The announcement the world had been waiting to hear–that Facebook would launch its own cryptocurrency–finally came to light in June. But as it turned out, there would be significant differences from the bits and pieces of information that had been leaked out previously.
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Instead of creating its own proprietary cryptocurrency, Facebook is collaborating with dozens of other organizations to launch a crypto they hope will become universal in scope.
The June announcement certainly put many of the speculations surrounding the Facebook cryptocurrency to rest. But there’s still plenty of unanswered questions, though the consortium building behind the cryptocurrency will have until its launch in the first half of 2020 to work those details out.
But here’s what we know, at least up to this point.
As speculation mounted over the launch of the Facebook cryptocurrency, it was alternately being referred to as “Facebook Coin” or “Global Coin.” As it turns out, the new crypto won’t bear either of those titles. Instead, it’s now being referred to as “Libra.”
Facebook has opted to create an independent organization, call the Libra Association, that will manage the digital currency. It’s being established as a not-for-profit governing body for the crypto. It may be that Facebook is looking to the Association to create a digital currency that goes beyond Facebook itself.
It will have plenty of company within the Association. As of June, there are 28 organizations participating in the Libra Association, with the ultimate goal of having 100 members by the time the currency is launched.
The lineup of supporting organizations was impressive. It included PayPal, Visa, MasterCard, eBay, Uber, Lyft, Vodafone, Andreessen Horowitz, Union Square Ventures and 19 other organizations. Bringing such a diverse group into the Libra fold should definitely work to make acceptance of the currency more widespread.
But one of the more interesting members of the group is Coinbase, because it’s currently one of the largest cryptocurrency exchanges. Integrating Libra with a major cryptocurrency exchange should be a benefit to both the currency and Coinbase. It’s clear Facebook is looking to cover all bases with the launch of Libra.
What’s more, Libra Association is based in Geneva, Switzerland. That’s significant because Switzerland is politically neutral, traditionally a major force in the banking industry, and highly innovative in finance, including blockchain technology.
In case you might be thinking Facebook will dominate Libra Association, it will merely be one of the 100 participating organizations. At the Association’s biannual meetings, each of the 100 members will be able to cast one vote–and that includes Facebook. So while Facebook may be spearheading the venture, they may ultimately be no more than the first among equals. Time will tell.
You may also be thinking the whole Libra concept represents some sort of reduction in the digital currency rollout by Facebook, it’s nothing of the sort. Instead, they may be attempting to create a much larger financial network through the inclusion of 99 partners. Meanwhile, Facebook fully plans to occupy a significant corner of the Libra network through its own proprietary digital wallet.
Facebook’s corner of Libra will be called Calibra, which is clearly a play on the Libra name. Calibra is a subsidiary created and funded by Facebook, and headed up by David Marcus, the former president of PayPal, and a member of the Board of Directors of Coinbase. With that kind of resume, he seems particularly well-suited to run Calibra.
Calibra is developing a digital wallet application that will enable users to transact with the Libra cryptocurrency. Through Facebook, Instagram and WhatsApp, users will be able to send the currency via messages. That will allow users to send and receive money to and from individuals, as well as make purchases through the social media platform.
Facebook’s position as the world’s largest social media platform could do much to speed adoption of Libra. Facebook’s 2.3 billion global users represent an immense built-in market that can cause this crypto to develop widespread public acceptance in a way its predecessors never could.
What’s more, since Facebook’s user base is largely comprised of young adults, who are more familiar both with social media and online financial transactions, they have the makings of a natural market for the launch of the unique cryptocurrency.
The Facebook market aside, participation by 99 other well-positioned organizations should move acceptance forward at a rapid pace. It means the currency will have a larger built-in network than earlier cryptocurrencies. For example, in addition to Facebook’s Calibra wallet, other participating organizations will also be able to create their own wallets. Eventually, banks, retailers and other businesses can tap into the network, at least in receiving payments from customers.
