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Innovations and Payment Systems

What you need to know about Libra, Facebook’s new cryptocurrency

The social media giant hopes Libra will promote financial inclusion, but many are concerned about privacy risks and criminal exploitation

Summary

Controversy has erupted over a proposed digital currency named Libra. The brouhaha stems in large part from a key backer of this initiative (Facebook) and from the concept of a first-of-its-kind worldwide digital currency. Here, we explain what you need to know.

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Editor’s note: This article was updated Oct. 11 to reflect news about key members of the Libra coalition withdrawing their support of the project. 

Symbolized by the scales of justice, the Libra zodiac sign may feel like it’s being done an injustice.

Controversy has erupted over a proposed digital currency that has adopted the name Libra. The Libra brouhaha stems in large part from a key backer of this initiative (Facebook) and from the concept of a first-of-its-kind worldwide digital currency.

Here, we explain what you need to know about this hotly debated Libra cryptocurrency.

What is Libra?

Libra, unveiled in June 2019 by Facebook and more than two dozen partners, is a proposed cryptocurrency-based, fee-free global payments system. Cryptocurrency is virtual money that changes hands outside normal banking channels.

David Marcus, head of Facebook’s digital currency subsidiary, Calibra, explained that unlike other types of cryptocurrency, Libra is designed to be a payment tool, not an investment vehicle.

“People will not buy it to hold like they would a stock or a bond, expecting it to pay income or increase in value,” Marcus said. “Instead, Libra is like cash. People will use it to send money to family members in other countries, for example, or to make purchases.”

See related:  Bitcoin credit cards? Mastercard patent suggests it’s possible

What is the purpose of Libra?

The creators of Libra envision a “more inclusive, more open financial ecosystem” that empowers billions of people, particularly those who lack access to traditional banking, Marcus said.

“More than 1.7 billion people today are financially cut off from the world, with no access to a bank account — a poverty trap that could deepen as the rest of the world becomes ever more connected,” said Neal Keny-Guyer, CEO of Mercy Corps, a nonprofit group that provides humanitarian aid. “A global digital currency has the potential to spark financial inclusion for the world’s poorest and most vulnerable people, connecting them to the local, national and global economy.”

How will people be able to use Libra?

Calibra envisions rolling out a digital wallet for Libra that’ll be available through Facebook Messenger and WhatsApp (owned by Facebook), as well as through a standalone app.

The Calibra wallet will enable users to send Libra currency to almost anyone with a smartphone, similar to how they might send a text message. Calibra expects a number of other digital wallets and digital services to eventually support Libra.

How do the financial aspects of Libra work?

The value of Libra will not be tied to a single currency, Marcus said. Rather, Libra will be backed by Libra Reserve, which will contain a bucket of currencies held through assets such as cash and short-term government securities. Those currencies will include the U.S. dollar, the British pound, the euro and the Japanese yen.

“This approach will minimize exposure to fluctuations from a single region, providing further stability for people around the world who could rely on Libra for their daily financial needs,” Marcus said.

See related:  J.P. Morgan Chase becomes first major U.S. bank to launch its own cryptocurrency

Will Libra replace currencies like the U.S. dollar?

No. Libra is meant to “exist alongside existing currencies,” according to a whitepaper produced by the Libra Association, a nonprofit established in Switzerland to independently oversee the new cryptocurrency.

How does Libra differ from other cryptocurrencies?

Cryptocurrencies like bitcoin lack stable assets to back them; rather, investors determine their value. As a result, cryptocurrencies are prone to frenzied buying and selling by investors who are trying to capitalize on the currencies’ frequent price fluctuations, according to the whitepaper.

The value of Libra will be far less volatile than the value of other cryptocurrencies typically is, the whitepaper says. A user of Libra “will know that the value of a Libra today will be close to its value tomorrow and in the future,” according to the whitepaper.

“Just as consumers in Europe know the number of Euros it takes them to buy a coffee today will be similar to the number of Euros it will take them tomorrow,” the whitepaper says, “holders of Libra, too, can be confident the value of their coins today will be relatively stable across time.”

Who is behind Libra?

