Facebook enters the world of digital currencies with Libra

Written by Bernard van Biljon

In June 2019 Facebook officially announced plans to launch a new global cryptocurrency. The launch date is scheduled for early 2020 and the currency will be called Libra.

WHAT IS LIBRA?

Libra is the digital currency that will be used on the Libra Network. The Libra Network will be controlled by the Libra Association, a group of diverse organisations from around the world. Each founding member of the association runs one of the validator nodes that forms the network that operates the Libra blockchain. This means Facebook will not control the Libra Network but will have an equal vote with other members of the organisation.

A cryptocurrency backed by physical assets

Libra is different from other cryptocurrencies because it will be backed by physical assets (investments) that will be managed by the Libra Association. Libra will invest in a collection of low-volatility assets, such as bank deposits and short-term government securities, in currencies from stable and reputable central banks.

A network for thousands of transactions per second

Unlike Bitcoin, the Libra Network will be permission-based because it will be controlled by the Libra Association. The main reason for this decision is scalability: permissionless networks are limited to about seven transactions per second, while the Libra Network is designed for 1,000 transactions per second.

CALIBRA: FACEBOOK’S MOBILE PAYMENT PLATFORM

Facebook will control Calibra, its mobile payment platform. Calibra will be integrated with the Libra Network and will be available through WhatsApp, Facebook Messenger and as a standalone application. Calibra can be linked to a bank account to convert or transfer currency.

Exchanges will be available for people without bank accounts, which means mobile payments will be available to more than two billion people on these platforms.

Developers will be allowed to develop apps that interact with the Libra Network, although there are currently no plans to vet developers or apps.

THE GOOD SIDE OF LIBRA

Libra will cut out the traditional role of money-transfer services like Western Union, making the transfer of money between individuals much easier and cheaper. Libra will also remove credit card companies from the current payment system, lowering transaction costs. VISA and Mastercard are part of the Libra Association, which means they will have to take on a new role in the Libra world.

Libra can help countries with unstable currencies by providing an alternative to their local currency and a platform that will encourage trade.

THE MARKET FOR LIBRA

Libra has a very powerful marketing strategy and a business case that has already proven very successful in China. Mobile payment systems like WeChat are used by about 600 million people in China (45% of the population) and have a transaction value of more than $12 trillion/yr.

Libra will target the estimated 1.7 billion adults globally who remain outside the financial system or have no access to a traditional bank.

THE SHADOWY SIDE OF LIBRA

Facebook is not exactly known for respecting the privacy of its users. This creates an immediate concern about how Facebook will track the spending habits of users. To address this, Facebook has split the payment network (Libra Network) from the payment system (Calibra). This means Facebook will not be able to harvest payment data from the Libra Network.

The US treasury has serious concerns that Libra will be used to fund terrorism and launder money. These concerns have not been adequately addressed by the Libra Association and it looks like lawmakers are putting pressure on them to delay the launch of Libra until these concerns are addressed.

The future of money

Opinions of Libra are just as varied as they are of Bitcoin. Some see Libra as the dawn of a new age of freedom from banks and governments; others predict certain financial doom. It is still early days for digital currencies, but it seems inevitable that a form of digital currency combined with mobile payment systems will be the future of money.

The fact that there is not a single bank in the Libra Association is certainly not a good sign. It appears that the ‘grey suits’ are not able to adapt to this new world.

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