In June, Facebook announced the launch of its native cryptocurrency, Libra. Media outlets and social media around the world reported and commented extensively on the news: the biggest social media platform was developing a global currency that could benefit billions.
In general terms, Libra’s whitepaper states it’s a cryptocurrency with low volatility that relies on a decentralized blockchain and a smart contract platform, to create innovation in financial services.
Despite sounding promising, the announcement generated all kinds of reactions. Crypto enthusiasts, bankers, financial experts, and even politicians have been an active part of the discussion.
In this article, we cover the pros and cons, from different points of view, in order to provide an overview of the impact of Libra in the financial system and the crypto community.
Facebook issuing a crypto asset is a huge push for all cryptocurrencies. Despite not being directly related, after Libra’s announcement, Bitcoin’s price had a 22% increase – rising from $9,000 to $11,000. Since Bitcoin serves as a bridge between Fiat and altcoins, all cryptocurrencies had a considerable price pump in US dollars.
Many cryptocurrencies like Bitcoin and Monero are related to illegal activities such as hacks, money laundering, and drug trading. Just recently, a man in the USA pled guilty to “running a $25 million bitcoin laundering scheme”. This has led to an association in many people’s minds, connecting cryptocurrencies to criminal behavior. The fact that Facebook promotes a native cryptocurrency is helping to change this perception.
Adoption has been a major obstacle in the crypto space. In order to own cryptocurrency, users need to be tech-savvy and handle exchanges, wallets and private keys. Added to this, some countries remain reluctant and have either banned or restricted crypto trading. Libra is intended to be much easier to acquire; according to their whitepaper, it’ll be available through all their platforms (Facebook, Whatsapp and Instagram). This huge reach will be positive for crypto adoption.
Facebook coordinated the creation of “The Libra Association” which is responsible for overseeing the development of the token, the reserve of fiat assets that gives its value, and the governance rules of the blockchain. In order to be part of “The Libra Association”, an upfront payment of $10 million was required which would entitle the investor to: become a validator node operator, a vote in the council and a proportional share to the initial investment.
The opportunity called the attention of 28 major investors that include companies such as Mastercard, Visa, PayPal, eBay, Spotify, Uber, and Coinbase, amongst others. The interest includes diverse sectors that range from payment services and marketplaces to blockchain institutions and nonprofit organizations. These big names will help provide oversight of Libra.
The founding members of The Libra Association
Libra states that one of their main objectives is to provide a financial solution for the unbanked. According to the Global Findex Database 2017 report which is funded by the Bill & Melinda Gates Foundation, 1.7 billion adults remain unbanked – without an account at a financial institution or through a mobile money provider.
In this same line, Calibra, a subsidiary of Facebook that is in charge of developing the digital wallet for Libra, declares that “almost half of the adults in the world don’t have an active bank account. Those numbers are lower 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 credits and $25 billion is lost by migrants every year through remittance fees.“
Offering a frictionless payments ecosystem is possibly the most positive outcome of Libra. Including billions into a low fee remittance application, powered by blockchain, will be a game changer that will boost financial inclusion.
On July 17, 2019, the US Congress held a hearing on Facebook’s Libra. Among the different speakers, the intervention of Meltem Demirors, Chief Strategy Officer at CoinShare, was by far one of the most compelling. In order to clarify her arguments, she compared Libra with Bitcoin. Let’s review her main points:
If you’re interested in Demirors complete 5 minute intervention in the US Congress, you can watch it below:
One of Facebook’s most well known issues has been its data security breaches. The Cambridge Analytica scandal proved how the information of million of accounts was exposed, which ended up in a $5 billion fine for the social media platform.
Bearing this in mind, it’s important to highlight what Mike Chapple, associate teaching professor of information technology, analytics and operations at the University of Notre Dame’s Mendoza College of Business, says: “Libra’s design does leverage the blockchain, preserving the privacy of transactions from outsiders peering in, but the facilitation role played by Facebook and other partners leaves the company the ability to penetrate that veil of privacy. While Facebook promises that they won’t access information from the currency’s digital wallets ‘without customer consent,’ there are no technical barriers to guarantee it.”
There is no final statement on whether Libra will be either positive or negative for the general public and the financial sector. There are important arguments from both sides which all be at stake once Libra is launched in 2020. In the meantime, US politicians are discussing additional requirements prior to its launch since it’s up to them to either halt or allow its development. Time will tell if next year we’ll be buying our coffees and sending low fee remittances with Libra.
“Libra raises many serious concerns regarding privacy, money laundering, consumer protection, and financial stability.”
Jerome Powell, US Federal Reserve Chairman
“We have seen that Libra is more likely to be commercialized than existing virtual currencies … Libra will have a big impact on the existing financial system, banking industry and financial consumers.”
Financial Services Commission of South Korea
April 23 / 2020
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