra could make developing nations reliant on Facebook. One of the biggest problems around financial inclusion is that many of those most isolated from financial services do not possess an official government-issued form of ID. Or even have a birth certificate. If a Calibra account requires official ID to be presented will it really help those most in need of financial inculsion?
Where Will Libra Be Launched?
It’s also not yet clear where Facebook will launch Libra. It is believed that the USA won’t initially be included in the roll-out of Facebook’s cryptocurrency and nor will the EU or other regions with highly developed economies. Facebook has also stated that Libra won’t be available in territories that are either subject to U.S. sanctions or have banned cryptocurrencies. The latter clause would rule out India, which, with 200 million WhatsApp users and a significant problem with financial inclusion, was initially thought to be an obvious entry point.
How Will Libra Work, What Financial Services Will Calibra Offer And Just How Big Could It Become?
Facebook says its ambition for Libra is for it to eventually become the world’s ‘go to’ payment and money transfer option globally. It hopes to achieve that level of market penetration through rock bottom conversion and transaction fees and making it easy to convert into and out of Libra from traditional fiat currencies.
Libra transactions will initially work through Facebook’s Messenger app and WhatsApp, its alternative encrypted messenger service. Standalone apps will subsequently be launched. As well as a payments service, Calibra will also offer many of the other financial services associated with traditional banks. Bank accounts, loans and other credit facilities and even ATMs where Libra holders can make withdrawals in local fiat currency are all planned.
Facebook’s ambition is for Libra to become the first truly mainstream cryptocurrency. In fact, if it achieves the extent of those ambitions, it would be more mainstream than any fiat currency.
Does Facebook’s Record Deserve The Trust That The Power And Personal Financial Data Libra and Calibra Would Involve Would Put In The Company?
Facebook has what would kindly be put as a patchy record when it comes to how it has historically treated personal user data. It also stands accused of allowing its social media platform to be used to spread disinformation and manipulate democratic political processes.
The company is not naïve enough to have thought this would not be a concern and has moved to attempt to address these questions. The Calibra website states that user personal and financial data “will not be used to improve ad targeting on the Facebook family of products”.
Facebook data will not, however, be entirely separated from the use of Libra and Calibra. It will besused to “comply with the law, secure customers’ accounts, mitigate risk, and prevent criminal activity”.
If Facebook should be entrusted with the information and power that Libra and Calibra reaching mainstream status would entail is a debate that is sure to rage between the public, legal and regulatory bodies for a long time. In response to that the Libra mission statement highlights many of the gripes held against the incumbent financial system. Among the ‘beliefs’ listed by Libra, presumably as opposed to today’s banks and other financial institutions are:
“We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world.”
“We believe that people will increasingly trust decentralized forms of governance.”
“We believe that a global currency and financial infrastructure should be designed and governed as a public good.”
What’s In It For Facebook?
Even if we take at face value the altruistic motive behind Libra, Facebook is still a publically listed company and investors won’t allow it to simply pour money and focus into a huge project that won’t benefit it financially. And if fees and other charges really are as insignificant as the company say they will be, it doesn’t sound like Libra or Calibra would be particularly profitable endeavours. So what’s in it from Facebook from a business perspective?
The glass half full answer to that question would be Libra and Calibra would make Facebook an integral, or even more integral part of the lives of people around the world. Spending more time within the Facebook ecosystem would presumably help the company increase its current revenue streams as well as opening up new opportunities.
It would, for example, be easier to pay for Facebook advertising using Libra and the company has struggled to gain significant traction for its native ‘marketplace’ ecommerce platform. Integrating a mainstream currency would presumably help there.
The glass half empty interpretation is that Mark Zuckerberg and Facebook have raised their ambitions from competing with companies to competing with governments. In the New York Magazine Max Read speculates Libra and Calibra could lead to Facebook effectively becoming:
“the global federal reserve, overseeing a global currency over which it has not just monetary control but a visible, minable record of every transaction made.”
That is certainly an ultimate destination for Libra that the thought of which is enough to send a shiver up the spine. But even if such megalomaniacal ambition were to lurk behind Libra’s altruistic set of ‘beliefs’ and stated good intentions for all mankind, particularly those that have the least, such complete domination would involve a lot of steps before the destination were reached.
And it for now it is pure speculation. Libra and Calibra could genuinely, suitably controlled and regulated, become a force for good. The grand plan might never take off at all or have a more limited role in future financial systems. For now, we will have to trust that the centralised authorities we do have do a good job in putting checks and balances in place. As consumers and social media users we can also have an influence on what we do and don’t want from Libra. And we should by now, in theory at least, have enough experience of big tech to not blindly become reliant on something in a way that would hand over too much power.Risk Warning:
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.