A Marketer’s Guide to Facebook’s Libra
Here’s What Brand Marketers Need To Know About Facebook’s Ambitious Global Cryptocurrency
By now, you’ve probably heard about Facebook’s ambitious plan to create a global digital currency called Libra. Indeed, much ink has been spilled over the various facets and potential implications of Libra and cryptocurrencies in general since the Libra whitepaper was released last Tuesday, from speculating about Facebook’s true motives behind launching Libra to hypothesizing how Libra “will help make the internet of value a reality.” Depending on whom you ask, Libra is either “a terrible idea” for Facebook, “a nonstarter,” or a brilliant endeavor whose “significance should not be underestimated.”
Although the official launch of Libra is still a year away, brand marketers, especially those in the financial services and retail industries, are already flooded with questions: how exactly does it work, who will be using it, and most importantly, what impact will it have on consumer behavior and my business? If you find yourself wondering the same things, fret not. The Lab has got you covered.
How Libra Works
Libra is a cryptocurrency where each transaction is permanently written into a blockchain — a cryptographically authenticated database that acts as a public online ledger, like a special live spreadsheet that everyone in the network can edit and verify. If you’d like to learn more about the basics of blockchain, you can check out this handy guide we wrote in 2017. Essentially, you can think of Libra as Facebook’s version of Bitcoin, only far more stable in value and easier to use in daily lives.
In contrast to Bitcoin, whose volatile value fluctuation has made it rather unsuitable for everyday use, Libra will be pegged to flat currencies, such as the U.S. dollar and Euro, and is backed by a reserve of real assets pooled together by the members of the Libra Association, an independent consortium based in Switzerland. The nonprofit consortium is led by Facebook along with 27 other members including big-name companies Visa, Mastercard, PayPal, Uber, Lyft, Spotify, eBay, as well as some lesser-known VC firms, foreign telecom carriers, and NGOs. Facebook plans to expand the consortium to 100 founding members before the official launch next year and says it’s open to anyone that meets the requirements.
Unlike Bitcoin and other existing cryptocurrencies that leverage the kind of distributed network enabled by blockchain to create an open ledger that anyone can anonymously join and trade on, Libra will be based off a permissioned network with comparatively centralized control. Each founding member has paid around $10 million to join and optionally become a “validator node operator” for the Libra chain. Collectively, the node operators will verify and record each and every transaction facilitated by Libra. In other words, the system will be controlled by a set of authorities in a top-down fashion. This compromise in decentralization, a hallmark characteristic of blockchain-based cryptocurrency, has led some to question the authenticity and trust-worthiness of Libra, but it will also allow the Libra chain to handle 1,000 transactions per second — a huge and necessary improvement over Bitcoin’s 7 transactions per second or Ethereum’s 15.
Essentially, Facebook wants to create a global digital currency that aims to make sending payments as easy as sending a photo today. Libra will be made available to Facebook users — all 2.38 billion of them — who can cash in their local currency to buy Libra and then spend it on products and services such as the ones provided by partners like Uber and Spotify, at participating merchants and retailers in the offline world, or simply send money to each other as many users already do with apps like Venmo. To withdraw funds, users will be able to convert their digital currency into legal tender based on an exchange rate, just as one would to acquire some euros for a European vacation.
Libra As A Facebook Product
Although technically Facebook does not completely own or control Libra, there is no doubt that the company is leading the charge in developing Libra, and most people will rightfully associate Libra with Facebook, as it will be used initially as a digital currency on Facebook services and those of its launch partners. Facebook has set up a new Swiss subsidiary called Calibra, which will create a digital wallet for Libra as a standalone iOS and Android app and integrated within WhatsApp, Facebook Messenger, and Facebook’s main app, thus leveraging Facebook’s existing social graph to acquire users. Other wallet providers will be able to build products on the Libra protocol when the network launches in early 2020. But most users will likely try the official Calibra wallet first, further deepening the impression that Libra is a Facebook product.
Of course, this branding is very much intentional on Facebook’s part, as the company has a lot to gain should Libra work as intended and successfully take off as a default global digital currency. If that happens, Facebook will become much more indispensable for millions of people around the world. After all, it is a lot harder to switch banks than switch social media platforms. The level of ecosystem lock-in will no doubt add tremendous value to the company and perhaps even grant it some greater influence on the world economy. In addition, if Calibra turns out to be popular and become many people’s default digital wallet, it would be a great touchpoint for Facebook to expand its offerings of financial services such as credit and loans, just as Alipay has done in China once they disintermediated consumers from banks.
Financial services also carry a social element thanks to the growing prevalence of P2P payments and transactions incurred by social commerce. Tencent’s WeChat Pay already set a much-lauded precedent of a social media platform integrating a native digital payment method so as to not only entrench its ecosystem lock-in, but also facilitate social commerce on its platform and enable small businesses that operate on cash today to easily use Libra to buy ads on Facebook. If Facebook can somehow pull this off, it stands to reap enormous benefits, especially when it is trying to pivot to private messaging and diversify its business models.
