In today’s post, we’re going to go over the disputes that Facebook’s Libra currency has produced around the world and see what 2020 has up the sleeve for this new “stablecoin”.
It was in January 2018, that the founder of Facebook, Mark Zuckerberg, announced among his new year resolutions that he will be looking into the positive and negative impacts of cryptocurrencies. Fast forward a year and a half and the launch of the libra coin was announced.
Facebook’s entrance into the world of crypto has created quite a lot of turmoil. Already in the middle of controversies related to privacy, Facebook’s initiative hasn’t exactly been greeted with open arms.
As of October 2019, the regulatory hurdles have piled up before the Libra coin, some of the partners of the project have stepped back while others are reconsidering their involvement, and the potential users’ distrust in handing their financial details over to an entity so closely related to Facebook has only grown.
So, what’s the deal with the Libra currency? What makes it different from bitcoin and the rest of the altcoins? Where and how are we supposed to use it?
What is Libra coin?
Libra is a digital currency built on blockchain that was proposed by the American social media company Facebook. It is a “stablecoin” which is backed by a reserve of assets and governed by the independent Libra Association.
Where did Facebook’s Libra coin come from?
In July 2019, the Libra Association – a Swiss group made up of 28 stakeholders, all Silicon Valley megacompanies (including Facebook, MasterCard, Visa, Lyft, Uber, and Spotify) – released a white paper where they defined Libra currency and how it will function. It defines Libra as “a simple global currency and financial infrastructure that empowers billions of people”.
The idea behind the new currency is that “Moving money around globally should be as easy and cost-effective as — and even more safe and secure than — sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn.” In that sense, it becomes obvious that Libra is intended to appeal to those 1.7bn people around the world who remain outside of the financial system with no access to a traditional bank as well as to those accustomed to online wallets.
What are the outstanding characteristics of Libra coin?
Libra will run on a blockchain, however, it diverges from a traditional blockchain in a couple of ways.
a) Similar to other cryptocurrencies, it’s the ‘nodes’ that will validate the transactions and maintain the blockchain. However, as Libra’s nodes will only be run from the servers of the Libra Association’s current members, the network itself is not decentralized in the way that Bitcoin is. Facebook has said that the plan is to move to a fully decentralized network within five years.
b) To minimize the traditional volatility of cryptocurrency, Libra is being designed as a “stablecoin”. That means that the value of Libra units in circulation will be backed by a reserve of low-risk assets like bank deposits in various currencies and US Treasuries. The Libra reserve is made up of the U.S. dollar (50%), euro (18%), Japanese yen (14%), British pound (11%) and Singapore dollar (7%). This move is intended to prevent its value from fluctuating too wildly.
c) Libra is built for speed and aims to create a “global financial infrastructure”. That has also been the argument to defend its centralized nature. If Libra is to handle 1,000 transactions per second – compared to Bitcoin’s 7 transactions per second -, it’s easier when the blockchain is operated and constantly verified by the founding members.
Where and how are you supposed to use the Libra coin?
The digital wallet for Facebook’s new cryptocurrency will be available in the Messenger and WhatsApp apps in addition to the standalone app called Novi. The other partners of the Libra Association, e.g. Spotify and Uber, will also search for ways to integrate Libra payments.
In the application, users will be able to carry out real-world fiat to crypto conversion to obtain their Libras, which they will be able to send to each other for a very small transaction fee or use to pay for their coffee. In that way, it’s somewhat like PayPal or Venmo.
Why is Libra coin so controversial?
It took only a few hours for regulators, central bankers and politicians to react to Facebook’s plan to launch a new global digital currency. In today’s global economy, finance is a critical part of the world’s infrastructure and a crisis in one market will have its repercussions around the world. That means that most of the governments feel there’s a need to assess this new technology and have a clear regulatory framework for such a big scale project.
Until now crypto assets have remained somewhat a niche class. However, when a megacompany with over 2.41 billion monthly active users enters the equation, the need for comprehensive regulations becomes more eminent.
If Libra is to store metadata about every transaction and, for example, cross-reference it with apps like WhatsApp, they could come up with a detailed user profile. That perspective has led to concerns about Libra’s business model extending to what has been termed as “surveillance capitalism”.
What’s the state of the Libra project now?
The initial launch of Libra was planned for early 2020, however, with all the controversies in the air, it’s starting to look more like the end of the year if not much later. On the one hand, it’s the result of the regulatory backlash, on the other hand, the exit of some founding partners might have stalled the project a little.
Paypal, eBay, Stripe, Mastercard, Visa and Mercado Pago abandoned the project. in October 2019 after the pressure from the US senators. The payment processors got cold feet in face of being held responsible if Libra made things too easy for terrorists and money launderers. As a result, the Libra Association and project, in general, can count with only one payment processor (PayU). All that while, the CEO of Facebook, Mark Zuckerberg, is attending Congressional hearings to defend the company’s currency plans.
Despite the criticism, there are also opinions that welcome Libra as a new asset class leading to financial innovation. So all in all, there’s nothing too certain about the launch and we will have to stay tuned to see how the things unfold.
So if you’re interested in getting deeper into the cryptocurrencies world, take a step further!