For years there has been speculation about whether big tech firms would ever embrace cryptocurrencies. The idea of digital assets, while growing in recognition, is still on the fringes, working its way toward relevance. Now, a recent announcement by Facebook shows that the mainstream tech world is finally taking notice of blockchain technology.
Facebook’s Libra is set to be the first cryptocurrency issued by a major technology company. With it comes questions about how the new coin will work, the benefit it provides, and if it is any improvement over already available cryptocurrencies like Bitcoin. But no matter what happens, Facebook has shaken up the tech world with its cryptocurrency announcement.
How it Works
Libra was announced as a cryptocurrency with minimal to no transaction fees that can be used by people all around the globe. One of its major goals is to help those who are unbanked to have access to more financial tools and resources.
The foundation of Libra is the Libra Association, a nonprofit conglomerate of 28-companies who will control the Libra ecosystem. While Libra operates on a public ledger, these companies will be in control of keeping track of the ledger. Facebook itself will act as one of these trusted authorities, along with other financial and tech firms like Visa, Mastercard, PayPal, Uber, and more.
Another major feature of Libra is its price stability. The cryptocurrency is set to be backed by real-world assets, such as cash deposits and US Treasuries. When someone purchases Libra with fiat currency, that currency goes into the Libra Reserve, which invests in low-risk assets. According to the company, this is how it will maintain price stability. “By fully backing each coin with a set of stable and liquid assets (described later) and by working with a competitive group of exchanges and other liquidity providers, users can have confidence that they will be able to sell any Libra coin at or close to the value of the reserve at any time,” says Libra.
The idea is to create a digital currency which is price-stable, but also cheap to transact. Additionally, because of the infrastructure already in place, Libra will be integrated directly into WhatsApp and Facebook, making it easy for users to send money to family or make payments as needed. This will be done via Calibra, a wallet application designed to interface with Facebook’s already existing ecosystem.
As an asset-backed cryptocurrency, Libra claims it will be able to maintain its price stability for its users. The company hopes that this will make it appealing for users, as a price-stable cryptocurrency that can be easily used anywhere has the potential to be more convenient than fiat currency.
Will it Help the Unbanked?
One of Facebook’s biggest claims is that Libra will help the 1.7 billion unbanked people on the planet. However, some see these claims as unsubstantiated.
To begin with, the process of onboarding to Libra is not available to just anyone. Using Libra is dependent on the use of Facebook, Whatsapp, or the Libra app. Therefore, users will need a device (such as a smartphone or computer) that can interact with one of these services. Libra will also need to be purchased in exchange for fiat currency. This only creates a process of adding more users to the Facebook network, which gives the company even more control than it already possesses.
In fact, those in developing countries already have access to mobile financial services. As an example, the unbanked in developing countries throughout Africa and India are already utilizing digital payments using M-Pesa. Through the M-Pesa service, users can send and receive money via their mobile device with just a few clicks without the need for a bank account. If unbanked people across the globe can find ways to send and receive real money, why would they ever need Libra?
In this way, detractors see Libra as nothing more than a convenient way to make payments. Libra provides no added benefit to digital payment systems already in place, except for that of convenience and ease of use to those willing to interact with the Facebook ecosystem. Many are going as far as to say that Libra isn’t even a cryptocurrency at all, and closer to centralized digital assets like the Venezuelan Petro.
Scammers Emerge
Cryptocurrencies have unfortunately brought with them a slew of people taking advantage of unsuspecting consumers. Unfortunately, this problem is no different with the announcement of Libra.
With consumers excited about the prospect of a new Facebook-based cryptocurrency, they are eager to exchange their cash and Bitcoin for Libra. Yet, Libra is not even available, and isn’t expected to be made public until 2020. But this hasn’t stopped people from creating fake websites built to mimic Facebook’s new cryptocurrency in an attempt to dupe potential investors and users out of money. One site is even promoting “Zuckbucks”, a fake cryptocurrency which doesn’t even exist. The general public should be aware that cryptocurrency scams are easy to concoct and even easier to fall victim.
Aside from outright scams, Libra could have a negative impact on the global banking system. Even Facebook co-founder Chris Hughes sees the cryptocurrency as a way for Facebook to grow its power and influence in the financial markets. “If even modestly successful, Libra would hand over much of the control of monetary policy from central banks to these private companies. If global regulators don’t act now, it could very soon be too late,” Hughes warned.
Some in the United States government are also concerned that Facebook will open up a Pandora’s Box of problems with its new currency. United States Congresswoman Maxine Waters wants Facebook to stop in its tracks so this project can be better analyzed.
“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users,” Waters said in a statement. “Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action.”
How Does it Compare?
When compared to other cryptocurrencies, Libra looks very similar but is mostly of a different breed.
The biggest difference between Libra and many of the world’s largest cryptocurrencies, such as Bitcoin and Ether, is due to its centralized nature. Libra is controlled by 28 handpicked organizations, making it a relatively centralized digital asset. On the other hand, Bitcoin and its competitors are touted for their decentralized nature. In theory, the Libra Association has the power to censor or restrict payments on its network, while decentralized cryptocurrencies are built on the principle that no entity is large enough to control the network in any way.
Libra should never be compared to Bitcoin because they are two completely different things. Many, like Bitcoin engineer Jameson Lopp, view Libra as a step in the right direction for onboarding the masses to digital payments. Therefore, Libra shouldn’t be viewed as a competitor to public blockchain projects; it should be seen as an alternative instead.
Although, this hasn’t stopped the entire cryptocurrency industry from rallying partially as a result of the Facebook Libra announcement. After Libra was announced, Bitcoin rallied more than 40% in under two days, proving that hype is sometimes better than progress.
Conclusion
On one hand, Libra is another in a long line of cryptocurrencies making claims to bring banking services to those in need without any substantial proof that it will accomplish its goals. On the other hand, Libra is a new digital asset being operated by one of the world’s largest tech giants in conjunction with some of the world’s biggest financial and technology companies. This support brings with it greater potential than any of its predecessors. While cryptocurrency purists see it as an overhyped announcement by an already huge tech company, Libra could turn out to be a catalyst in the global cryptocurrency movement.
