You somehow trust Facebook with the intimate details of your personal life, but would you trust it with your money? On Tuesday, Facebook co-founder and CEO Mark Zuckerberg announced plans to launch a new digital currency called Libra in 2020.
The reactions have been mixed at best. Though Facebook claims Libra is the answer to supplying economic empowerment to the masses, others point out it’s a regulatory nightmare with the potential to give Facebook even more Big Brother-like power (if Libra even gets off the ground in the first place).
For the average person, however, Libra might seem like a completely foreign concept. So here are answers to some of the big questions about Libra.
What Is Libra And How Will It Work?
Libra is a planned digital currency developed by Facebook and designed to run on the Libra blockchain, a network of computer servers or “nodes.” In the world of cryptocurrency, blockchains are electronic, public ledgers of transactions. Each node is responsible for validating and maintaining those transactions.
The driving purpose behind blockchain technology has typically been to make it accessible to everyone by requiring no transaction costs and maintain transparency through the use of a public ledger, but also protect users’ anonymity. So it’s no surprise that Facebook’s venture into blockchain has raised a few eyebrows. And as it stands now, Libra won’t exactly meet the true definition.
“The Libra network is a permissioned public network, which means a specific group of participants will validate transaction blocks, but anyone can use the network,” said Marc Boiron, a partner in the corporate, technology, fintech and blockchain practice groups at the law firm FisherBroyles LLP. Currently, 28 founding members, including individuals and corporations, have signed on to run nodes in the Libra blockchain.
“The goal is to eliminate transaction fees and create a universal payment system capable of quickly transacting payments around the world,” explained Braden Perry, a regulatory and enforcement attorney whose expertise includes areas of novel and emerging technology with a financial focus. “These transactions would be pseudonymous, meaning they are available to view on a public ledger, but without personally identifiable information, including names.”
Unlike other popular cryptocurrencies, Libra will be tied to a set of fiat currencies, which are backed by the governments that issue them, including the U.S. dollar, the euro, the yen and others. Facebook says it will also be backed by a reserve of real assets, including a basket of bank deposits and short-term government securities. “This means the Libra currency will act as a globally hedged currency that is intended to stay stable in value,” Boiron said. In other words, Libra is meant to avoid the volatility and wild swings in value we’ve experienced with other popular cryptocurrencies such as Bitcoin.
The flip side to this system is that Facebook would keep interest earned on those reserve assets, a questionable move considering the company is not an investment fund manager. “Users give up the right to interest that they would receive had they put their fiat currency in a bank account,” Boiron noted. “For people in developed countries, giving up interest to use a cryptocurrency that essentially allows them to do the same thing they can do in the current banking system is not appealing.”
However, he noted that for people in underdeveloped countries, especially those with unstable currencies, the appeal of a globally hedged currency like Libra currency could be significant.
Boiron said Libra should operate similar to Venmo, except that it won’t actually rely on the banking system. Users will be able to exchange Libra currency through various applications, meaning Facebook won’t be the only company allowed to build apps on the Libra network. “Any other company can similarly build applications that can be used on the Libra network to transact in the Libra currency,” Boiron said.
So why is Facebook trying to launch a cryptocurrency now? In addition to making cryptocurrency more mainstream, the backers say they see Libra as a solution to a major financial problem.
“The stated goal is to bring money and finance to people around the world who don’t have access to traditional banks,” said Ian Cogswell, a consultant for the cryptocurrency ATM network Pelicoin. According to the Libra white paper, 31% of the global adult population ― or 1.7 billion people ― are unbanked, meaning they don’t have access to a traditional bank account or mobile money.
It’s also expensive to send money internationally. On average, the fee to send $200 across borders is 7.1%. Libra is meant to bridge the gap in access to affordable financial services across the globe.
What Is Calibra?
Though Libra is intended to be exchanged via a number of different platforms, Facebook also created a new subsidiary called Calibra, which is working to create a digital wallet that can be used to buy, sell and spend Libra coins.
