By: Tim Bennett
04.07.2019
Social media giant, Facebook, has created a huge stir by announcing plans to launch a new cryptocurrency. Tim Bennett explains all the “Libra” basics.
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What is Facebook’s Libra all about?
It’s not every week that a firm the size of Facebook announces plans to launch a new currency. They are calling it Libra. So, what’s it all about?
Background
Undeterred by the poor publicity it has been suffering, connected with alleged data misuse, Facebook is planning to release a new cryptocurrency in 2020. Whilst the exact details are being kept under wraps whilst, inter alia, regulatory approval is achieved, we do know that the plan is to create a new way for payments to be made globally, at minimal cost, via a new “Killer App”.
Why Facebook?
Mark Zuckerberg’s plan seems to be to little less than a full-blown assault on traditional banking. The firm has around 2.7bn users on its various Apps and hopes to encourage them to use Libra for payments. As such, it will need co-operation from not only its own users but also advertisers and commercial partners.
What they say
The aim of this new payments system is multi-fold. Firstly, it will throw a gauntlet down to traditional banks by opening up parts of the world that don’t have access to regular banking. Next, it will create a new way to pay for content online that sits somewhere between a subscription model and pre-rolled adverts. Thirdly, Facebook’s wider aim is to create a method of payments that can be woven into smart technology, such as driverless cars.
How will it work?
Whilst the exact working of Libra is being kept quiet, we do know quite a bit. You will be able to buy it by setting up a “wallet” and swapping Libra for currency deposited into a bank account. The price of a Libra will then be determined from a weighted average currency basket. The moment you have Libra, other users will be able to accept it in exchange for services.
Why this isn’t Bitcoin
Tempting though the comparison may be, Libra is not just another Bitcoin challenger. There are several major design differences for starters;
- The supply of Libra will be theoretically unlimited and there will be no “mining” required to create new ones
- Backers of the project will earn interest from the deposits held as Libra are bought
- This currency backing should make Libra more price stable than its crypto rivals
The global Holy Grail
These built-in benefits solve many of the problems associated with the likes of Bitcoin and, as such, Facebook hope that one day Central Banks will relent and allow technology companies to store funds with them. Once that happens, banking could change forever;
Who is with Facebook?
The reason this project is not being dismissed by the big banks is that Facebook are not alone here – some pretty serious names have signed up as partners.
What could go wrong?
It’s early days yet, which is why Facebook are not releasing full details until nearer launch. Three things could block their path to global domination in payments.
Let’s take each briefly in turn.
Trust
Although Facebook hope that their many users will adopt Libra, the suspicion that the firm has generated around its use of data will worry many. The concern is that payments data will make the firm too powerful, despite its claims that all such data will be fully protected.
Power concentration
Next, regulators. If Facebook becomes a firm that is “too big to fail” thanks to Libra, it may face early restrictions. With names such as Visa and Mastercard signed up, anti-trust issues are another possible roadblock.
Loss of control
A third concern, for governments and central banks, is that something the size of Libra could undermine their currency controls and/or ability to execute monetary policy. Widespread adoption could even weaken existing smaller currencies, say critics.
(M) any questions
Whatever your view of this new currency and payments pretender, Facebook’s arrival in this space is creating headlines. My advice? Watch this space. If you have any questions in the meantime, please email me as usual; [email protected]
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