Will Facebook’s Libra Legitimize Cryptocurrency?
Facebook, the world’s largest social network with 2.4 billion users, is developing a cryptocurrency that has the potential to reshape the global financial system. Called Libra, the cryptocurrency and blockchain system is backed by major companies and groups and scheduled to hit the market in 2020. Facebook wants Libra to become a global currency that could help the 1.7 billion ‘unbanked’ people get access to financial systems.
Unsurprisingly, the announcement was met with calls for tough scrutiny from regulators and skepticism from technologists and the cryptocurrency community. Congressional committee hearings already are planned. In an op-ed for The Financial Times, Facebook co-founder Chris Hughes called the prospect of Libra’s success “frightening.” Facebook’s practice of moving fast and breaking things works for a college social network, he says, but “it’s not appropriate for the global monetary system.”
Wall Street, however, gave a thumbs up to this endeavor because it adds a potentially big source of revenue for Facebook beyond advertising. The stock was up as much as 8.5% in the days after The Wall Street Journal reported that big backers have lined up behind Libra. “For Facebook, this is a big opportunity, obviously,” says Wharton finance professor Itay Goldstein on the Knowledge@Wharton radio show on SiriusXM. With more than two billion users, he says, Facebook can profit handsomely from consumers using Libra even if the transaction fees are low.
At the same time, Goldstein sees Libra generating a lot of concern. With privacy issues and outsized market power plaguing Facebook, its plans to get into finance and become a kind of “bank of the world” will set off alarm bells for regulators, he says. It’s also a “tricky time” for tech giants to be expanding their influence, Goldstein adds. “There’s generally a crackdown on the so-called ‘Big Tech’ and how much power they have.”
“It’s potentially the thing that will bring cryptocurrency truly into the mainstream.” — Kevin Werbach
With the help of our sister site, Knowledge@Wharton, here are some considerations about Facebook’s new cryptocurrency:
What is Libra? Libra is a cryptocurrency like bitcoin (a completely digital currency that holds a store of value like any other currency and is not controlled by any one person or institution), but with key differences. To make it a stable currency, Libra’s value will be pegged to a basket of fiat currencies (currency without intrinsic value that has been established as money) and backed by reserves consisting of bank deposits, government securities and other ‘low volatility’ assets, according to Libra’s white paper. This should weed out speculators who want to make a fast buck from big price swings. Libra is several different things at once, notes Kevin Warbach, Wharton professor of legal studies and business ethics and an expert on blockchain. It’s Facebook creating a cryptocurrency. It’s potentially a new decentralized global payments platform. It’s potentially the thing that will bring cryptocurrency truly into the mainstream. It’s potentially Facebook’s strategy to compete against [China’s] WeChat and Alipay by integrating payments with messaging. I think it’s [also] potentially the company’s strategy on reestablishing trust with users and regulators.”
Going global. With all the complexities that come with cryptocurrencies, why doesn’t Facebook just offer mobile payments of fiat currency like WeChat Pay in China, M-Pesa in Africa and Paytm in India? That’s because “Facebook wants [Libra] to be ubiquitous,” Werbach says. “No existing fiat currency extends beyond the territory of an issuing country.” For a payment system to be truly global, it has to be based on a cryptocurrency, he adds.
A question of stability. The problem with most cryptocurrencies today is that they lack price stability. A key selling point for Libra is its purported stability, since it will be pegged to a basket of currencies and other assets. However, “there are huge questions as to whether they can actually do it, whether this can actually be resilient in times of stress,” Goldstein says. “If everyone wants to convert their Libra into dollars or other currencies at the same time, this is effectively what we think of as a run.” Adds Werbach: “If there is a run on Libra, who is going to backstop it? That’s a relevant financial stability concern for central bankers.”
The regulators will rise. Werbach does not see Libra supplanting financial institutions or central banks; these could be validators on Libra’s system. “If Libra is successfully launched, I would expect many of the world’s major banks to be involved,” he says. “Banks have expertise in building services and applications on top of money. The fact that there is a new kind of asset and a new kind of entity doesn’t mean that banks have no value.” Besides, Facebook is under such pressure from antitrust regulators that any hint of it crowding out players in another industry would be viewed negatively, adds.
A silver lining is that Facebook’s entry into cryptocurrencies would hasten their regulation — and give them more legitimacy over time. “I have felt for a long time that there needs to be more regulatory engagement with cryptocurrencies, not to shut them down but to actually transition them to become more trusted and widely used,” Werbach says. Scams, fraud and theft are all problems that hinder wider adoption. “Libra, by getting the attention of all of the world’s regulators, … will hasten the coming of the regulatory resolution of cryptocurrencies,” Werbach notes. While these rules will not benefit all cryptocurrencies but rather mainly major ones like bitcoin, he adds, “in the long run, it will be good for the cryptocurrency world.”
