Facebook’s Cryptocurrency Will Challenge The Global Financial Establishment
The news about Facebook’s cryptocurrency called the Libra coin is generating a lot of buzz. The stories are mixed, with some saying this is the gateway to cryptocurrency adoption. Others are concerned since Facebook does not have a good reputation when it comes to privacy and data security issues. The fact that Facebook, the world’s largest social network, is also the biggest advertisement platform getting in cryptocurrency will have huge implications that affect everybody. That is even if they don’t use Facebook because it will affect society in general.
What Is Libra Coin?
The Libra coin is a token that will run on Facebook’s own blockchain. It is meant to be a stablecoin backed by a variety of assets that are securities and regulated by law. If you plan on buying as much Libra coins in the hopes that its value will rise, don’t speculate any further. The tokens are pegged to more stable assets like fiat currency and government securities, so they won’t have the volatile price swings in cryptocurrency like Bitcoin and Ethereum. There will also be a second token that is for investment purposes. The Libra coin will follow an inflationary model since it will be pegged to fiat, so it is pretty much just digital cash.
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The Libra coin will have its own wallet for keeping a record of how much a user owns. A digital wallet developed by another company called Calibra will be integrated with the Facebook ecosystem. This will include its availability in applications like WhatsApp and Messenger. All a user needs to do is have access to the Calibra wallet and undergo a KYC/ AML process of submitting their personal information for regulation purposes. Users will then exchange their fiat for Libra coins using a payment processor. These payment processors are members of an association consisting of big business firms that have established credibility. Once a user has exchanged their fiat, their Libra coins will be available in their wallet which they can now use from Facebook’s applications.
The Libra coin is supported by the Libra Association which will start with 28 founding members with plans to expand to 100. They are going to be the block validators on the Libra blockchain, so they have incentivized interests. To become a validator, a member needs to put $10 Million to become a node on the blockchain, get one vote in the Libra Association council and get shares of the dividends from interest earned on the Libra reserve. The members of this association are very well known in the industry. Members include PayPal, Uber, Stripe, Mastercard and Visa just to name a few. If you take a look at the members of the Libra Association, there is not a single bank. They also refer to the association as “not-for-profit”. Now that has me questioning, if you are not-for-profit, then how are validators incentivized?
According to Investopedia, the definition of a not-for-profit is:
…. a type of organization that does not earn profits for its owners. All of the money earned by or donated to a not-for-profit organization is used in pursuing the organization’s objectives and keeping it running.
So it appears that the funds that go into the Libra reserves are to keep the organization running. In doing so they can offer shares of it to members, and that is big money.
Is it a real blockchain?
If you have read the white paper, then you will have an idea of how its blockchain works. However, if you understand the properties of a “true” blockchain (care of Andreas Antonopoulos, the blockchain evangelist), you will begin to question it. So it is just another token basically, or another version of PayPal that integrates tightly with Facebook’s ecosystem. The project follows the design of a blockchain in that it uses cryptography to secure transactions recorded on a digital ledger, but there is a particular feature that many can argue is the reason it cannot be a real blockchain. That is because the system is permissioned, whereas a blockchain is meant to be permissionless. A blockchain by design is meant to be open to all in a decentralized network. Libra is somewhat decentralized because it is run by an association and not just a single entity, but it is permission because it runs on top of the Facebook ecosystem. In order to use it you must have a Facebook account, otherwise, you cannot really use Libra’s token.
Another property a blockchain should be is trustless. With Libra, you have a trusted environment which consists of an association. How can it be trustless when the association requires a membership that is determined by rules and policy rather than by votes made by constituents? In a trustless system, anyone can enter the network to validate blocks, while Libra is a network of 28 founding members. You cannot just become a member unless you commit $10 Million. The association can also determine who can be a member and who cannot. For example, an organization from a blacklisted country will not be allowed to join due to trade and finance laws.
The system is also highly centralized, counter to the blockchain which is meant to be decentralized. According to the Libra Association, they plan on moving to the DPoS (Delegated Proof-of-Stake) consensus mechanism and become more decentralized and permissionless. To also lessen fears about who controls the Libra blockchain, they will not be under the control of Facebook since there is an association.
What are the advantages to using Libra?
