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Margarita Spivak

What You Should Know About Libra, Facebook’s New Cryptocurrency

Margarita Spivak

August 6th, 2019 | Written by

Earlier this summer, Facebook announced that it will introduce a new cryptocurrency, called Libra, that is expected to launch in June of 2020. Libra’s mission will be to deliver a “reliable digital currency and infrastructure that together can deliver on the promise of the ‘internet of money’”.[1] Libra hopes to deliver on the promise that moving money, on a global scale, will be simple, cost effective and safer than sending a text message.

The Blockchain Technology Behind Libra

Similar to other cryptocurrencies, Libra will use blockchain technology to facilitate transactions on a global scale.

Simply put, blockchain is an infrastructure that allows digital assets to be transferred. Think of it as a very large excel spreadsheet where each transaction adds a field of information. Once a sheet fills up, a new sheet starts. With blockchain, you can only add to the database and you can’t remove old records.

While blockchain is the underlying technology in cryptocurrency, don’t assume that crypto is its only application. Blockchain is evolving to facilitate other applications in intellectual property, supply chain, insurance, healthcare, real estate and much more[2].

What Determines the Value of Libra?

Libra will be backed by a currency basket that includes the US Dollar, Japanese Yen, the British Pound and the Euro. In comparison, Bitcoin’s value is completely speculative; it is prone to extreme volatility and price fluctuations. While Libra won’t be immune to volatility, it’s price should hold much steadier in comparison to other cryptocurrencies.

Libra vs Bitcoin

Libra

Bitcoin

Blockchain technology able to handle 1,000 transactions per second[3]

Blockchain technology able to handle seven transactions per second

Backed by a reserve of established currencies

Value is completely speculative – not backed by anything

Presumed lower volatility

High volatility

Unlimited supply – Libras will only be made when they are bought

Total number of bitcoins ever made will be capped at 21 million

Calibra – Facebook’s digital Libra wallet

No built-in wallet

Governed by The Libra Association

Not governed by any specific entity, rather it is controlled by “Bitcoin users around the world”[4]

Transactions should move within seconds and have negligible fees

Transactions can take several minutes to confirm, and can each cost several dollars

How will Libra be Governed?

While Facebook may have founded Libra, it will not be the sole governing body of the cryptocurrency. Instead, Libra will be governed by an independent, not-for-profit association called The Libra Association, headquartered in Geneva, Switzerland. Members of The Libra Association will consist of diverse international businesses and nonprofits.

What You Should Know About Libra , Facebook’s New Cryptocurrency

Each founding member must pay a $10 million fee to join. Each member will then be granted one vote to govern the currency.  The founding members will vote to select new members, a managing director and appoint an executive team. The goal for The Libra Association is to have 100 members ($1 Billion invested) by the launch date.

Adaptability

Facebook’s massive 2.38 billion user base, which is roughly one third of the world’s population, will give Libra the potential for wide reach and mass adoption. Buying and selling Libra will be simple for users as Facebook plans to launch its digital wallet, Calibra, and allow users to buy, sell, hold and send Libra within Facebook, Messenger, WhatsApp and potentially other applications.

Libra will need to be accepted by a variety of businesses to be successful. The Libra Association plans to implement an incentive programs to subsidize the adoption of the new currency.[5] If Libra is a success, it could be one of the most consequential products ever released, not just for Facebook, but for the world. On July 16th, the Senate Banking Committee and the House Financial Services Committee questioned Facebook’s David Marcus, head of the Libra project. Rep. Michael San Nicolas (D–Guam) speculated that Libra could easily attract $100 billion in deposits as Facebook pushes users to convert their funds into Libra.

Criticism of Libra

Privacy Concerns

A growing suite of critics are interrogating Facebook on their plans for Libra. Since the Cambridge Analytica scandal in early 2018, Facebook has had an uphill battle with regaining the trust of its users. Now, there are mounting concerns over the security and privacy of future Libra users. Dimitri Zabelin, Junior Currency Analyst at DailyFx, says “Regulators and users should be wary about wide-spread adoption of Libra. Facebook’s tarnished reputation for respecting user privacy and maintaining data integrity is a reason why regulators are putting the Libra system under such heavy scrutiny.” The Libra Association helps in this regard as it relives Facebook from the responsibility of being the sole governing body of Libra. However, officials have continued to question whether they can trust that Libra’s privacy policy will continue to be sufficient for shielding user data.[6]

Facebook’s Influence

There is also the concern of Facebook’s already extensive influence being intensified. Libra’s implementation can make Facebook inextricable from users lives. While this is a priority for the company, it can be worrisome from a regulatory standpoint. At the July 16th hearing, Facebook’s David Marcus was grilled over these concerns.  Sen. Van Hollen (D-MD) questioned Facebook’s motives for launching Libra. Van Hollen stated that Facebook may already be too big, too powerful and getting into currency would only make them more influential. Marcus responded by stating “We (Facebook) have the ability and the means to innovate on behalf of the people we serve and we shouldn’t stand back and wait to do it if we can help…we have the resources and the engineering talent, I believe we should.”

Macroeconomic Impact

Governments and other financial institutions have also voiced their concern as to how Libra will impact monetary policy, exchange rates and financial stability. In response to concerns that Libra could replace government-issued currencies, Zabelin says “The Libra system will not replace fiat currencies as a medium of exchange but will rather act as a payment system on top of existing ones (e.g. Visa). Regulators all over the world would never allow Libra to act as an alternative currency for numerous reasons; the primary one being that it would usurp monetary sovereignty of central banks.” In response to concern that Libra could influence the currency basket that backs it, Zabelin says, “Due to the sheer size of the FX market, it is highly unlikely Libra will have any noticeable impact on the Yen, Dollar, Euro or Pound despite the digital coin’s value being derived from this currency basket.”

 

What are your thoughts? Are you excited or wary of Libra? Share with us in the comment box below!

 

[1] https://libra.org/en-US/white-paper

[2] https://www.blockchaintechnologies.com/applications

[3] While this surpasses Bitcoins’ seven per second, it still pales in comparison to Visa which is 24,000 per second

[4] https://bitcoin.org/en/faq#who-created-bitcoin

[5] https://www.economist.com/the-economist-explains/2019/07/12/what-is-libra

[6] https://fortune.com/2019/07/18/facebook-libra-cryptocurrency-washington-hearings-financial-system/

 

This article is written for educational purposes only and is not meant to be used for investment advice or as an endorsement in the identified assets. Each individuals situation is unique and past performance is no indication of future results.

 

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