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The Lowdown on Libra: Why Facebook Wants Its Own Cryptocurrency

As we go to press, Congress is demanding explanations from Facebook CEO Mark Zuckerberg on the company’s new cryptocurrency project, Libra. What is Libra, how will it work, and what do the surrounding politics mean? Let’s take a look.  

What Does Facebook Have in the Works? 

Libra is a global currency with an infrastructure to support it. It will run on Facebook’s version of blockchain—the encrypted transaction recording system famously introduced by Bitcoin. When Libra launches, so will Calibra, an online wallet. Wallet holders will be able to send Libra currency to anyone with a smartphone. The wallet will work through Facebook’s Messenger app or a separate Libra app. It will also work through WhatsApp, the chat system Facebook bought for $19 billion in 2014.

Wait. Trust Facebook With Our Money?

They thought you’d ask…so the Facebook managers make several altruistic or reassuring claims about Libra:

  • Facebook wants to reach the many people around the world who lack bank accounts. 
  • After Libra’s 2020 launch, Facebook will withdraw from a leadership role in governing Libra. Governance will come from a nonprofit: the Switzerland-based Libra Association.
  • A subsidiary called Calibra will operate Libra, keeping a solid wall between financial transactions and the social profiles of Facebook’s 2.7 billion users.

Facebook also says Libra will hold a stable value. It will be tethered to an underlying currency such as the dollar, yen, or euro. 

Why Libra? Why Now?

The Libra Association might be a nonprofit, but Facebook is a for-profit company, and it’s looking ahead. In many of the areas where the most “unbanked” people live and work, mobile payment systems are gaining steam. Facebook came up with Libra to compete with Asian apps such as WeChat and Alipay. Each company boasts more than a billion active users. Their digital payment systems give them formidable power in emerging markets. But the competition is working both ways. This year, China’s central bank—reportedly prompted by Facebook’s aspirations—announced plans to develop a digital currency backed by the yuan. The U.S. dollar is the world’s current reserve currency. Could China’s move change this? Clearly, the stakes in this game are high.

Influencers Unfriend Libra

The companies that invested at least $10m to be founding members of the Libra Association are financial icons. PayPal. Stripe. eBay. Spotify. Visa and MasterCard. But after Libra met with pushback from business insiders, congressional finance committee members, and global regulators, Libra’s influential partners found themselves pressured, too.

In July 2019, U.S. lawmakers called for a moratorium on Libra—which, they predicted, could form a “new global financial system that is based out of Switzerland” that would “rival U.S. monetary policy and the dollar.” Seven Libra Association companies, including PayPal, Mastercard, and Visa, backed out—taking their global acceptance and reputations with them. The remaining companies signed the Libra Association’s charter in Switzerland. Spotify, Uber, and Lyft are still in.

Writing on the Wall

Watch for Facebook to continue coming up with digital wallet concepts. And watch for a big push from governments to develop digital currencies. Indeed, regulators’ understandable frustrations with Facebook aren’t the big issue here. The Blockchain Association, a lobbyist group in Washington, D.C., has urged Congress to support digital payment innovations—which will inevitably take up roles in the internet age. China’s newly announced cryptocurrency goal makes the point crystal clear.

 

Sources:

https://www.theguardian.com/technology/2019/jun/18/what-is-libra-facebook-new-cryptocurrency

https://www.fidelity.com/news/article/default/201910141856MRKTWTCHNEWS_SVC000528

 

 

 

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