The Calibra wallet will exist as a stand-alone app, but also include integration with Facebook Messenger and WhatsApp, allowing users to send and accept Libra currency directly within the messaging platform just as they would text, photos and GIFs. Right now, there is no plan to include Instagram messaging.
A Facebook account won’t be required to have a Calibra wallet, either; the company plans to offer the wallet for free. Facebook also said it won’t have access to users’ financial data, which will be managed by Calibra exclusively. This way, public transactions won’t be tied to users’ identities so that information can’t be used for ad targeting.
Who Is Partnering With Facebook To Launch Libra?
Facebook says it won’t directly manage Libra. Instead, Zuckerberg plans to partner with major organizations to create an independent governing body that will share in that duty, including the 28 founding members mentioned above.
“The network initially will be managed by the Libra Association, a nonprofit based in Switzerland, which currently has 28 members but will have up to 100 members at the launch of the network,” Boiron said.
The goal behind the Libra Association is to prevent any one single company from having control over the currency. Even Facebook says it will hold just one equal vote among the members. Current members ― who invested at least $10 million to join the venture ― include major finance and tech companies such as Mastercard, Visa, PayPal, eBay, Lyft and Uber.
The members will reportedly encourage consumers and merchants to use Libra coins through offerings such as product discounts and bonuses. However, there haven’t been any details released regarding these incentives yet.
How Is Libra Different From Other Cryptocurrencies Like Bitcoin?
Though Libra is designed to rely on blockchain technology, it’s set to work quite a bit differently than other cryptocurrencies.
“Most agree that the coin itself is unlikely to be a cryptocurrency in anything but name,” said Matt Baer, founder and CEO of KeyoCoin, a universal travel rewards cryptocurrency company. “A public blockchain must be open, public, neutral, borderless and censorship resistant. Without any of those fundamental characteristics, it’s destined to act more like a bank, or quasi-bank such as PayPal, than any fully independent cryptocurrency.”
The fact that Libra will be managed by a set group of members means it’s not truly open and neutral. And since it’s backed by real assets, Libra is not so much an investment that could potentially soar in value, but more of another means to pay for goods. In reality, Libra will really be closer to fiat currency than cryptocurrency, and that’s exactly what Facebook says you’ll get if you want to cash out your coins.
But that’s not necessarily a bad thing for crypto enthusiasts. “If Zuckerberg’s move pulls millions of people into the cryptoverse for the first time, and settles some nerves around digital currencies in the process, it could be a step toward the mass adoption that the industry is so desperately seeking,” Baer added.
What About Privacy Concerns?
“From a privacy perspective, it’s difficult not to be skeptical,” Perry said. According to the Libra white paper, for instance, Facebook won’t import contacts or any of your profile information ― but it will request you do so.
“It also states it won’t share any transaction data back to Facebook, so it won’t be used to target you with ads, rank your news feed or otherwise earn Facebook money directly,” he said. However, Perry noted, data will be shared anonymously for research, hunting down criminals or requests from law enforcement.
Given Facebook’s rocky history with user data and privacy, not everyone is convinced it will stick to its words.
Though cryptocurrency and blockchain technology were created to promote security and anonymity, the fact that Facebook is interested in blockchain ― a technology that distributes information across a vast network of computers to create a detailed ledger ― is alarming to many people, Cogswell said.
“Facebook’s hand has already reached deep into our personal lives, and for many people, the last thing we need is Facebook reaching into our financial lives, too,” he said.
Considering Facebook’s revenue is largely dependent on connecting advertisers with the right consumers, we have to wonder what’s ultimately in it for the company by offering this new service.
“For those that stand by the maximalist ideals of blockchain, Facebook appears to be riding the hype train without paying for a ticket,” said Baer. “There are still a lot of unknowns around this project and its links with the world’s largest social network.”