Does Libra matter?

Facebook’s new cryptocurrency, Libra - how it impacts banks, social networks, and you.

This week, Facebook launched a stable, fiat-backed cryptocurrency, called Libra, built to facilitate cross-border money transfers. Facebook’s goal is to build a payments network around Libra by creating an online ecosystem (on/off the social network) where users can make purchases and peer-to-peer (P2P) transfers. Its structure and backing create the potential for Libra to be a catalyst in the cryptocurrency market.

Why is Facebook interested in crypto?

A large technology player coming into the payments market with a solution that excludes cards has long been a concern for banks, card payment networks and other traditional financial institutions. This is one attempt. Libra is early and opinionated but gives a glimpse of where the financial system can go, yet it does have interesting implications for what the financial system can shape into:

• A global blockchain-based payments system could lead to fundamental changes in the digital consumer economy — payments can become faster, more reliable and cheaper.
• A significant portion of Bank’s profits come from cross-border and foreign exchange, which would be directly impacted by this alternative.
• Libra has a long path ahead: decisions by global policy makers will have a major impact on the future of the cryptocurrency.

It’s important to consider the notable differences between Libra and Bitcoin, the latter of which has been the basis for most cryptocurrency policy and design. Of note:

• Libra will not be fully decentralized or anonymous (at least initially).
• Libra is meant to be exchanged, not to be used as store value.
• Libra is backed by various global fiat currencies in order to avoid massive volatility experienced in most existing cryptocurrencies.

Facebook going after global payments validates the massive opportunity to improve existing cross-border and P2P payments systems. Transferring money from one country to another should be as easy as it is to send a text message. Banks can leverage their existing market position with new technologies to better fill this gap, giving them a better shot at avoiding disintermediation when (and if) Libra (or something similar) should take off.

What is Libra?

“a simple global currency and financial infrastructure that empowers billions of people” — Libra White Paper

The Libra is a stablecoin — a digital currency that’s supported by established government-backed currencies and securities. The goal is to avoid massive swings in value so Libra can be used for everyday transactions, one of the main challenged with more volatile crypotcurrencies, like Bitcoin.

Facebook created a new subsidiary, called Calibra, to build the new wallet and focus on the company’s blockchain efforts. The digital currency is expected to launch in 2020.

How will it work?

In order for the Libra to reach the usability and acceptance scale required to make it work as a payment method, it needs to be widely trusted. Facebook is creating a new payments network on which users can buy things and pay each other. This ecosystem consists of:

• The Libra Blockchain: a new, open rail for anyone to build on top of.
• The Libra Reserve: a reserve of real assets, distributed globally, to back Libra.
• The Libra Association: a governance structure for the entire Libra network and Reserve.

Members of the Libra Association will each invest $10 million in the network through the Libra Reserve, which will govern the digital coin. While Facebook will be one of the founding members, it will be just one equal member of the Association. The Founding Members are:

• Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
• Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, MercadoPago, Spotify AB, Uber Technologies, Inc.
• Telecommunications: Iliad, Vodafone Group
• Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
• Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
• Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

Why it makes sense for Facebook

The large majority of Facebook’s revenue comes from advertisement. Payments are a potential way for Facebook to turn its messaging platforms — Messenger, WhatsApp — into complementary, revenue-generating businesses.

With its 2.5 billion users, Facebook’s network dwarfs that of any other bank or payment system globally — with a proven network effect. Monetizing its user base could lead to a global commerce network inside the Facebook Ecosystem.

As expected, this is a project that will take time and face several regulatory hurdles. There is a long way to go. Facebook has attempted to address some immediate regulatory concerns by establishing a governance structure that places Facebook as an equal member of the governing body. The Libra Association has as a charter to define a sustainable governance structure, a path towards decentralization and oversee the Libra Network and Reserve.

Facebook will be heavily involved in developing the technology behind Libra throughout 2019. The Libra Blockchain is open-source, intentionally, enabling any developer to build application on top of it. This is an initiative that the entire payments ecosystem should be following.

Let’s see what happens when you point 2.5 billion people at a cryptocurrency.