Hubris Libra?
What to make of Facebook’s new currency
Facebook launched Libra this week generating a tsunami of press, all expressing a range of reaction from great enthusiasm to deep skepticism and cynicism. There’s much to cover on this hot new topic (and many questions still unanswered) but here’s a quick rundown of everything you need to know.
Topline: In the near-term, Libra will lack any significant utility for those of you reading this article but surely offer the novelty of using a new currency. However, it could be life-changing (even lifesaving) for those living in countries with unstable currencies and high inflation or simply the 1.7B who are unbanked globally. Hence, Libra will likely flourish as an “inclusive currency” in the coming years versus an “alternative asset” for the affluent — and that’s actually a good thing.
Okay, let’s dive in…
~ Is Libra a cryptocurrency?
This is probably the most confusing part of Libra, as it has been referred to as a cryptocurrency, digital currency, token, stable coin and many other monikers. The short answer: Yes and No.
Cryptocurrency: a digital currency in which encryption techniques are used to regulate the generation of units of currency and verify the transfer of funds, operating independently of a central bank.
Fiat Currency: a government-issued currency that is not backed by a physical commodity, such as gold or silver. Most modern paper currencies are fiat currencies. The word “fiat” comes from the Latin and is often translated as the decree “it shall be” or “let it be done.”
Libra operates like a cryptocurrency (being digital and leveraging blockchain) but its value is more of a “fiat currency” — one tied to a government-issued currency. So, while Libra technically operates independently of a central bank, its value is directly tied to their policies and valuations (think of it as a “hybrid crypto”).
Whereas, cryptocurrencies like Bitcoin and Ethereum are not tied to any government-issued currencies — their value is 100% independent and driven solely on demand (hence the wild fluctuations). Libra is what’s called a “stable coin”, as its value will be tied to the U.S. dollar, yen and euro. Also, the consortium they assembled consists of corporate giants like Visa, PayPal, eBay, Uber and Spotify.
Hence, Libra is a digital extension of hard currencies but operates separate from the core banking system which allows it greater value exchange possibilities on Facebook’s 2.7B user social network that includes Messenger, Instagram and WhatsApp (plus their partner networks).
~ Who will Libra appeal to most?
As we mentioned, Libra will appeal most to those under the duress of unstable currencies and/or those who are unbanked. Having an alternative value store could be life-changing for millions around the globe, IF in fact they are permitted to do so. It’s likely some countries will try to block Libra usage.
As for the unbanked, Libra would also be a huge win by freeing them from high fees charged by check cashing facilities and giving them access to critical digital marketplaces. Though there is a “chicken and egg” dilemma of how the unbanked get Libra in the first place since you can’t deposit cash via smartphone. The most likely scenario is users getting paid in Libra for services rendered or goods purchased (versus converting cash at some location). For examlpe, if you’re an Uber driver, you might choose to be paid in Libra, or should you complete work for someone, they can pay you in Libra as well — just like we Venmo. This part is still unclear but plenty of options seem feasible.
~ Will Facebook control Libra?
Tecnically, no — the Libra Association will govern the currency. This just might be a shining light amongst the fog of discourse, as Facebook will not be in full control of Libra but rather governed by 100 founding members of the Libra Association which will be based in Switzerland (shocker).
~ Will this be a game-changer for FB?
This is the billion dollar question and the simple answer is yes. The complicated part is whether for better or worse? There’s no doubt this was a wise strategic move considering Facebook needs a big second act and better way to monetize its base. So, from that regard kudos.
They were also smart by addressing an actual void in the market versus jumping in with an iterative “me too” offering. Though, by their own admission, it will take years to play out this very ambitious initiative. Only time will tell if they can navigate all the legal and operational hurdles to make Libra the huge success it could become. Especially, if they can’t stem the growing techlash momentum calling for their break-up (see next point).
~ Will Libra be the match that lights the breakup powder keg?
The self-oversight of Facebook has already been in great question, fueling bipartisan cries for a breakup of the social giant. Now adding finance (the most regulated industry) into the topic of privacy, censorship and monopoly might just be the tipping point to an unwanted outcome.
For example, anti-money laundering regulations require a “know-thy-customer” capability which Facebook appears quite incapable of managing in the past. Forbes recently reported that Facebook removed over 2 billions fake accounts in the first quarter of 2019 — that’s nearly the same number of their total global users. So, what’s the solution? Add Social Security and passport numbers to your account? (Ah, no thank you)
Also, who’s protecting these accounts? Not the FDIC. We’ve heard the nightmare stories of people forgetting their Bitcoin passwords and mills being hacked which won’t play well with the Facebook community.
Hence, Zuck’s moto of “move fast and break things” may not be so wise in the world of finance and also not land well with congress. Worth noting at the time of penning this piece, Maxine Waters is already calling for a moratorium on Libra until the initiative can be reviewed. I’m sure there was intense debate internally on whether to broach this topic with congress in advance of launching Libra but seems the route of “better to ask for forgiveness later” was the choice. We’ll see how that works out.
Home-field pitchforks aside, Libra will likely get an even frostier reception from the EU where they already tried to fine them $1.6B for a data breach (WSJ) and now they and Google are being threatened with billions more in fines for not removing terrorist content (Forbes).
~ So, what should brands do to get on the Libra bandwagon? (or stay clear of it)
The short answer: be prudent and patient. By all means begin to think about emerging opportunities and start “test & learn” initiatives once it launches but also be cognoscente of the many hurdles that lie ahead and potential for negative optics that could materialize. At the very least, there’s hope Libra could become a strong vehicle for worthy causes andhelp those financially and digitally disenfranchised.
Stay tuned for more on this fast-changing topic and feel free to contact us with any thoughts or questions.
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