The preliminary indication is that Libra users will need to participate in the network by exchanging their national currencies into the digital currency. Presumably, this will take place through banks and local money exchanges. That should make it easy for users to transfer funds between individuals. But the ability to spend Libra the way you would with paper currency or credit or debit cards will depend on how quickly and widely the crypto is accepted by a large number of merchants. This has been a significant problem with existing cryptocurrencies up to this point.
For easier access, Calibra is expected to be available for use on mobile devices, using Facebook Messenger, WhatsApp and a standalone app. The basic concept will be to make transferring Libra as easy and instant as sending a message to a friend.
It was thought that the large number of participating organizations, particularly those like PayPal, Visa and MasterCard, would accelerate the acceptance of Libra. And a big push from Facebook’s social media exposure can only help.
But something happened on the way to October. Six of the sponsoring partners exited the program. Those include some of the biggest names, like MasterCard, Visa, eBay, Stripe, and perhaps most significant, PayPal. That dropped the number of initial Libra sponsors from 27 down to 21.
That doesn’t necessarily doom the program. Other major players, including Coinbase, Lyft, Uber, Spotify and Vodafone, remain committed to the program–at least at the moment. As well, the Libra Association has disclosed as many as 180 unnamed concerns expressing interest in supporting the cryptocurrency. Still, the exit of financial powerhouses like Visa, MasterCard and PayPal has the number of doubters growing.
The Libra Advantages Remain Considerable
Since existing cryptocurrencies operate in a completely decentralized universe, detached from large organizations, they haven’t been widely accepted for commerce. Up to this point at least, they mainly serve as speculative investments. Libra seems poised to overcome that limitation.
But perhaps the real “secret sauce” will be in low transaction costs. Online purchases and electronic money transfers are already widespread, at least in the developed world. But the fees involved in more conventional methods of transacting business online or transferring funds are a cost most consumers are only too well aware of. If there’s a significantly less expensive way to do it, the potential to cut into the existing transaction methods will be enormous.
But it’s thought there may be at least equal potential in bringing in the large number of consumers around the world who operate primarily outside the mainstream banking system. This is especially prevalent in the developing world. Hundreds of millions of people around the world are unable to participate in mainstream banking operations because they can’t afford the cost. With Libra, Facebook hopes to lower that barrier considerably.
The cost of using Libra for consumers is expected to be near zero. It’s hoped this will encourage those without traditional bank accounts to avoid using high-cost check-cashing services. And much like existing cryptocurrencies, you’ll be able to send money without revealing your real name.
Another benefit, at least as far as Calibra, is that Facebook plans to offer 24/7 support in which you can be refunded for coins lost if you get hacked or scammed. This is a potential problem with existing cryptocurrencies, which Facebook is hoping to remedy. Eliminating the fear of that loss will presumably help bring more people into the network.
This is another major step toward wider acceptance by Libra–or a deterrent–depending on your viewpoint on cryptocurrencies. One of the goals of the digital currency is to maintain a stable value. That will be critical in its acceptance as a medium of exchange (but virtually eliminate the investment angle).
But to do that, Libra’s value will be tied to a combination of major international currencies, including the U.S. dollar, the euro, and the Japanese yen, as well as bank deposits and short-term government securities. It is believed this tie into accepted currencies and assets will keep the value of Libra stable and predictable.
That predictability is a major source of concern for merchants with existing cryptocurrencies. No merchant wants to accept payment for currency today that will be worth considerably less tomorrow. The peg to major currencies should eliminate much of that concern.
This convertibility is expected to give rise to what is being referred to as the Libra Reserve. When a national currency is put into Libra, an equivalent number of Libra are created. But when Libra is converted back to a national currency, the equivalent number of Libra is destroyed. That means the value of all existing Libra is always 100% backed by internationally recognized assets. It’s reminiscent of the gold backing national currencies once had. In theory at least, that backing should help to stabilize the value of the Libra currency.
The Libra Reserve is also expected to be a future source of revenue. Since funds held within the Libra system will be invested in interest-bearing securities, a large reserve will generate interest income for the Libra Association members. This would certainly apply to Facebook’s Calibra wallet.