Related Links
- Understanding Libra
- The Financial Times Op-Ed
- Libra’s White Paper
- Will Facebook’s Libra Bring Cryptocurrency into the Mainstream?
- Wall Street Analysts React to Libra’s Debut
- K@W: Regulating Big Tech
Conversation Starters
Do you follow the cryptocurrency market? What are your thoughts about Libra?
What are some ways that this new kind of currency will change the global financial market?
I do not follow the cryptocurrency market because it just doesn’t seem well developed yet. Take Bitcoin for example. When it first started out in 2009, one Bitcoin basically worth nothing. On December 17, 2017, it reached its all-time high at $19,783.06. Facebook can claim that Libra will be a stable currency, but no one can guarantee that. Even if Libra is a stable currency, Facebook’s privacy issue will probably be the biggest problem standing between Libra and the rest of the world.
Hi Xinyu. Thank you for your insights on Libra and cryptocurrency in general. You pose some great examples of obstacles that Facebook could face in its rollout of Libra, such as privacy concerns and the volatility of cryptocurrencies. However, I have followed the cryptocurrency market relatively closely and I feel that certain aspects of Libra give it the potential to be a legitimate globally used cryptocurrency. Bitcoin’s value is determined by the market: supply and demand. Bitcoin is first mined by using expensive computers and takes quite a bit of time. Mining requires a special computer that can solve complex math problems, and these problems will increase in difficulty as more miners join. However, anyone who is willing to invest in the equipment can mine for Bitcoins. As more people became aware of Bitcoin, the problems grew harder and more expensive equipment was required. As it becomes more expensive to mine Bitcoins, the price will also gradually increase. There is 21 million limit on the number of Bitcoins that can be in circulation, and currently there are about 17.8 million Bitcoins in circulation. After the maximum limit is reached, the value of Bitcoin will be predicated on factors such as popularity, demand, practicality.
Another recent criticism of a mined cryptocurrency is that it requires too much electricity and generates too much electricity. Studies by the Cambridge Bitcoin Electricity Consumption Index (CBECI) show that Bitcoin uses more electricity than the country of Austria and generates more carbon dioxide emissions than the country of Jordan.
Libra will be backed by a reserve that consists of real currencies, so its value will vary relative to each currency. This reserve will be managed bu the Libra Association which consists of companies such as Mastercard, Paypal, Visa, and Uber. Unlike Bitcoin, Libra is controlled by an entity so they will have control over how much Libra supply is in circulation. This is a role similar to the Federal Reserve and it raises some questions about the regulation around Libra.
1. Will there be a public announcement as to how much Libra will be in circulation?
2. Will Facebook/Libra be required to get proper banking charters in order to operate like this?
3. Will country government need to be included in the Libra Association for supervision?
Unlike the limited 21 million Bitcoin cap, the Libra Association will control how much Libra is in circulation and they will only let certain people who have permission mine for Libra. Although Facebook has stated that they will not track your financial data through Libra for targeted advertisement services, we have seen that there can be mishaps at times and the Senate has shown this distrust at the hearing. In order to get over the privacy barrier and trustworthiness, Facebook should partner up with a bank that could oversee some of the financial technicalities and keep Facebook in check as well. We have seen this with Apple and Goldman Sachs partnering up to launch a credit card. They can uses Apple’s brand and customer base and Goldman Sachs rich history of banking services to reach an even wider customer base.
If Facebook and Libra are able to overcome these hurdles and answer some of these questions and concerns in a satisfactory manner, then they may have a chance at revolutionizing the financial industry as we know it. Their intent is to target individuals with limited access to traditional banks because of this they have created their own subsidiary known as Calibra. Calibra is like a standard digital wallet company such as Venmo or Apple Pay. Because of this, some have labeled Libra as a digital currency and not a cryptocurrency. Calibra is supposed to be used as a method of transferring Libra and will include other digital wallet features to make sure that it is the one-stop for all financial transactions. Facebook alone has 2.38 billion monthly active users and this is where they hold the advantage over many other digital wallet services. Other digital wallets require people to have bank accounts and credit cards, but Facebook does not and they will also offer significantly lower transfer fees. Because of this they will be able to attract those who do not have access to those services, but have an inexpensive smartphone and can access Facebook and Libra.
