With the world still getting used to cryptocurrencies as a medium of exchange, Facebook has given us a new, rather disputed topic to chew on. The once social media giant is now amidst turmoil due to scrutiny of its data privacy practices and plausible antitrust violations. Still, as ambitious as it may sound, Facebook has announced its plan to roll out Libra cryptocurrency. Though the Libra cryptocurrency launch date is not known, Facebook plans to make it available in 2020.
While some experts suggest this move may revive Facebook’s revenue system, others challenge that it will disrupt the international banking system. That’s why, ever since the Libra crypto announcement, the alternative currency has been the talk of the town and has attracted mixed feelings. Let’s look at the most-discussed points about Facebook, Libra, and Calibra — Libra cryptocurrency app — so you can gain meaningful insights into the topic and draw a conclusion for yourself.
A tad bit more about the Libra cryptocurrency
First things first, Libra is not Facebook’s cryptocurrency!
Yes, you read it right.
Despite Facebook rigorously promoting Libra cryptocurrency as its own, it is not directly associated with Facebook. In fact, it is the brainchild of the Libra Association, a non-profit organisation belonging to Facebook Inc. but based in Geneva, Switzerland.
Like any other crypto, Libra will be a non-government alternative to fiat currencies that you can exchange for national currencies. However, in contrast to traditional crypto whose value fluctuates wildly based on speculations, the value of Libra cryptocurrency will be far from volatile. This is because Libra will be backed by top international currencies and government securities, which are typically near to stable.
How will the Libra cryptocurrency work?
While having stability is a plus point for Libra, there are other grey parts that have worried regulators and public. Before getting into that, understand how Libra will work to understand the concerns in a better way.
Libra Association will overlook the activities of the crypto
Originally, the Libra Association had 28 bigshot investors such as Visa, MasterCard and Uber that had agreed to partner with Facebook in its ambitious venture of launching its own crypto. To become a member, each investor, except those for non-profit, put in a minimum of $10 million. In turn, each member earned one vote on important issues in the matters of the Libra Association. However, 7 out of the original members quit citing reasons including various regulatory concerns (we have discussed it later).
Libra cryptocurrency will be minted as per its demand
The Libra cryptocurrency will be made available on a need basis. That is to say, the association will buy underlying assets worth the user demand, mint the crypto, pay the users, and then burn it once used.
Libra will start-off on a permissioned blockchain
This Libra association crypto will work on a hybrid blockchain called the Libra blockchain. This public-private blockchain will allow anyone to join the network but only authorise invited members to modify the software. This permissioned blockchain will then be evolved into an open system.
Calibra: Libra cryptocurrency app and digital wallet
Although Libra will run on blockchain technology, transactions will take place through Calibra, Libra cryptocurrency app. This digital wallet will be a regulated platform that will be available for use to both individuals and merchants, who can store and spend Libras via WhatsApp, Messenger, and a standalone app.
Possible threats that Libra and Calibra can cause
By introducing Libra and Calibra, Facebook aims to facilitate seamless online financial transactions across the globe. Once launched, you will be able to transact using Libra through Calibra in two ways:
- By linking a bank account or
- At a physical store via cash transfers (in case you don’t have access to a bank account)
By doing this, Facebook is targeting over 1.7 billion people across the world who don’t have bank accounts. While this increases financial inclusion globally, there is still a looming danger that may prevent Libra from taking off smoothly.
Data privacy and security concerns
To distinguish between the social and financial activities of its entities and ensure data privacy, Facebook has sworn to identify Calibra, the Libra cryptocurrency app, as a separate entity, distinct from its own. However, certain policies of regulators have left them in a mist of doubt.
Says Facebook, you can only use Calibra on successful verification of your identity through a KYC process, which will aid the platform to prevent possible financial crimes and offer user support services such as password reset and the refund of lost cryptos due to fraud. Although Calibra has sworn that it will not exchange user data with Facebook for reasons like targeting ads, regulators are still not convinced, given Facebook’s existing reputation of compromising user data privacy.
So, if you ask the big question ‘Is Libra a crypto’, then you should know that experts opine it is not. Considering the above points, the Libra doesn’t abide by most features of a cryptocurrency. First off, the crypto’s activities will be overlooked by the members of the Libra Association, which should ideally not be the case. Next, Libra cryptocurrency will be minted per demand and will have underlying assets, which makes it non-volatile, a feature that doesn’t define crypto.
How can the Libra association crypto improve Facebook’s revenue system?
Since Libra will be far more stable when compared to other cryptos like the Bitcoin, this makes Libra a preferred currency to transact in emerging markets and economies where the government is unstable.
Amid a crisis of facing fines of $5 million for settling a federal inquiry over its data privacy practices, launching the Libra cryptocurrency would give Facebook a new revenue opportunity. The Economist estimates the crypto to generate a whopping revenue to the tune of $19 billion by 2021. This will prove to be a major crisis for the international banking system!
How can Libra disrupt the global banking sector?
By now, you know that through the Libra cryptocurrency, Facebook is looking to improve financial inclusion and offer its users a less volatile alternative to transfer money. Given exposure to a large user-base (over 2.4 billion users of Facebook and others of brands associated with Libra), if Facebook allows users to transfer funds via Calibra at a low cost, it will eat into the profits earned by banks from international transaction fees.
Regulator’s stand regarding the Libra cryptocurrency
Though Libra can ease global transactions and redefine the ecosystem of cryptocurrencies, it is not as simple as Facebook puts it across. Sensing the impending jeopardy that Libra can cause to the banking sector, the Swiss authorities have stressed that Libra has to conform to regulatory compliances, which apply to both a payments system and a bank.
Further, major economies and regulators across the globe have expressed their concerns about Libra relating to data privacy, its impact on the international financial system, and the chances of being used for money laundering. As for India, the Economic Affairs Secretary, Subhash Garg has expressed that India isn’t keen on embracing Libra as it would be a private cryptocurrency.
After receiving little to no support from regulators across the globe, Facebook took time off to reflect upon Libra, its cryptocurrency. Mark Zuckerberg’s spirit is indomitable, and this is proof. Facebook has now decided to redesign Libra in line with what the reserve banks and IMF desire.
As you read, Libra was initially supposed to be a stablecoin backed by multiple national currencies, which was set to disrupt the global banking system. But last week, Facebook published a new whitepaper that discussed a new design for Libra.
As per the changes, Libra would only be tied to the currency belonging to a country where it would be issued. So, a Libra issued in the USA would be backed by the US dollar and that issued in the UK would be tied with the British Pound and so on.
How will the new Libra work?
Since Libra would be tied to only one currency belonging to the country of issuance, the holder of a Libra coin would have to convert it into the coin of the country when crossing borders. So, if you hold a Libra in India and want to travel to the USA, you would have to convert it from a coin tied with the INR to that of the USD.
But that’s not all. Facebook still plans for a central Libra coin, backed by currencies of multiple countries. However, it would work differently—in a way that wouldn’t threaten the international banking system. Libra would be a digital mix of several single-currency stablecoins available on the network. It would be similar to the IMF’s reserve of national currencies where they are maintained in a specific ratio. Libra would also be tied to several currencies, which would carry fixed nominal weights.
Latest posts by Aradhana Gotur (see all)
- Analysing L&T Finance Holdings Ltd - Sep 15, 2020
- The AGR story part 2: Airtel’s prep and hindrance from Jio - Sep 10, 2020
- The AGR story: part 1 - Sep 8, 2020