Facebook unveils plan for global cryptocurrency called Libra

by Ike Obudulu Last updated on June 20th, 2019,

Facebook unveiled an ambitious plan Tuesday to create a new digital currency similar to Bitcoin for global use, one that could drive more e-commerce on its services and boost ads on its platforms.

But the effort, which Facebook is launching with partners including PayPal, Uber, Spotify, Visa and Mastercard, could also complicate matters for the beleaguered social network. Facebook is currently under federal investigationover its privacy practices, and along with other technology giants also faces a new antitrust probe in Congress.

Creating its own globe-spanning currency — one that could conceivably threaten banks, national currencies and the privacy of users — isn’t likely to dampen regulators’ interest in Facebook.

The digital currency, called Libra, is scheduled to launch sometime in the next six to 12 months. Facebook is taking the lead on building Libra and its underlying technology; its more than two dozen partners will help fund, build and govern the system. Facebook hopes to raise as much as $1 billion from existing and future partners to support the effort.

Company officials emphasized Libra as a way of sending money across borders without incurring significant fees, such as those charged by Western Union and other international money-transfer services. Libra could also open up online commerce to huge numbers of people around the world who currently don’t have bank accounts or credit cards.

“If you fast forward a number of years, consumers all over the world will have the ability to access the world economy,” Facebook executive David Marcus said in an interview with The Associated Press.

Facebook also could use its own currency to drive more people to make purchases from ads on its social media sites, said Gartner analyst Avivah Litan, who based her comments on press reports about Libra that preceded Facebook’s formal announcement. “This is about fostering more sales within an ad to get more business from advertisers to make ads more interesting on Facebook,” she said.

Backing by familiar corporations might also make Libra the first Bitcoin-like currency with mass appeal. Such “cryptocurrencies” have generally failed to catch on despite a devout following among curious investors and innovators. Bitcoin itself remains shrouded in secrecy and fraud concerns, not to mention wild value fluctuations, making it unappealing for the average shopper.

Libra will be different, Facebook says, in part because its value will be pegged to a basket of established currencies such as the U.S. dollar, the euro, the yen and others. Each purchase of Libra will be backed by a reserve fund of equal value held in real-world currencies to stabilize Libra’s value.

To be sure, recent history reminds us that many big Facebook announcements never really take off. Two years ago, for instance, Facebook CEO Mark Zuckerberg promised that “augmented reality ,” in which phones and other devices project digital images into real-world surroundings, would be a major focus for the company. Such AR applications remain all but invisible today. Same goes for the online shopping chatbots that Zuckerberg unveiled a year earlier, saying they would revolutionize e-commerce in its Messenger app.

Facebook won’t run Libra directly; instead, the company and its partners are forming a nonprofit called the Libra Association, headquartered in Geneva, that will oversee the new currency and its use. The association will be regulated by Swiss financial authorities, Facebook said.

“No single company should operate this,” Marcus said. “It should be a public good.”

The company has also created a new subsidiary, Calibra, that is developing a digital wallet to allow people to buy, send and use Libra. Calibra pledges that it won’t share transaction data from details of Libra user’s financials with Facebook unless compelled to do so in criminal cases. Still, if people are using Facebook products to buy things and send money, it’s possible Facebook will be able to track some data about shopping and money transferring habits.

Calibra won’t require users to have a Facebook account to make a free wallet. And it will allow people to send Libra back and forth on two of Facebook’s core messaging apps — WhatsApp and Messenger. Instagram messages won’t be included, at least at first.

Libra partners will create incentives to get people and merchants to use the coin. That could range from Uber discounts to a Libra bonus paid when users set up a Calibra wallet, although the companies haven’t laid out specifics.

Many privacy questions remain unanswered, though. Cryptocurrencies such as Libra store all transactions on a widely distributed, encrypted “ledger” known as the blockchain. That could make the Libra blockchain a permanent record of all purchases or cash transfers every individual makes, even if they’re stored under pseudonyms rather than real names.

Facebook said that if people use Calibra or similar wallets, their individual transactions won’t be visible on the Libra blockchain.

Earlier this year, Zuckerberg announced a new privacy-focused vision for the company after months of backlash for its treatment of personal customer information. Zuckerberg’s vision — which has mostly not been detailed publicly — will rely heavily on privacy-shielded messaging apps in an attempt to make the services more about private, one-to-one connections.

Many analysts believe Zuckerberg wants to create a U.S. version of the Chinese service WeChat, which combines social networking, messaging and payments in a single app. Libra would take Facebook a step closer to that end.

What is a crypto-currency?

Virtual currencies can be used to pay for things in the real world, such as a hotel room, food or even a house.

Digital tokens are held in online wallets, and can be sent anonymously between users.

Crypto-currencies run on blockchain technology. A blockchain is a ledger of blocks of information, such as transactions or agreements, that are stored across a network of computers.

This information is stored chronologically, can be viewed by a community of users, and is not usually managed by a central authority such as a bank or a government.

The concept was designed to ensure security and anonymity for users, by preventing tampering or hijacking of the network.

What are the concerns?

Facebook has come under fire in recent years over its handling of users’ personal data, and regulators are likely to examine the launch closely.

Earlier this month, the US Senate and Banking committee wrote an open letter to Mr Zuckerberg questioning how the currency will work, what consumer protection will be offered and how data will be secured.

Facebook has also discussed the process of identity checks and how to reduce money laundering risks with the US Treasury.

It is believed that Facebook and its partners want to prevent wild swings in the coin’s value by pegging it to a basket of established currencies, including the US dollar, euro and Japanese yen.

Will it be second time lucky?

It’s not the first time Facebook has dabbled in digital currencies. A decade ago, it created Facebook Credits, a virtual currency that enabled people to purchase items in apps on the social networking site.

However, Facebook ended the project after less than two years after it failed to gain traction.

The company will also have to navigate a myriad of regulations in the countries it wants to launch in. India, a rumoured target for Facebook, has recently clamped down on digital currencies.

However, the biggest test is likely to be whether people will trust the social networking giant enough to start changing their cash for the digital coin.

Facebook is in the initial phase of engaging with governments, central banks and regulators, and insiders admit that launching any crypto currency network by the start of next year is ambitious.

Facebook, Western Union and the Bank of England declined to comment.

Will the Facebook crypto-currency work?

The biggest attraction of digital currencies to banks and big firms is the technology that underpins them.

Blockchain technology can help to slash the time and cost of sending money across borders by bypassing banking networks.

Lord King, the former Governor of the Bank of England, warned two decades ago that central banks could become “irrelevant” if people started to use digital currencies as pounds and pennies are used today.

Blockchain expert David Gerard said that Facebook would gain access to valuable spending data by creating its own payment system.

However, he questioned why the social media giant needed to mint its own crypto-currency to harvest that data. Instead, he said, Facebook could create a platform like PayPal, which allows users to transfer traditional currencies.

Crypto-currencies are vulnerable to fluctuations in value, which Gerard said could create a barrier to the success of Facebook’s so-called GlobalCoin.

“Normal people don’t want to deal with a currency that’s going up and down all the time,” he explained.

But Garrick Hileman, a researcher at London School of Economics, said the GlobalCoin project could be one of the most significant events in the short history of crypto-currencies.

Conservatively, he estimated that around 30 million people use crypto-currencies today. That compares to Facebook’s 2.4 billion monthly users.

Image: : A 3-D printed Facebook logo is seen on representations of the Bitcoin virtual currency in this illustration picture

Leave a Reply