Facebook is the primary driver of the Libra initiative, but it has recruited 27 other founding members of the Libra Association. Among the early supporters were Mastercard, Visa, PayPal, Booking.com, eBay, Uber, Lyft, Stripe and Spotify.

However, PayPal, Visa, Mastercard, eBay and Stripe in October 2019 announced they were withdrawing from the project amid increasing scrutiny from U.S. lawmakers, the Federal Reserve and others. Facebook founder Mark Zuckerberg is set to testify in an Oct. 23 congressional hearing about Libra.

Libra hopes the number of founding members will reach 100 by the time the digital currency becomes available. Each founding member of the association must chip in at least $10 million to help stabilize the cryptocurrency.

Association leaders say that since each founding member holds equal voting power, Facebook won’t be able to monopolize Libra. Facebook says its Libra-focused Calibra subsidiary will operate separately from the association.

What do critics think of Libra?

To put it bluntly, opponents hate the idea of Libra.

In the U.S., Democrats and Republican lawmakers alike have blasted the proposed digital currency. So, too, have President Trump, Treasury Secretary Steve Mnuchin and Federal Reserve Board Chairman Jerome Powell.

Mnuchin said in July 2019 he feared money launderers, terrorist financiers, cybercriminals, drug traffickers, human traffickers and other evildoers would exploit Libra.

Meanwhile, a number of Democratic lawmakers say Libra raises red flags about issues such as internet privacy, national security and monetary policy. These lawmakers note that during the first nine months of 2018, hackers stole nearly $1 billion from cryptocurrency exchanges. Some legislators even want to prohibit Facebook and other online platforms from entering the banking business.

“We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight,” U.S. Sen. Sherrod Brown, D-Ohio, wrote on Twitter.

Officials in Europe also are frowning upon Libra. For instance, one German politician protested that Libra would empower Facebook to become a largely unregulated “shadow bank.”

In July 2019 testimony before a U.S. Senate committee, Marcus said the Libra Association fully expects it will be licensed and regulated.

“We’re talking about something new, at scale in a very regulated industry, and if this is not done right, it could definitely present systemic risks no one wants,” Marcus wrote on Facebook.

See related:  ‘FOMO,’ ‘likes’ and card debt: How Facebook might lead you to overspend

Will crooks be able to take advantage of Libra?

They’ll certainly try. The Libra network will be available to anyone with internet access. Therefore, just as criminals prey upon credit cards and other payment methods, “bad actors will try to exploit the Libra network,” the whitepaper says.

How do Libra’s creators plan to protect the privacy of users?

Facebook says it set up its Calibra subsidiary to ensure no overlap between social media data and financial data and to build and operate services on top of the Libra network.

“Calibra customers’ account information and financial data will not be used to improve ad targeting on the Facebook family of products,” the social media company said.

Libra says the cryptocurrency network will operate on what it calls the “secure, scalable and reliable” Libra blockchain. Blockchain is a database that shares digital information across a network of linked computers.

Pessimists, however, point out that the Libra blockchain will be powered by open-source software that could be vulnerable to security breaches.

The Libra Association says privacy on its blockchain will be similar to that of existing blockchains —  a transaction will include only the sender’s and receiver’s public internet addresses, the transaction amount and a timestamp. No other information will be visible, Libra says.

The association says it won’t keep any personal data about users of the Libra blockchain. As a result, Libra says it cannot and will not profit from that data.

A number of organizations question whether Libra can live up to its privacy promises.

The Electronic Privacy Information Center, a nonprofit research center, doubts Facebook’s ability to protect consumers’ financial data. Similarly, the Open Markets Institute, a nonprofit that combats corporate monopolies, maintains that Facebook can’t be trusted to manage banking matters, such as currency transactions.

“Given Facebook’s record and stated views on privacy, why should anyone believe that claims and commitments about privacy made now will be maintained?” asks Public Citizen, a nonprofit consumer advocacy group.

When will Libra be available?

Libra is supposed to be launched in early 2020, but skeptics doubt that’ll happen, given the regulatory scrutiny the proposed monetary system already faces.

In July 2019, Marcus, the Calibra executive, vowed that Libra would not be released as a currency until regulatory concerns have been “fully addressed” and necessary approvals have been received.

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