Facebook’s new cryptocurrency is big news — and there are still a lot of big questions to be answered.
After about two years of work in Facebook’s Menlo Park headquarters, the digital currency Libra was unveiled to the world in a publicity blitz centered in San Francisco’s historic mint, a 150-year-old building that used to be home to a third of the American gold reserve.
So Mark Zuckerberg is officially getting into the money business.
The basics are simple: Put cash in, receive Libra, send them and spend them cheaply, cash out at any time. Facebook is hoping it’s easy for developers to work on the currency and easy for the globally unbanked to use it. We won’t get to see if it all actually works as planned until next year.
Facebook is working with 27 partner companies and Calibra, a Facebook subsidiary, will launch a Libra wallet in Messenger, WhatsApp and a standalone app in 2020.
Let’s launch into some of those big questions: Who will Libra target, what makes it different from current options, what’s in it for all the big partners involved, what will regulators do, and what about privacy?
1. Who is the target?
The companies involved — Facebook, Uber, Spotify, Visa and a couple of dozen other multinational giants who paid a $10 million entry fee — are so big that they typically ultimately care about the big picture: The entire world.
With that said, we should keep an eye on Libra in India. Facebook’s two immediate stated goals with Libra are to bank the “unbanked” and offer low or no fee money transfers around the world.
The most obvious targets for Facebook’s new venture are India and countries like it. The Silicon Valley social media giant already has more than a foothold in the world’s largest democracy: 200 million Indians use WhatsApp, Facebook’s second global empire of a messenger app. A Libra wallet will be built into WhatsApp as well as in Messenger and in its own standalone app.
India leads the world in remittances, according to the World Bank. The Indian diaspora sent $80 billion back to the country in 2018. Facebook sees an opportunity in providing low or zero fee international transfers in countries with a vast amount of money moving across borders, especially with a big population of unbanked and underbanked individuals who often have to pay exorbitant fees.
“For many people around the world, even basic financial services are still out of reach: 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,” Facebook’s announcement blog reads. “The cost of that exclusion is high — approximately 70% of small businesses in developing countries lack access to credit and $25 billion is lost by migrants every year through remittance fees.”
2. How is this different from something like Venmo, PayPal or Western Union?
If you want to send money online right now, you have a handful of options. Libra’s offering — which, we should stress, we have yet to see materialize — is aimed at beating the existing options at the task of sending money globally with low or no fees. That’s potentially big for businesses, people with families spread around the world or “unbanked” people who have to pay exorbitant fees to move cash.
Libra aims to be a better option than Western Union or Venmo (owned by PayPal) by offering low or no fees. The goal, Facebook says, is to “let you send Libra to almost anyone with a smartphone, as easily and instantly as you might send a text message and at low to no cost.”
PayPal is a Libra partner and can easily update its own apps to offer Libra when the digital currency launches next year. Since PayPal does charge fairly standard fees, it will be competing with itself, in a way.
Something like PayPal sends a dollar or Euro. A Libra, by contrast, is backed by a collection of real currencies but is distinct from and is not exactly pegged to any single currency.
The currency’s exact starting value and the “basket” of currencies which it will reflect remain unknown but ultimately the goal is to provide a stable, easy to understand and easy to convert currency that can do the work of money in any country and across borders.
Libra is also different in that one company isn’t running this thing. It’s spread out among a group of partners and, Facebook says, eventually will be decentralized so that anyone can have a hand in it.
How exactly all of this works remains an open question as well for reasons we’ll get into below.
3. What’s in it for the partners?
Simply put, 28 multi-billion dollar corporations — a group that will number 100 by next year, according to Facebook — don’t get together just for fun. So why have so many big companies signed on to this project?
The profits work like this: A person will pay $1 to get Libra and use as they see fit. That $1 will sit in a bank account — called the reserve — which means that Libra, unlike other cryptocurrencies, is backed by an actual asset. That bank account will earn interest. That interest will pay the partners and investors — together known as the Libra Association — who are building out the infrastructure on which Libra will live.
The idea is that any company could become a founding member of Libra as long as it meets a few requirements including $1 billion USD market value, 20 million users per year or, put more simply, a globally recognized and enormous industry-leader. It’s possible, then, that a Google or Apple could theoretically jump on board.
Facebook itself sees plenty of opportunity on top of that, particularly in the ad game where Facebook makes most of its money and on building services, like credit, on top of the Libra platform.
All the ways Libra will — or will not — make money remain one of the big unanswered questions here.