Now let’s get down to why Libra will be so important. There are already so many cryptocurrency, why do we need another one? Well, if it has value it will be useful. What gives Libra value is that it addresses the issues of scalability, availability and distribution that many cryptocurrency projects have problems with. Let’s take a look at how it compares.
It can scale because it will be fast through the use of its validator nodes that can process upwards of 1,000 TPS (transactions per second). Compared to Bitcoin at 3–5 TPS and Ethereum 15–30 TPS (as of this writing), Libra is much faster in terms of transaction velocity. There is no question Facebook is developing this blockchain for speed to handle micro and nano-transactions. This can accommodate payments ranging from a cup of coffee to charges for using IoT devices.
Since Libra coin will run on top of Facebook’s ecosystem, it will be widely available to 2+ Billion users. That is a large scale of on-boarding but made easier through the on-ramp provided by the association members. The Libra vision is to actually provide access to the global financial system to the “ unbanked”, which consists of billions of people around the world. More people have access to smartphones than they do to an actual bank account ( read this article). Many people do not have access to bank accounts because they are either not qualified or not permitted due to lack of documents. In most countries, to have a bank account means to have a stable source of liquidity and proper documentation. In less developed countries, many people do not have access to banks either because they don’t have proper documents or they are not within reach of one. With Libra, all you need is the Calibra wallet and access to Facebook. It is possible to get the un-banked on-board because their on-ramp will be through their smartphone which will have apps that will allow them to have access to Libra coins.
This will not be a problem because you have an association supporting it. Two big names in the finance industry, Mastercard and Visa are supporting Libra and are members of the association. This will allow users to exchange from fiat using these two giants as their on-ramp processor. The distribution of tokens does not require mining, like with Bitcoin. The pegging to fiat means that it will have lower volatility which allows Libra to be used as digital currency for transactions. It is also fungible, so it can be used interchangeably from one transaction to another.
Benefits for consumers and retailers
I think Libra coin will benefit consumers and retailers tremendously. When you integrate a system like this with social networking, you have an established user base. That is billions of people using Facebook’s WhatsApp and Messenger. You also have Instagram which will allow consumers to purchase products directly from brands and influencers who are on that platform. By using a platform with a large user base, Libra has a huge market.
You may have heard stories of Facebook developing cryptocurrency for WhatsApp specific to users in India. That is because they realize that there is a huge market for remittances here, even though India may change its policy on cryptocurrency. Nonetheless, the foreign remittance market is lucrative because of millions of overseas foreign workers who need to send money back to families in their home country. The problem is that this market is controlled by a few payment processors that run remittance centers that take a cut from the payments. Enter Libra, and they offer a frictionless way to make cross-border payments that don’t involve a third party like banks and payment processors. A user can simply send money using Libra directly to their family using for example WhatsApp. Not only is it faster and more convenient than having to go to a payment processor, but it will also cost much less.
Libra may also benefit the whole cryptocurrency space rather than compete against it. Facebook provides an easy way for more users to get into cryptocurrency. This is because users can use Libra to exchange for popular cryptocurrency like Bitcoin and Ethereum. When you provide easier ways and more user-friendly interfaces, then it makes it more welcoming to use a new service.
Privacy and data protection concerns
Using Libra will be just like making a payment using PayPal or Venmo. In fact, we always give information about ourselves when we transact with a credit card and even a debit card. That is because our identity is connected to our transactions so using Libra won’t be that different. Since PayPal is also a member of the association, its integration with Libra does not require any more information than what you are already giving them.
It can still be concerning, but this is the reality of the digital and information age. Your transactions can be linked to you regarding the services and items you purchase. Facebook will not be collecting any more data about users for targeted ads, but that is like saying a fisherman won’t collect fish that voluntarily goes into its nets. Facebook already has your data from using its applications, plus they will get even more from the document required for the Calibra wallet.
If you are paranoid about privacy and data, the simple solution is not to use Libra coin. It is not being forced upon anyone to use. There are still other ways to make payments and that should be reassuring to those who don’t want to have to use a system that they don’t trust.
Who should be scared of Libra?
My thoughts on this are based on what I have gathered. It seems to me that banks and financial institutions will become Facebook’s competitor eventually. You see, by creating a fiat reserve Facebook is basically becoming a bank. You can even call them a global or central world bank. Now imagine taking care of your financial needs using Facebook. Banks will be threatened by this because they can lose customers. If the day comes that Facebook will be the go-to platform for lending, payments and store of value then, of course, banks will have to develop a new strategy for the future.