At least initially, the value of one Libra is expected to be comparable to one of the world’s major currencies, facilitating easier acceptance. However, that won’t necessarily overcome the problem of the same item being more expensive in one country than it is in another.
Obviously there are still many details to be worked out. After all, reinventing money–or at least adding a brand-new major currency to the current mix–is no small undertaking.
Related: 5 Ways to Invest in Bitcoins
Initially, Libra and Calibra are not expected to be profitable to Facebook and the other organizations participating in the Libra Association. But the feeling is that if Libra gains acceptance quickly, and grows rapidly, monetization will take place in the future.
There’s potential to earn revenue from the Calibra wallet. But the bigger payoff may be getting a large percentage of Facebook’s nearly 2.3 billion users to see the platform as a way to transact business, and not merely as a social media outlet.
Given its recent troubles on the privacy front, Facebook may avoid collecting financial data on users in the near-term. Initially at least, Facebook is claiming its user’s financial data will be maintained exclusively by Calibra, and not connected with Facebook user’s social media activity. But there is enormous potential for additional revenue if they ever decide to even partially monetize that data. We’ll have to wait and see on that front.
Facebook faces an uphill battle on this front as well. Politicians and regulators, already having deep concerns about Facebook’s practices of protecting users privacy, see the Libra issuance as only making that situation more questionable. The crypto has its enemies in Washington and elsewhere. It may never get off the ground if it doesn’t get regulatory approval.
However, the low cost of using Libra also has the potential to bring in activity from the hundreds of millions worldwide who are currently outside the mainstream banking system. Facebook may see this as a potential growth market, with the use of the digital currency as the incentive to draw them to their business.
One of the early criticisms of Libra is that it seems to be less of a cryptocurrency, and more of a new and improved version of PayPal.
Libra is certainly based on blockchain technology, which is at the core of cryptocurrencies. Libra’s is being called the “Libra Blockchain,” a cryptographically authenticated database acting as a public online ledger to handle transactions. It’s expected to be much faster at handling transactions than existing cryptocurrency blockchain technology.
Users will purchase Libra using local currencies, transact business with it or send it to family and friends, then convert it back to local currency upon withdrawal. And as is the case with Bitcoin and other cryptos, it will be managed through digital wallets.
So far, that looks like a real cryptocurrency. But that’s where the similarities stop. The sponsorship by at least 100 large organizations eliminates at least the perception of the currency being completely independent. Meanwhile, the peg to major world currencies in many ways establishes Libra as more of a competing world currency, than one completely unattached to major governments or large organizations.
However, given that there has been such reluctance to accept existing cryptocurrencies as any more than an investment speculation, the fact that Libra will be so different from existing cryptos in fundamental ways could turn out to be an advantage.
Ironically, the primary success driver for Libra may be exactly in its ability to merge the best qualities of cryptocurrencies and existing payment transfer networks, like PayPal. If the digital currency can succeed at lowering transaction costs–especially international transactions–and speeding transaction processes, it can quickly grow into the online medium of exchange the world has been waiting for, and cryptocurrencies were expected to provide but never did.
However, the exit of major players so early in the game may not bode well for the cryptocurrency. Though it still has the support of significant sponsors, and the potential for more, any of those can bow out at any time as well. Meanwhile, the success of the program has always been based on acceptance by major financial concerns. Visa, MasterCard and PayPal withdrawing their sponsorship won’t help that cause.
And there’s still the open question of whether Libra will ever receive regulatory approval. Apart from privacy concerns, government regulators may be most concerned with the potential of Libra to compete with –and even replace–nationally issued currencies. All optimism aside, Libra’s climb into reality continues to carry a great big question mark.
As consumers, we should probably be rooting for Libra to succeed. If it gains widespread acceptance due to a lower fee structure, it could be the disrupting force that causes a price war equivalent in banking and finance, in which traditional institutions are forced to lower their fee structures to compete with the new digital currency. If that happens, it’ll be a win for us all.
This is all largely speculation right now, so the entire topic is an open forum. What are your thoughts on Libra, Calibra, and Facebook’s participation?Topics: Financial News • Investing • News