That being said, the success of Libra is far from guaranteed. Ever since Facebook’s announcements on Tuesday, the debate over Libra’s chance at being widely adopted has been rather heated. Let’s examine both sides of the argument.
The Argument for Libra
Considering our changing banking and payment habits as well as an increasingly interconnected global economy, there is certainly a need for a global digital currency, and Facebook may just be the company to make that a reality, given its unparalleled global reach and its extensive social graph.
While it may be hard to imagine most Facebook users in the developed markets getting excited for a virtual currency created by Facebook, especially when it doesn’t really offer that much real convenience to the payment process compared to existing credit card-based methods, it is important to remember that Facebook is mainly targeting the population that lacks access to banking services, especially those in developing countries. This is evidently clear as Libra’s launch video prominently features users in developing countries.
As Facebook eagerly pointed out in the Libra whitepaper, there are about 3.4 billion adults in the world (1.7 billion “unbanked” and another 1.7 billion who are “underbanked”) that remain outside of the financial system with no access to a traditional bank, even though one billion of them have a mobile phone and nearly half a billion have internet access. Millions in developed countries are missing out on the benefits of ecommerce and cashless stores because they don’t have a bank account and thus can only pay in cash. The Federal Reserve estimated there are 55 million unbanked or underbanked U.S. adults in 2018, which account for 22% of all U.S. households. Libra then, as Facebook argues, would act as a mobile-native currency that democratizes access to financial services and brings hundreds of millions of people into the digital economy. Even for those that already have a digital wallet but lack access to any global currency, Libra would offer a nice alternative to promote universal financial inclusion.
One particular use case of Libra in the developed markets that is worth singling out is international remittance — transfers made by immigrants and family members in developed countries to their families in the developing world that totals half a trillion dollars a year. The overwhelming majority of that is sent by slow, high-fee processors such as Western Union, and the people that are making those transfers typically can barely afford to pay the steep remittance fees that start at around 7%. If Libra takes off in the developing countries, then there is a pretty good chance that Libra will be a no-brainer choice for this segment of users in developed countries as well.
Another positive impact that Libra could bring is how it may change how we handle online authentication and manage our identifying credentials. If we can use the Libra blockchain as a basis for a “decentralized and portable digital identity” system, then theoretically, it would provide an alternative way to manage individual identifications, both online and offline, without having to resort to a single centralized authority. Such a new system would have a profound impact on our global commerce and other social domains that few would be able to forecast.
The Argument Against Libra
As compelling as Libra’s value proposition of global financial inclusion may sound, it is important to remember that it is not without flaws and hurdles. While Facebook’s global reach forms the basis for its potential success, the company’s deteriorating reputation and plummeting consumer trust provide a strong argument against it.
Money is fundamentally a social construct. A dollar bill has no intrinsic value but rather serves as a medium of value because it is backed by the U.S. government and therefore believed by everyone in the world to be valuable. The same “make-believe” principle applies to digital currencies as well. Consumers and merchants will have to trust Facebook enough to convert their local currencies into Libra, and right now, trust happens to be something that Facebook is running low on. Nonetheless, Facebook seems to have learned nothing of its dead-on-arrival launch of the Portal devices last fall and decided to dive headfirst into the market anyway. Of course, this is likely why Facebook formed the consortium with a diverse group of partners as it attempts to assuage this trust issue; nevertheless, Facebook is still the face of Libra, which puts enormous strain on its rollout in developed markets where anti-Facebook sentiments are gaining momentum.
The torrent of bad publicity that kicked off with the Cambridge Analytica scandal has yet to subside. Just last week, shortly after the Libra announcement, an in-depth piece from The Verge detailing the dismal work conditions and severe mental trauma that Facebook content moderators suffer from caused quite a stir, with many railing against the “sweatshop-like” jobs that Facebook outsources to enterprise service vendors such as Cognizant. Trust in Facebook dropped by 66% following the aforementioned scandal, and all the negative press since have not helped Facebook in winning back consumer trust. While this has yet to hurt Facebook’s bottom line in any substantial manner, it also doesn’t offer Facebook any license to enter new markets, especially one like personal finance where consumer trust is paramount.
While Facebook seems to have anticipated the obvious data privacy concerns by claiming that no Libra transaction data will be mingled with Facebook data for ad targeting purposes, its long history of misusing data does not inspire much confidence. The Libra whitepaper states that “aside from limited cases, Calibra will not share account information or financial data with Facebook or any third party without customer consent.” At a time when most people glaze over the lengthy ToS and rarely bother to learn what they are consenting to, the particular wording has left Facebook some significant wiggle room in this regard. In addition, Calibra’s fine point also stats that “Calibra will use customer data to facilitate and improve the Calibra product experience, market Calibra products and services,” which appears to confirm that purchase data will indeed be collected and used to market additional products. Facebook may keep its words and separate the Libra data from its main ad products, but it will still be free to collect transactional data from Calibra for other purposes. For a business that fundamentally hinges on mining user data, Facebook may find it simply too hard to resist.