What Libra might lead to happening is forcing banks to adjust to a new system. Banks will have to upgrade their outdated business models and adopt the more recent innovations in fintech. If it means developing a blockchain or using a blockchain platform similar to Libra, there will likely be resistance to it because the banking system uses different principles. Banks may have to change if they want to compete, otherwise, it will be up to government regulators to determine the outcome using policy.
Amazon and other online retailers would have some cause for concern. The world’s largest online retailer, which is not a part of the association, will be competing against Libra’s network. Amazon has a large lead, but if more retailers accept Libra tokens then this can change the online retail game. While Amazon is known for selling retail items that range from clothing to electronics, the possibilities for retail on Libra’s network can potentially be bigger. This is because since it uses Facebook as a platform, it can lead to direct peer-to-peer transactions among users of WhatsApp, Messenger and even Instagram. The potential for Libra tokens on Instagram makes business sense. Facebook would like to integrate retail with the social media network to allow brands to have a direct reach to the billions of users on the platform. If you can buy brand X directly using Libra coin on Instagram for example, this would be a loss for retailers like Amazon. This remains to be seen, but it can certainly have a huge impact on the retail space.
It is not just banks, but also payment remittance centers, creditors and lenders, insurance companies and even the government who are concerned. At this point, there are already politicians who want to challenge Libra and question what Facebook’s intentions are for going into cryptocurrency (read more about it here). Policymakers are going to look at regulating this because Facebook is a giant that has considerable influence in society. The implications here are who Facebook’s cryptocurrency will affect and whether it is negative to the competition.
Final thoughts on Libra
There have been so many reactions about Libra. Some think it will be good for cryptocurrency in general. One reason critics are cynical about cryptocurrency, in general, is because no one is really using it other than to transfer or store value. When you can use cryptocurrency on a daily basis to make payments, then it is a much different story. If you can make payments instantly, retailers will be happier about it too. When we use credit cards to make payments, retailers don’t get the money right away. What electronic payment systems with the blockchain will enable are instant payments that will appear immediately. No more settlement processes that go through so many layers.
The association seems like a new oligarchy that is going to benefit tremendously from Facebook’s billions of users. While a true decentralized blockchain means no one is in control of the platform, that is the opposite with Libra. Who is to say that the association won’t block users line with what is already happening on platforms like YouTube and Twitter. A transaction can also be rejected by funding sources because it may be illegal or a violation of company policy. Libra attempts to remove all those obstacles for users, yet we cannot say for sure they won’t block transactions since we must not forget that it is controlled by an association. In such systems, if there is a conflict of interest with a transaction then it will most likely be rejected.
It may also be disturbing that Facebook has issues regarding user privacy and data. They are not exactly honest and ethical when it comes to protecting our data. How more can we expect this with cryptocurrency? The thing is that cryptocurrency was meant to be self-securing and autonomous, so it really does record transactions which can’t be modified or altered and made publicly viewable on the blockchain. Facebook should have no control over this if they are a true blockchain. The data is meant to be public anyway, so there is not much concern here. The issue is more on how tamper proof or prone to influence the Libra blockchain is.
The simplest solution to those who don’t buy any of Facebook’s pitch for Libra coin … don’t use it. If you are paranoid about privacy and data concerns, then don’t use it. The good thing about the cryptocurrency space is that we have options to use other tokens. This is good for us consumers because that means we still have other ways of making payments. If Facebook wants to limit those choices then it is obviously monopolistic and serves no good purpose for a fair and competitive free market.
It will be banks and other financial institutions that will need to worry more about Libra coin I believe. This is because Facebook will be their competitor, and it will be hard to compete due to the enormously large user base Facebook has from its social network. The question is now whether Libra coin is even going to be allowed by government regulators. If it will affect our lives in more ways than one then we have the right to know this information. We need to know the vested interests of all the association members, not just Facebook, and what their plans are for “world domination”, so to speak pun intended.
Note: This is an opinion piece based on the author’s views. Please do your own research always to verify facts.
Originally published at https://www.datadriveninvestor.com on June 28, 2019.