The social media behemoth’s foray into the crypto territory with some financial powerhouses on board should prompt heavy suspicion. With the recent data leakage scandals yet to fade into the past, investors should remain hesitant to trust Facebook with their money. It has not been secret for months now that Facebook was designing a cryptocurrency.
Various names were floated around before Facebook officially announced Libra including Facebook Coin and GlobalCoin. The Facebook Coin name made some commentators think that the crypto was a joke. They would ask:
“who would trust Facebook, of Cambridge Analytica fame, with their money?”
Anyone who doubted Facebook’s crypto explorations was served with Libra last week. The social media giant unveiled its crypto plans in a white paper. Just like bitcoin, Libra does use any underlying blockchain technology. Other than that, these cryptos are hugely different.
Whereas Bitcoin is highly volatile, Libra is supposed to be a low-volatility currency. The Facebook crypto will enable users to buy things and transact with other people with very low fees. The coin will be backed by huge reserves managed by a nonprofit organization known as the Libra Association. That association gives the token real-world value and also oversees the management of the blockchain technology that supports the token.
The Libra Association
This group comprises of various members who pay an entrance fee of over $10 million to join. That gives every member one vote on the governing council and enables them to share dividends from interest on the Libra reserve. The members get a share of the dividends proportional to their investments. Interest will arise when users pay their fiat currencies when buying Libra coins.
The current members of the group include PayPal, MasterCard, Visa, Vodafone, and five venture capitalist firms. Also, some oddballs made their way into this group including Uber and other relatively unknown outfits but which presumably produced the entrance fee. The association will also sign up businesses that are ready to accept Libra for payment.
How it Works
Users will need to cash in their fiat currencies into the Libra reserve that will then ‘mint’ an equivalent amount of Libras at the prevailing rate. When anyone decides to cash out by returning their Libras, the system ‘burns’ these tokens and the investor gets an equivalent of their investment back in fiat currencies.
Thus, all of the available Libras at any given point in time will always remain in circulation backed by the reserves managed by the Association. In theory, investors will get back real money at an exchange rate corresponding to the basket of currencies held by the reserve.
Evidently, it is different compared to Bitcoin. Also, Facebook does not control the Libra although it came up with the idea since it has only one vote on the association council. That strategy is wise for Facebook ensuring that nobody is worried of Mark Zuckerberg turning it into his monopoly.
Libra’s underlying concept is ambitious. It will use the scale and network power of Facebook’s 2.2 billion users to let anybody around the world to pay for things and transact in a frictionless manner without territorial limitations.
It works somehow like PayPal for everyone, including the 1.7 billion unbanked people around the world. The idea behind Libra is to create a new currency with a global reach matching the US dollar. That is the reason analysts think that the concept of Libra is highly ambitious. Also, central banks and governments around the world are hesitant and worried about this project.
After Libra’s white paper was launched, the French finance minister, Bruno Le Maire, said that it should never be considered a replacement for fiat currencies. Bruno called the G7 central bank governors to prepare a report on Facebook’s project for their July meeting. Top on his list of concerns is money laundering, privacy, and financing of terrorism.
Also, the Bank of England governor, Mark Carney, dived in at the European Central Bank’s annual symposium held in Portugal. He said that anything functional in this world must become systemic and will adhere to the highest standards of regulation. At one level, it primarily looks like the standard reaction of the mainstream and established powers to an unruly disrupter.
But before the regulators are dismissed as the predictable fuzzing of the worthies, it is important to ask a few integral questions. First, are we contented and comfortable with the concept of a new global currency controlled by a group of corporate bosses? After all, the central bank bosses are at least appointed by democratic administrations. On the other hand, nobody elected Zuckerberg and his consortium.
The major question in all of this Libra frenzy is; what is Facebook getting out of it? For now, the answer to that is anybody’s guess. Hence, the coming year is going to be highly interesting in the crypto world.