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Facebook officially unveils cryptocurrency plans
Facebook has released details about its Libra cryptocurrency, but questions still remain over how, and if, it will work
Facebook has officially unveiled plans for its cryptocurrency project, Libra, which the company claims will “enable a simple global currency and financial infrastructure that empowers billions of people”.
Although the new currency is still in the early stages of development and will not be available until the first half of 2020, it is being touted as a potentially huge disruption to the current financial system – one that could decentralise economic power.
However, given Facebook’s shaky relationship with privacy and the overblown hype of cryptocurrencies in recent years, the project is already coming under scrutiny.
How will Libra work?
According to a whitepaper published by Facebook, Libra aims to create a more inclusive financial system based on three interlocking components: blockchain, monetary reserves and its governance structure.
The first is the Libra Blockchain developed by Facebook itself – a decentralised, programmable database designed to support a low-volatility cryptocurrency.
The technical paper for the Libra Blockchain says the aim is “to create a financial infrastructure that can foster innovation, lower barriers to entry and improve access to financial services”.
To make Libra a low-volatility currency, it will be tied to a mixed reserve of assets, including bank deposits in various fiat currencies, which are designed to give it a stable, intrinsic value.
This will make Libra much less speculative than other cryptocurrencies, such as bitcoin and ethereum, which are not backed by any underlying assets.
The Libra Reserve will therefore be a key mechanism for preserving the currency’s value, and will be made up of money from both investors and users.
Governance of Libra
Although the currency is underpinned by Facebook’s own blockchain technology and backed by the reserve, both will be overseen by the Libra Association, a Swiss-based non-profit set up to facilitate and govern use of the currency.
The association will comprise 100 private sector and civil society members with equal voting rights, which so far includes PayPal, Mastercard, Vodafone, Lyft and eBay, among others.
Members of the Libra Association must pay at least $10m to operate a node of the blockchain, and in return will receive interest from the reserve. Although it will start with 100 companies, the association will be open to other partners in the future.
The activities of the association will be governed by a reserve management policy, which can only be changed by a super-majority of members voting in favour of the change.
Jehan Chu, Social Alpha Foundation & Kenetic
It is worth noting that all of the banks, as well as other tech giants such as Google, Amazon and Apple, are conspicuously absent from the association, while the current membership is entirely made up of payment solution incumbents, blockchain companies and venture capitalists.
According to Jehan Chu, co-founder of Social Alpha Foundation and managing partner at Kenetic, Facebook’s onboarding of the “Who’s Who” in global payments bears a lot of similarities to how Apple brought a range of music publishers to its iTunes platform.
“While it’s unlikely that the endgame will result in the same power shift away from traditional institutions, Libra will trigger a seismic shift in how these institutions engage and adopt crypto into their businesses,” said Chu.
While many critics may bemoan Libra’s higher degree of centralisation, especially when compared with traditionally dencentralised forms of cryptocurrency, he said: “I believe it is an enormously positive driver that will accelerate crypto into mainstream consciousness and adoption, and provide further capital and opportunities for fully decentralised blockchains like bitcoin and ethereum and the startups that build on them.”
Spending Facebook’s cryptocurrency
In terms of spending the currency, a new Facebook subsidiary called Calibra is developing a standalone digital wallet. The wallet will have two core functions: holding money securely for free and allowing low-fee payments or transactions.
The overall goal of the subsidiary is to build financial services and software on top of the Libra blockchain, which can then be integrated into Facebook and related services such as WhatsApp to push adoption.
Until competing third-party wallets are developed, which Facebook CEO Mark Zuckerberg confirmed would happen in a blog post following the announcement, Calibra is how most people will use the new currency.
The subsidiary will also become a member of the Libra Association, operating its own node and receiving interest from the reserve.
Will anyone actually use it?
According to Mateusz Tilewski, chief technology officer at Concordium, Facebook’s main advantage is its enormous reach of 2.7 billion monthly active users, “which will undoubtedly help with the mainstream adoption of cryptocurrencies and will see other big players moving into the space”.
However, Charlotte Crosswell, CEO of Innovate Finance, said that although financial technology (fintech) firms often have issues with customer adoption because of their small size, they make up for it through gaining consumers’ trust with their product over time.
“Obviously, some of the sceptics would say, ‘Yes, Facebook has billions of customers, but how is it going to marry that with the trust needed for financial services?’,” she said.
Crosswell added that Facebook has high adoption across generations too, which means if the trust for financial services can be built, Libra’s potential for mass adoption is much higher than a fintech’s, which is much more likely to go for a specific niche in the market.
“Is it going to change banking? Is it going to compete with banking? Is it going to sit alongside? I think that’s still to be determined at the moment,” she said. “No one has a crystal ball.”
Appropriate separation of data?
According to the Libra whitepaper, which only mentions privacy once, Facebook created Calibra, a regulated subsidiary, to “ensure separation between social and financial data” and to “build and operate services on its behalf on top of the Libra network”.
However, a precedent already exists for the collapse of this separation.
In August 2016, for example, WhatsApp started sharing user data with Facebook despite the founder’s earlier claims that nothing would change as a result of the acquisition.
Senior IT professional
Similarly, Germany’s antitrust regulator, the Federal Cartel Office (FCO, or Bundeskartellamt), ruled on 7 February 2019 that Facebook had been exploiting consumers through its data collection and combination practices.
Even more recently, Facebook was booted out of the Standard & Poor list of ethical companies because of its lack of transparency over how and why it collects and shares the information of millions of users.
According to a senior IT professional with years of experience in the banking sector, Facebook has shown that it cannot be trusted with user data, so if there were any issues, millions of people could be affected.
“I have lost faith in the moral compass of big tech and I think more people are reaching the same conclusion,” said the IT professional. “I don’t think this is advancing humanity or innovation, it is just another way for Facebook to abuse and monetise its users.”
Will Libra be regulated?
Existing cryptocurrencies are infamous for their lack of regulation, but with a number of large multinational corporations involved in the Libra network, it is unlikely that the currency will go to market without some form of regulation taking place.
Bloomberg has reported that Libra is already facing a pushback from both European and American lawmakers.
In the US, for example, the House Financial Services Committee chairwoman, Maxine Waters, urged Facebook to stop developing Libra until Congress and suitable regulators had had the chance to properly examine it.
Across the Atlantic, lawmakers are worried about the risk of Facebook becoming a “shadow bank”, with the French finance minister Bruno Le Maire warning that it should not be seen as a replacement for traditional currencies.
The governor of the Bank of England, Mark Carney, recently said during a central bank meeting in Portugal that although he was “open minded” about the utility of Libra, it would have to meet the highest standards of regulation should it succeed in signing up users.
Carney added that Facebook would have to ensure anti-money laundering measures were in place, as well as measures to properly protect users’ data privacy.
Read more about Facebook
- Facebook’s CEO ruthlessly exploited personal data shared by its users to turn Facebook into the biggest social network, but internal documents show that privacy appeared to be an afterthought for executives.
- An International Grand Committee on Big Data, Privacy and Democracy considers whether failure to protect citizens’ privacy constitutes grounds for anti-trust regulation against Facebook and other big tech companies.
- Co-founder of Facebook, Chris Hughes, has published an op-ed in The New York Times calling for Facebook to be broken up, as it faces investigations from the US Federal Trade Commission.