This week Facebook finally took the wraps off Libra, its new cryptocurrency, that will allow users to buy things online, send money with minimal fees and eventually, interact with offline businesses.
It’s a digital cryptocurrency, but unlike Bitcoin, it can’t be mined and will remain at relatively the same value — making it prime to be used as a currency in countries where banks aren’t common. Unlike Bitcoin, Facebook hopes to embed the currency in the Facebook, WhatsApp and Messenger apps, alongside any third-party ones that want to integrate with the currency. Libra could eventually become as popular as mobile payment options like WeChat Pay in China, which are used by 92 percent of people in 1st-4th tier cities (the SCMP explains tier cities here), reports a new study by Tencent Media.
Facebook still has a lot of questions to answer about how Libra will operate but for now, here’s an overview of the main features, why it’s so monumental and the possibilities it possesses.
What is Libra?
The whole premise is that Libra will act as a new digital currency, allowing people to purchase things online, in-store, or to send money with virtually no fees. Facebook explains it will work by allowing users to purchase the currency either in a retail outlet and online, which will load up your interoperable wallet app like Facebook’s own Calibra wallet that’ll be built into Messenger, WhatsApp and the stock Facebook app, or another company’s app.
It’s intended as a way to enable people without a traditional bank account to still be able to make purchases and transfer money online — according to the GSMA more than 5 billion people were using mobile devices in 2017, so accessing Libra will be simple for the majority of people throughout the world.
Who controls Libra?
Facebook doesn’t fully control Libra itself, instead getting a single vote in the governance of the Libra Association, which includes Vodafone Group, Mastercard, Visa, PayPal, Stripe, Andreessen Horowitz, Booking, Uber, eBay and Lyft, among others.
Each company invested a minimum of $10 million in the currency’s operations, granting them a single vote, or 1 percent of the total vote — whichever is larger, providing a sense of decentralisation that means a single company won’t control all aspects of it. Companies will earn interest on the money users cash into their wallets, similar to how banks earn interest on traditional deposits. As The Verge reports, Facebook could work in the future to supply people with loans or savings accounts, which would grant it a slice of the profits.
By not completely controlling Libra, Facebook is hoping to avoid more attention as US begin to build a case against the company, reports The Wall Street Journal. Calibra, the organisation in charge of operating the currency, promises to never give user information to Facebook without permission and identities aren’t tied to publicly viewable transactions. Anonymised data might be shared for research in the future, for finding cases of fraud or in response to law enforcement requests; a Facebook account won’t be required to use Libra.
How will it work
It’ll be underpinned or tied to a reserve of stable currencies, like the CAD, Euro or Chinese Yen, making the currency more stable than alternatives, such as Bitcoin. When Libra is purchased, the equivalent amount is created and added to your wallet and when you cash out, they’re destroyed and you’re given your money back in whatever currency is local to you — there’s never more people owning Libra than there is in circulation (unlike traditional banks, which are required in the US to only have up to 10 percent of their money on-hand, according to the Federal Reserve System).
By using wallet apps like Calibra and those built by third-parties, “Calibra will let you send Libra to almost anyone with a smartphone, as easily and instantly as you might send a text message.” When a user signs up they’ll first be guided to verify their identity with government-issued photo ID, and the services accepting Libra need to report suspicious activity to the proper authorities. Then, they can cash in or out of their wallet, pay a friend or merchant and request Libra.
If you get hacked or scammed, Calibra will refund the lost coins when possible through a 24/7 chat option and because the organisation manages all the keys, there’s no need to remember a series of long passwords or numbers.
What’s so controversial?
Launching Libra is risky because Facebook is now placing itself in the middle of a fight between lawmakers and regulators, with the US Senate scheduling a meeting in July about Libra with Facebook’s top leaders. The company is currently in the midst of major backlash over numerous breaches of privacy and the public’s trust — something that is still on the minds of many users as the company hopes to make new headway.
The company is also directly competing with banks as it attempts to take on the financial sector. It’s unsurprising that the company is entering the market (it was first leaked in The New York Times in late February) but it’s unprecedented. Libra hopes to have a much wider adoption rate than other cryptocurrencies and eventually, Libra could find itself more popular in developing nations. These countries would be forced to comply with the European Central Bank’s decisions, possibly losing their freedom and level of control for monetary policy that they have with their own central bank.
France has already created a task force dedicated to studying how central banks can ensure that cryptocurrencies are governed by the regulations of the country they are available in, Reuters reports
How will it help?
For people living in underdeveloped countries like Chad, Liberia, Sudan, Myanmar or even Haiti, it’s more likely to have a Facebook account than a bank account. “People with less money pay more for financial services,” Facebook explains in its overview — highlighting that payday loans cost up to 400 percent in interest, adding up to more than $30 per $100 borrowed. It’s clear that Facebook is aiming to help bank the unbanked world because when more people have access to online money, they’re able to spend on products targeted to them via Facebook’s own ads.
In fact, the Pew Research Center recently estimated that phone ownership varies across economies — while 90 percent of South Koreans and 60 percent of Russian people owning phones,
Smartphone ownership can vary widely by country, even across advanced economies, reports the Pew Research Centre. While around nine-in-ten or more South Koreans, Israelis and Dutch people own smartphones, ownership rates are closer to six-in-ten in other developed nations like Poland, Russia and Greece. In emerging economies, too, smartphone ownership rates vary substantially, from highs of 60% in South Africa and Brazil to just around four-in-ten in Indonesia, Kenya and Nigeria. Among the surveyed countries, ownership is lowest in India, where only 24% report having a smartphone.
According to a 2015 Goldman Sachs report on the Future of Finance, which you can download here:
33 percent of millenials believe that in 5 years, they won’t need a bank account
Only half believe they’ll use cash on a weekly basis by 2020
It’s clear that Facebook is interested in coming after a mass of people that rely on cash for their transactions or send money to places where banks aren’t as popular. Libra has the opportunity to become a painless way to make purchases online and transact with offline businesses, but only if Facebook and its partners tread water very carefully.