Facebook’s main goal is to use Libra and build various financial services on top of it and make money off of those services. We have seen a similar model with WeChat in China, where it is used as a mobile payment and communication service. If Facebook is able to gain the trust of regulators and the general public by creating a stable cryptocurrency with the help of other companies, then it’s plan to build a wide range of financial services within its social media can reach billions of people, even those who do not have a bank account.
Cryptocurrency and the concept of blockchain, firstly described in a paper by “Satoshi Nakamoto”, has been regularly discussed during the last several years, being suggested to be either the future of currency or a immature financial system. Because of the prosperity of the so called “deep web” and the frequent mentions from the press, many are able to know the essence of cryptocurrency including Bitcoin and ETH.
However, despite the fact that blockchain gives a theoretical support of a decentralized internet with less manipulation from one or two major corporations, there are multiple potential risks of using cryptocurrency as a major currency and that is also why Chinese enterprises such as Tencent and Alipay decided to create mobile payment platforms that is based on regular currency unlike what Facebook plans to do.
Within the article, two issues are listed: stability and regulating issues. If facebook want to change the whole game with its “Libra”, it has to deal with many problems that traditional currency has already dealt with during the last century.
In addition, the cost of cryptocurrency is too high since the delivery of such currency is much more current consuming. For instance, if you want to buy 2.5 dollar Starbucks coffee, the cost of credit card payment is about 3 cents; the cost of deposit card is about 1 dollar—— the cost of mobile payment is about the same, but the cost of bitcoin payment is about 20 dollars.
Moreover, the delivery time spent is much more. While the time spent for credit cards, cash, mobile payments is always less than 1 minutes——even less than a second. However, the delivery time of cryptocurrency is much longer and uncertain up to several days, because the delivery of each “coin” must be noticed by any server related.
Although I have concluded many difficulties that “Libra” will face, not to mention that Facebook has been notoriously unpopular when dealing with its privacy problems, it is possible for such innovation to be done with multiple technological breakthrough and change not only financial market but the entire human society. Cryptocurrency and blockchain are both powerful tool to accomplish the very beginning ideology of the internet. Current internet and finance has been full of fickleness, deception and depression and the success of decentralization may really be the only way out of the trap.
I agree with the fact that Libra has the potential to grow into a global cryptocurrency and has several advantages compared to other cryptocurrencies such as Bitcoin. Libra is easily accessible to anyone in the world and its volatility is low. The stability can be improved, especially with the prospect of it being backed by reserves containing government securities and bank deposits. Facebook can be greatly benefited by this because of the potential profits they can gain and the trust they can build in their users. More people around the world can gain active bank accounts in an efficient manner.
However, we need to be more alert of the dangers surrounding it. About 6 months ago, I had to do an assignment for school. I logged into my computer and suddenly was redirected to another tab with random ads urging me to click on them. The ads stated that I could get monetary rewards if I clicked on them. I closed the tab, but it made me curious on how I could protect my information from being stolen and how valuable information is stored online. This inspired me to attend a cybersecurity camp this summer. It was a very fun and memorable experience. On two of the days, we went into more detail about what methods hackers use to accomplish their missions and how they are able to hack into systems in the first place. Hackers are able to gain footholds in systems and exploit the vulnerabilities in it. It is easy to do this because of how extensive and complex online networks are. Encouraging a global currency is bound to attract several online criminals because of the increased room for flaws in systems and accessibility. Our instructor showed us some instances where this happened. The one instance that stood out the most to me was a Petya ransomware attack. Hackers took away millions of dollars worth of bitcoins from people’s digital wallets. Hackers encrypted Bitcoin users’ files and demanded money from them in order to decrypt their files. People and businesses are still struggling from the incident. If something similar like this happens to Libra, a larger number of people will be affected globally.
Overall, I do think Libra is a great idea and can make a significantly positive impact on the world, but I think that the cybersecurity risks should be addressed. I think that representatives from the National Security Agency(NSA) should get involved with the cybersecurity risks associated with Libra before it is implemented on a large scale.
Yes! truely an amazing step has taken by FB inc. because the market needs a stable hidden currency that’s what future wants to be with. As prof. Kevin was saying developing countries like India, China and even underdeveloped countries in the African continent want to be part of the digital economy. consider paytm in India its market value is billions nowadays.
The most important point to consider is no stable or promising cryptocurrencies out in the market. If Facebook is going to be a one other than the latter, It will be a good thing for facebook and the rest of the world.
Be a part of the digital world. but I have a doubt how those billion people don’t have access to banks gonna use cryptocurrencies.