Besides the challenges in earning consumer trust, Libra will also inevitably faces significant regulatory hurdles for the potential disruption it would unleash on the global financial system. Every major innovation breakthrough comes with its set of unintended consequences (the overarching theme of our 2019 Outlook), and Facebook has unleashed many of those on our media and politics, so it’s certainly within reason to be extra cautious with LIbra. If Libra gains significant adoption rate in a certain market and a significant amount of people start to use Libra for their primary currency, it could destabilize national currencies and potentially complicate the investigation of financial crimes. This is partly why it has already been flagged by some European regulators and U.S. politicians as something that will be heavily regulated, if not outright banned. As the public backlash against Facebook starts to turn into regulatory actions, Libra will almost certainly face significant regulatory challenges.
Of course, Libra won’t be without rivals. The upcoming Apple Card may seem old-fashioned in comparison to Libra, but it could very well become the first product to successfully convert many high-value mobile users into mobile wallet users, with the potential to expand Apple Pay into a full-blown financial service. Google, too, could come out with their own blockchain-based digital currency that leverages the large install base of Android to compete with Libra, especially in developing markets where Android phones dominate mobile usage, without the heavy baggage of eroding user trust that Facebook carries. Even Amazon, with its roots in ecommerce, could come up with its own “AmazonCoin” to facilitate global commerce if it chooses to. All these potential rival services further cast doubt on Libra’s chance at being widely adopted as the universal digital currency.
Implications for Financial Brands
Since Libra was announced last Tuesday, the media has been reporting on Libra as a huge deal, and it certainly could be a huge deal — if this gets widely adopted, it would become a world-changing product that could potentially remake the finance market and destabilize sovereign currencies. At the moment, the success of Libra is far from certainty, especially in the developed markets where it has to compete with other digital payment methods. Therefore, it is difficult to gauge just how much of the consumer behavior will change due to Libra, or how long that change will take to manifest. There is no doubt that Libra is a long-term project, and the best course of action for most brands right now is simply to wait and see how things play out.
That being said, there are several low-hanging fruits that Facebook will likely pick up to improve its user experience, and they are the things brands should also pay attention to. For starters, Facebook may incentivize people to use it for Instagram shopping and facilitate a global marketplace on its app. If Libra gains traction, brands that drive significant traffic from Facebook platforms should definitely support Libra to create a more frictionless online shopping experience. In addition, as the partners of Libra, such as Uber and Spotify, would also likely deepen integration with Facebook’s platform to increase the reach of their services, other brands should think about how to expand the reach of its own services by accepting Libra.
The adoption of Libra would also make business models based on micropayment a viable option since it eliminates the transaction fees that now go to a middleman. Integrating a native payment service into WhatsApp and Messenger will also make conversational commerce heat up again, which means brands will have to develop new sales strategies tailored to messaging apps. Once social commerce takes off, Facebook will likely add ad products to those platforms as well, as Amazon has done over the past few years, therefore providing marketers a new channel to reach their audience.
At the end of the day, the impending arrival of Libra did raise the mainstream awareness of applying blockchain technology to financial services. And Facebook is not alone in pushing blockchain into the limelight — numerous other companies are also looking to explore the revolutionary potential of cryptocurrencies and blockchain in general. For example, Starbucks is rumored to be working on its own cryptocurrency, while JP Morgan has just started customer trials for its “JPM Coin” this week. Visa’s blockchain-powered payment network finally went live earlier this month after 3 years of planning and preparation. As cryptocurrencies continue to filter into mainstream consumer consciousness, we expect to see more tools and services that will assist brands looking to experiment with blockchain-based services.
While most consumers will likely remain clueless about the technical specifics of blockchain, they have become aware that there is a new technology that could enable a new kind of financial system that is digital-native and globally inclusive. As consumer expectations rise, so must the brand experiences that banks and financial companies rise to meet them.
Libra is a fascinating project that’s still in its early days, and the global financial system is a complex and intricate thing to dissect. To learn more about Libra, we recommend reading the following:
- Facebook, Libra, and the Long Game — Ben Thompson’s thoughtful analysis on Libra [Stratechery]
- Thoughts on Libra “Blockchain” — an expert guide to the social media company’s foray into cryptocurrency [OneZero]
- Facebook’s Libra Masterplan — How Libra takes advantage of regulatory loopholes [OneZero]
- A deep-dive into the many questions raised by Libra [The Verge]
- A speculative short story about living in 2046 when Facebook’s Libra has become the global currency [Medium]