Will Libra be the killer app of digital money?

Facebook’s venture into the payments space has been a long time coming for many of us. Ever since Facebook filed for a Money transfer License in 2014, the hiring of former Paypal president David Marcus as head of Facebook Messenger the same year as well as the following launch of Facebook Pay, it has been a slow buildup towards the payment space. Today Facebook finally unveiled the details surrounding the rumored cryptocurrency, Libra that is set to launch sometime 2020. What is it, who will benefit from it, and who will be potential victims of Facebook’s potential success?

According to Facebook, Libra is going to be a simple global currency and financial infrastructure that empowers millions of people. If that were not ambitious enough, the tagline reads; Reinvent money Transform the global economy. So people everywhere can live better lives.

In order to keep it independent from Facebook, a corresponding organization, Calibra with a digital wallet of the same name has been formed together with some other big names such as Visa, Mastercard, Spotify, Uber, Vodaphone, and Paypal just to name a few. The initial members have all contributed with an entry ticket of minimum 10 MUSD.

According to The Block, Facebook initially had ambitions to get some of the big banks involved but found a lack of interest among institutional giants like Goldman Sachs and JPMorgan. Even though the inaugural members are limited to 28, The Block reports that the goal is to get 100 members in the consortium. With a 10 MUSD minimum per member, capital should not be an issue for Calibra if it manages to reach the desired membership amount.

To encourage adoption, The Libra Association wants to encourage more developers and merchants by issuing various incentives, possibly Libra coins, to validator node operators who can get people signed up for and using Libra. With global giants like eBay, Uber, and Spotify already on board, it is easy to imagine how these would again create some kind of incentives for consumers to chose Libra as their preferred payment option, thus achieving consumer adoption through network effects created by having wide-reaching digital services as a part of the Libra Association.

Libra differs from most known cryptocurrencies by being a Stablecoin, where the value of the ≋ is pegged to not only one fiat currency, but a basket of currencies such as dollar, pound, euro, swiss franc, and yen. This to ensure a stable currency rate, as opposed to bitcoin and other cryptocurrencies known for at times wild price fluctuations.

In addition to offsetting potential volatility of the currency itself, Coindesk reports that Facebook has created a best of breed where they have cherrypicked what they consider the best features from existing blockchains for the underlying protocol. Here some examples of how Libra borrows some of the features that have gained popularity among known blockchains:

1. Like bitcoin, there’s no real identity on the blockchain.
2. Like Hyperledger, it’s permissioned
3. Like ethereum, it makes currency programmable
4. Like coda, users don’t need to hold onto the whole transaction history

See the full list and explanations at Coindesk.

For more details on what Libra is, TechCrunch as compiled an extensive article covering what you need to know for now. For those who really wish to know more of the technical specs on the Libra blockchain, please refer to the white paper published today by Facebook. There is also a developer portal where any developer can build their own apps up and running.

In the official press release, Facebook state that the goal of Libra is to contribute to financial inclusion for those unable to access basic financial services, which is the case for 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.  Libra will also be available as a currency in Facebook Messenger and Whatsapp, giving an indication that Facebook is looking beyond financial inclusion for potential use.

With an installed base of 2,4 billion users worldwide, Facebook has the potential to transform the way we pay as well as money itself. This will undoubtedly be the cause of worry for both financial institutions, payment processors as well as central banks.

As a Stablecoin, Libra will hold a reserve in fiat currencies equivalent to the value of the digital currency itself. That means there’s always 100% of the value of the Libra in circulation collateralized with real-world assets in the Libra Reserve. This undoubtedly raises some questions among regulators on how such a reserve should be governed. IMF on their side suggests that one option is to place these reserves with central banks, a suggestion that unsurprisingly received a somewhat mixed response given the complexity regarding the tethering to multiple currencies. In France and Germany, central banks and parliament members are worried that a something of this magnitude will instantly become systemic, and call out for regulators to be on high alert. Not long after the reveal of Libra , G7 announced that they will set up a high-level forum to examine the risks of such currencies to the financial system with regards to financial stability as well as money laundering.

Even though the initial target demographic of Libra is the unbanked, banks should pay close attention to how this plays out. The future of banking is predicted to be everywhere, never at a bank if we are to believe the words of Brett king. Meaning that banking functions become embedded within other experiences, Facebook as a proved platform player and digital ecosystem has a significant lead on incumbent banks in the platform economy. According to the head of the Libra Association, their mission is to build more services through Calibra and start providing customers with more financial services. Although this surely won’t happen overnight, it is worth the while to stay vigilant.

Challenger banks such as Revolut and Monese should perhaps be most worried by this announcement.  If everyone with a Facebook or WhatsApp account will be able to use low-cost mobile and online banking, the need for mobile-only challenger banks will diminish.

While some suggest that Facebook will be a catalyst for mainstream bitcoin and cryptocurrency adoption around the world, Libra could just as easily disrupt existing cryptocurrencies. Cryptocurrency firms have been trying to build cross-border, digital currencies on the blockchain to disrupt traditional banking and payments for a decade, but nothing has caught on at the scale of traditional money yet. With Facebook’s ambitions, they surely are setting up a winner takes it all game for borderless payments.

But not everyone is convinced that this will work. The Financial Times Alphaville has through a series of posts raised doubts of the true motivation of the currency as well as its right to live. Arguing that Libra is nothing more than a brazen attempt to override national monetary sovereignty by creating a global-scale Federal Reserve equivalent — within which Facebook’s dominance is veiled by the cunning use of buzzwords like blockchain, DLT, decentralization, and cryptocurrency.

They receive support from several sources in the Cryptocurrency community, stating that Libra is still a centralized platform and is still subject to censorship, monitoring, and control and that adding a consortium of global companies as validators does nothing to decentralize the system. Whether or not it matters or not that Libra is not a cryptocurrency by definition, I’ll let the jury decide at a later stage.

Even though Libra promises to maintain privacy for its users, not everyone is convinced. Given Facebook’s history of exploiting user data for monetization, it is safe to say that Facebook has some trust issues. Facebook is currently facing a potential $5bn (£4bn) fine from the US Federal Trade Commission (FTC), which opened an investigation in response to the Cambridge Analytica revelations.

Another critic points out that given the alleged initial failure of Facebook Pay (that recently was discontinued in Europe), Facebook is taking a business area they’ve already failed at and adding complexity.

Personally, I find this immensely exciting. I’ve been following Facebooks positioning towards payments for years, and now a substantial move has been made. This will undoubtedly create a lot of interest and has enormous potential. If anybody is well positioned to become the borderless bank that is the holy grail for many fintechs and challenger banks out there, it is Facebook.

I’m already on the waiting list.