Facebook has announced that, come 2020, it will be launching its own digital currency – Libra – and an accompanying wallet, Calibra, that will allow the unbanked, the financially excluded and everyone using Facebook, Messenger and WhatsApp to spend, send and receive digital money.
The new digital currency is powered by Blockchain and will be run independently of any nation or central bank – making it a bona fide cryptocurrency and possibly the cryptocurrency that becomes mainstream.
The currency has been developed by Facebook but is also being supported by a number of mainstream companies, each of which have put $10million into the project. Among the various companies signed up to invest around $10 million each in Libra are credit card giants Visa and Mastercard, digital payments company PayPal and ridesharing powerhouses Uber and Lyft, as well as eBay, Farfetch and Vodafone. The money raised by members of the consortium will help to fund the launch of the coin. According to the report, Facebook has sought to raise as much as $1 billion in support of the new cryptocurrency project.
Together these companies will form the Libra Association, based in Geneva. The Libra Association will be totally independent of all its members and of Facebook, government and central banks and will be overseen by its founding members, who meet at least two of a range of criteria around net worth, reach and industry leadership. Once the currency is launched – and spendable – Facebook will have the same rights and obligations as any other founding member of the association. The aim is to have about 100 members by the time the currency launches in the first half of 2020.
What is it for?
The service is being touted as a way to democratise online commerce and digital payments, allowing the unbanked to get a foot on the ladder. According to a Facebook press release for the launch: “For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account and those numbers are worse in developing countries and even worse for women. The cost of that exclusion is high — approximately 70% of small businesses in developing countries lack access to credit and $25 billion is lost by migrants every year through remittance fees.”
While this is true and a valid driver for the development of the currency, its real value to Facebook lies in making it easier for its customers to buy things direct from adverts run on the social site.
This makes the adverts more engaging and potentially much more lucrative to the advertisers and is a way of Facebook driving more revenue from adverts. Opening that – and the wider world of ecommerce – to the unbanked and financially excluded globally is secondary, but potentially where the real money lies.
What it is really for
According to George McDonaugh, CEO and Co-Founder of KR1, writing in The Fintech Times: Let’s cut to the chase, Facebook (and Libra’s supporting corporations which include Ebay, Visa, Uber and PayPal) are doing this for one reason and that’s data. It will be spun as banking the unbanked, revolutionising payments and connecting the world, but don’t be fooled, this move into the murky world of cryptocurrency is about tapping new wells of data, the modern day oil. No doubt there’ll be plenty of assertions over privacy protection and ‘decentralised’ hand waving, but this is all about Facebook enriching their reservoirs of data, knowing who you are (for real), what your buying, who you’re paying and how much you have.”
He continues: “Want a loan? Ask Zuckerberg, want a credit card? Ask Zuckerberg and everything will be at the click of a button on a platform that literally 30% of the planet’s population are using. Further, Libra could crush merchant fees and potentially solve major issues with card fraud. If that wasn’t enough, if Libra is successful in seeing widespread adoption, watch a slew of new coins come to market from the other Silicon Valley heavyweights. Money is the next frontier for the candy crushing, social networking leviathans and I for one would not want to be standing in their way.”
How does it work?
Libra and the Calibra wallet are underpinned by a ‘limited blockchain’, which, rather than being controlled by all and any networked computer, is run only by selected machines on the network – in this case those of the member companies. This provides the blockchain security needed to underpin the currency, but allows Facebook et al to remain in more control of what is going on – in theory.
On a more practical level, Facebook says that it pins access to currency and digital banking on having ownership of a smartphone, rather than a bank account. At first, it says, Calibra will enable users to send Libra to others with smartphones as easily as sending a text message “and at low to no cost”. It adds: “In time we hope to offer additional services for people and businesses, like paying bills with the push of a button, being a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.”
With the likes of Uber, Lyft, PayPal and eBay on board, however, it also looks like the service is eying up ecommerce too. Where this to come to pass it could revolutionise how people pay for things online and on their phones – taking that away from banks and financial services companies and putting it in the hands of the social media firms.
Government is surely not going to like this, as it takes control of the financial world away from central banks and governments and puts it nominally in the hands of the people, but really cedes control to, in this instance, Facebook.
And this is not going to be the only regulatory issues faced by Facebook with the launch. While states will be looking on closely as to how this pans out, there is also the issues that Facebook is already under increasingly tight scrutiny over its mishandling of data.
Opening itself up to more scrutiny and criticism is the only guaranteed outcome of the Libra launch and it could, if things go poorly, scupper it before it has even been launched.
According to analyst Alice Blair at EngageHub: “As with any new digital offering, Facebook needs to ensure that trust is built with its users. The social media giant is still recovering from data breaches and in restoring overall trust in the brand, so the launch of Libra has to have a ‘customer-centric’ approach built in from the very start. This will involve robust social listening and analytics, to monitor how many customers are using the currency and how else they want to use and exchange it. This insight can be used to inform marketing personas and inform future experience strategies. Finally – this customer centric approach cannot be at the expense of security. Facebook needs to be highly transparent in how user data is stored and managed, to offer the best possible experience for Libra users that does not compromise on privacy.
Freedom of choice?
Just hours after Facebook announced its new Libra cryptocurrency project, European politicians issued stark warnings calling for tighter regulation of the platform. Some of the most vocal opponents are French Finance Minister Bruno Le Maire and Markus Ferber, a German member of the European Parliament.
In response, Fred Roeder, Managing Director at the Consumer Choice Center, said that “these political threats were harmful to consumer choice, and would ultimately backfire”.
“Overseeing regulation on Internet and financial firms is important, but the ‘regulate first, innovate later’ mentality that came in response to Libra should give every Internet user a reason to be concerned. If every new Internet innovation now needs to be approved by lawmakers, that sets a dangerous precedent for the future of consumer choice online,” said Roeder.
Roeder believes that consumers have the right to choose if they want to use cryptocurrencies, or social networks and are aware of the great risks and benefits that go along with that. People want alternatives, especially with new digital tools, which is why there is so much interest from consumers.