4. Why blockchain?
It’s an app of middling popularity in the west but, in Asia and among the Chinese diaspora, China’s WeChat is a phenomenon. It’s a money app, a chat app, a social media app and a tool of Beijing’s techno-authoritarianism on top of all that. American tech giants have for some time been looking longingly at WeChat’s vast scope, popularity, functionality, and profitability. Facebook, with its arsenal of massive apps, is in a position to build a “super app” for the rest of the world.
There are some fundamental differences. We’ll set aside some important points — for instance, it sure is swell that Facebook doesn’t operate under China’s strict censorship and surveillance laws — to talk about blockchain.
Among the most annoying buzzwords to ever grace Silicon Valley, I regret to inform you that blockchain is more than just a marketing ploy. It’s real, it can be genuinely useful and — according to Facebook’s announced plans, at least — Libra is utilizing blockchain in a way that in theory makes some real sense. I say in theory because we’ll have to wait to see how things shake out in reality.
The most basic reason is that it is a technology that allows for decentralized control — but just how decentralized that control will be is situational and in the long term, still up for debate.
Facebook’s first blockchain project is governed by the non-profit Libra Association based in Geneva and no member, not even Facebook, can have over 1 percent of the voting power. Open access allows anyone to participate by being a user, developing applications for Libra, or running a business on it.
Facebook says the Libra blockchain is aimed to eventually be “permissionless” so that anyone could become involved in governance, maintenance, and control of the system. But it will start off permissioned, and there is really no roadmap to the stated end-goal of a permissionless blockchain except for the end-goal itself.
The problem, Facebook contends, is that there is no “proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.”
Jerry Brito, executive director at the cryptocurrency research organization CoinCenter, laid out the potential perverse incentive pitfall:
“Even assuming Libra solves on-chain governance of Reserve composition (a big technical challenge),” Brito tweeted, “the Reserve is still going to need someone’s name on the bank accounts. (We don’t yet have central bank coins.) Presumably that’s the Association. Perhaps I lack imagination, but I don’t see how one decentralizes control of the Reserve.”
And the fact is, Facebook has never given anyone a reason to trust its promises.
We’ve reached out to Facebook and will update when we hear back.
5. What are financial regulators going to do?
This might be the most important question that we don’t have an answer to. What we do know is that Libra will undoubtedly be subject to scrutiny from regulators in Washington, D.C. and around the world.
Europe has been in the global lead on technology and privacy regulations, so the reaction in Brussels is worth watching closely. French and German regulators have already sounded off about Facebook’s new project with concerns centering around privacy, money laundering, and financing terrorism.
Beyond that, we’re not sure what to expect or when to expect it from regulators who have only just now begun to look at the project. Facebook has taken unique steps to ensure that Libra is tougher to use for crime than Bitcoin by enforcing identity rules on users and charging a small fee on transactions to deter spam and denial of service attacks.
It’s also likely that this big new project will attract the attention of those who are already calling for Facebook to be broken up. However, Facebook set up Libra so that the social media giant is just one of many entities in charge.
But we’re so early in both the Libra project and federal antitrust inquiries that it’s unclear what comes next.
6. How much anonymity is possible?
Facebook and privacy, what a pair.
Everyone has questions about how privacy works with a Facebook-created digital currency. Like everything else you’re reading about Libra right now, we have stated goals but no hard facts in front of us until the thing launches. But we do know how Facebook says it will work.
Facebook’s primary source of revenue is advertising. The company says it will not use Libra payments data for ad targeting.
“It’s decentralized — meaning it’s run by many different organizations instead of just one, making the system fairer overall,” Zuckerberg wrote in a post on Tuesday. “It’s available to anyone with an internet connection and has low fees and costs. And it’s secured by cryptography which helps keep your money safe. This is an important part of our vision for a privacy-focused social platform — where you can interact in all the ways you’d want privately, from messaging to secure payments.”
One of the defining features of cryptocurrency has been anonymity and pseudonymity. Libra takes a different route. The specifics are still unannounced and maybe undetermined but Facebook says it will use “all the same verification and anti-fraud processes that banks and credit cards use, and we’ll have automated systems that will proactively monitor activity to detect and prevent fraudulent behavior.” That means you’ll likely have to show government identification in order to use Libra. That may or may not make for a better product but it will definitely make for friendlier treatment from regulators looking at the new coin.
But will it be enough? Facebook is more profitable than ever but it also faces an unprecedented slew of privacy and antitrust investigations in the United States and Europe. The company has seen data breaches of various forms and scopes over the last year ranging from Cambridge Analytica to a 2018 breach impacting 50 million accounts.
There are a lot of open questions but we can be sure of one thing. As the U.S. government moves forward with its antitrust inquiry into Silicon Valley giants, Libra will be a big topic of conversation.