It’s Not About The Benjamins
A new cryptocurrency powered by Facebook seeks to establish the company as a global financial powerhouse.
Giovanni di Bicci de’ Medici and the bank that he founded, have for centuries been regarded as the creators of the modern financial system. That title, however, may soon pass to Mark Zuckerberg and the new consortium that is tasked with managing what could be the most disruptive financial instrument ever to be created.
According to the Financial Times, the G7 nations plan to set up a working group that will evaluate all of the risks associated with dominant cryptocurrencies such as Libra, the name of the proposed digital financial instrument that would be created by Facebook.
The participants of this review group will examine and analyze the potential for Libra to be used for illegal activities and exploited by money-launderers.
It is not known how many of Facebook’s 2.4 billion users would actually make use of Libra, but given the size of the social network, it is quite likely that the crypto-currency could become a financial powerhouse.
French finance minister Bruno Le Maire said that Libra must not be allowed to “become a sovereign currency,” and several members of the European Parliament have expressed concern that Facebook risks becoming a shadow bank.
Facebook stated that they plan to partner with some of the biggest names in payments and technology including Visa, Uber, Vodafone, and Spotify.
A global digital currency run by Facebook would no doubt make sending money across the world as easy as texting, and it would further offer many benefits to users such as no fees, no delays to cash flow, and protection of wages from runaway inflation.
The new currency could also trigger a new wave of innovation in finance, much like the internet did for online services, and 4G did for mobile apps.
On June 18th, Facebook promised to launch Libra within one year.
Worth your wait in history
The name, Libra, refers to an ancient Roman unit of mass, and is, in fact, the word for pound in several languages. This reference to the most powerful and influential empire in history is no accident and is indicative of the ambitions that the leaders of Facebook have for the new currency.
If all of Facebook’s users converted just a small piece of their existing savings into Libras, it would immediately become one of the world’s most circulated currencies.
While most people know Facebook as the owner of the popular social network by the same name, it is less commonly known that Facebook owns Instagram and WhatsApp, both of which would be utilized for the transaction of the new currency.
Libra would be different from existing fintech firms in that there would be no fees for wire transfers, and it would stand out from PayPal and Venmo since it would not require a bank account. Libra would in essence function like bitcoin, however, Libra will be capable of changing hands in seconds, rather than minutes, and for almost no cost whatsoever.
At launch, it is claimed that the system managing Libra will be able to handle 1,000 transactions per second, which is more than 100x what Bitcoin can currently handle.
Not only will Libra be quick, but it will also be far more stable than other cryptocurrencies because Libra will be backed by real money which is regulated by a central bank.
Power to the powerful
If the Libra is created, it will put unprecedented power into the hands of Facebook and Mark Zuckerberg. This gives many lawmakers pause, along with the fact that Libra has many moving parts, and thus much can easily go wrong.
Facebook is already facing political challenges due to their recent mishandling of user data and condoning the spread of misinformation. As a result, some lawmakers in America and Europe have called for anti-trust suits, which could result in the tech giant being broken up into smaller companies. These lawmakers are unlikely to be supportive of allowing the new currency to ever see the light of day.
While Facebook claims that it has a working prototype, the technology has yet to be tested, and skeptics doubt that a 100-node system could actually process thousands of transactions per second. Furthermore, hackers are likely salivating at the prospect of all the new opportunities that Libra will offer them, and several lawmakers were quick to express their dismay over allowing the politically embattled organization to possess such financial influence on a global scale.
I can already hear the conspiracy theories
Of course, Facebook expected such a response, and so the answer has already been provided in the form of the Libra consortium.
Planned to be based in neutral Geneva, the proposed consortium will take control of the new currency before the first transaction ever takes place. The consortium will also manage the currency reserves that back the cryptocurrency.
To prevent the mixing of social and financial data, Facebook has already created Calibra, a subsidiary that will run Libra services within its various apps, such as WhatsApp and Facebook Messenger.
The bottom line for Libra is that Facebook hopes to bring to the world a global cryptocurrency that does everything that Bitcoin had hoped to offer, but without the kinks, libertarianism, black market activity, volatility, and lack of accountability. It further hopes that Libra will be able to transact almost instantaneously.
While the vision is grand and the benefits are certain to change the world, policymakers and financial professionals should not be so quick to trust the controls put into place by the proposed consortium. One year is not a lot of time to identify all of the potential pitfalls that could arise from launching this currency and subsequently making it globally available. If history has taught us anything, it is that moving too fast always leads to a painful outcome for many.
Also concerning is that it is not yet clear what risks users of Libra will face with currency exchanges. Furthermore, the Libra blockchain is still under development and there is little detail about how the system actually works.
Regardless, if Libra does launch, it could be what finally brings cryptocurrency into the mainstream, and thus would be the future of money.
If this happens, there will be all sorts of unseen consequences for the world economy, and so regulators need to be vigilant as the Libra project develops.