Facebook revealed its long-awaited plans to launch their cryptocurrency earlier in 2019. “Project Libra” is a new type of digital currency designed to make it accessible for billions across the world through apps and social networks. The initial announcement suggested that the digital payment system would be set up in a dozen countries by the first quarter of 2020.
For most of the world, this would mean an easy pathway to using cryptocurrencies and every benefit that comes with it. But from the perspective of global economic experts, Facebook’s Libra would push the world to reconsider the supremacy of the United States Dollar as the anchor currency.
In the latest developments, on 23 January 2020, at the annual World Economic Forum, the panel on “Challenging the Dominance of Dollar” discussed how Libra evoked a future digital currency. Paraphrasing Gopinath, an IMF research department director, Libra is one of the major factors initiating changes in the world financial system. While the world is weighing the impact of Facebook’s cryptocurrency Libra, let us adjust our focus to how things are looking so far.
The Libra Network
The Libra Mission started out as a global and digitally native cryptocurrency developed on blockchain technology. Users would be able to use this reserve-backed digital currency to send, receive, and protect their funds through a more transparent global financial system. Those with accounts on any of Facebook’s platforms such as Messenger, Whatsapp, and other social networks could use Libra and transact with those who have these accounts. Alongside this, the network also is planning to serve the 1.7 billion people in the world who do not have access to conventional financial services.
The news of the Libra launch is one of the noteworthy potential developments in the financial world. Professors are even encouraging students to follow the story and learn about the implications of Libra on the world. If students of financial studies need any help, they can reach out to the academic professionals at Essay Pro to receive insightful notes on financial research papers. It is time to be aware of the latest news, which could gain you some extra credits.
Libra is aiming to promote an ecosystem of its products and services, making its use and integration into daily lives easier. While Libra has many characteristics of other cryptocurrencies such as blockchain technology, the significant difference is that it relies upon a much more official and centralized infrastructure called the Libra Association, working with the backing of other major businesses.
What Is The Libra Reserve?
According to Facebook, a cryptocurrency should be stable, subject to low inflation, recognized worldwide and exchangeable for its value. The Libra currency is designed and is expected to meet all these requirements, with the aim to make it available to a new monetary system around the world.
Facebook adopted the “stablecoin” model, complete with an ecosystem and a wallet called Calibra, which is launching in 2020. They offer a cheaper way to transfer funds worldwide, by avoiding bank charges and avoiding capital controls.
The design of its stability hinges on a reserve of real assets, which Facebook calls the Libra Reserve. In contrast to the majority of existing cryptocurrencies, Libra functions on a competitive exchange network that governs the purchase and sale of Libra. With this reserve in place, users of Libra receive assurance that they can convert their digital money to multiple local fiat currencies depending on the exchange rate, much like how currencies are exchanged for each other whilst on vacation.
Similar to how other traditional currencies have been introduced into the system, Libra will also be backed by real assets. In Libra’s case, low-volatility assets would support the currency like government securities in terms of money from reputable banks. A basket of currencies, including US dollars, Euro, Japanese Yen, British pound and Singapore Dollar would also back the range of assets.
These assets make it easier to acquire and hold on to digital money with little risk as well as prevent Libra from facing price volatility like Bitcoin. As the system keeps a Libra reserve consisting of currencies and assets for each Libra created, it helps in building trust in the fundamental value of the currency. If the plan is successful, by 2020, the world would be seeing a shift in the cryptocurrency landscape, with increased accessibility and transparency.
What is Expected
1. Powerful Force in Developing Countries
Libra is expected to be the global “stablecoin”, limiting the volatility associated with the other cryptocurrencies. It is interesting that 70% of small businesses in developing countries lack access to credit and migrant workers lose $25 billion every year through remittance fees. Facebook intends to attract these users through offering the alternative to switch from unstable local currencies for international transactions.
2. The Libra Association will Take Over
When the project was launched, there was an increase in the speculation over how Facebook would rise to be a huge power in the global capital markets. However, Mark Zuckerberg had pledged to the US regulators that Facebook would be stepping down from the project. He was set to handover the governing control to an outside agency, the Libra Association, a Switzerland-based consortium. Today, the body comprises companies, non-profit organizations, and many academic institutions all collaborating to help with the governance and handling of the network.
The association was announced in January 2020, forming a five-member team to govern the ongoing development of the project. These members of the new “Technical Steering Committee” are responsible for long-term strategy as well as managing the Libra reserve. It will also make decisions on which social projects to support to foster additional financial inclusivity. Nevertheless, the name of Facebook is closely tied with Libra. If it is successful, it will almost certainly influence the market value of the social media giant.
3. Developing the Libra Blockchain
The Libra White Book details the plans for successful launch in the first six months of 2020. The association is currently developing API’s and libraries to allow users to interact with the existing prototype. The team also plans to devise a structure for the further enhancement of the Facebook blockchain.
The blockchain was also subjected to tests, along with its integration with supporting entities such as digital wallet and exchange services. In the last few months, the team has been working with communities to record reactions on the Libra blockchain model to prepare it for the big launch.
Facebook still seems to be in the initial phase of cryptocurrency development. However, the technical aspect is not the only thing that is delaying the release.
What are the Concerns?
The regulators in various jurisdictions across the globe have already raised their concerns on its implementation. Later in 2019, the European Union was keen to propose new regulations for cryptocurrencies. The officials predict that a digital currency such as Libra could have systemic effects on the economic stability of the entire EU.
Facebook had also reportedly met with officials from the Bank of England as well as the US Treasury to discuss the opportunities and risks of using their cryptocurrency.
Libra’s scale is another thing that countries are worried about. Their millions of users across the world would be able to use this currency. While Facebook puts this forward as an encouraging outcome, the regulatory officials from the user’s country might not welcome it with the same enthusiasm. The EU is insisting on crypto regulations that focus on defending financial stability, protecting consumers and tackling risks of cross-country money laundering using cryptocurrency.
Many countries are already working on their own virtual currencies to compete with Libra. Sweden has been developing one for years, while the Banque de France is said to launch an experimental digital Euro. The American Fed and the Chinese Central Bank are alos looking at digital currencies more closely with the looming threat of Facebook’s cryptocurrency.
Central banks in the US and Europe have also voiced their opinions against Libra, suggesting that the currency would result in a grey economy and reduce the transparency of transactions. Switzerland’s President and finance minister Ueli Maurer has come forward saying that “Central banks will not accept the basket of currencies underpinning it”. He makes the bold claim that Libra has “failed” already.
Another major hurdle for Facebook to look into is whether the public will trust social networks enough to use them for transactions. It is also super important to raise awareness about cryptocurrencies, its impact, and benefits before launching it. A majority of the target users are simply not educated enough about what cryptocurrency is and how it would function. Moreover, the lack of centralized governance and concern for security issues needs to be resolved before introducing it into the markets of developing countries.
There is also another opinion that Libra does not fall under the category of “crypto”. It only has the same database structure, while the currency would be running similar to an exchange-traded fund (ETF), only without a quoted price on the stock market. This would further eliminate all the benefits that Facebook claims its cryptocurrency would achieve.
The announcement of Libra has opened Pandora’s box, with the past issues of data collection and targeted content resurfacing. Since Facebook has failed to give direct guidance on Libra, Zuckerberg has been forced to come out and assure everyone that there would be no transaction data gathering.
As the year progresses, Libra seems to be facing a fresh wave of doubt.
Where Libra Stands Now
It is not the first time that Facebook finds itself in hot water when it comes to virtual currencies. A decade ago, in 2009, another digital currency called Facebook Credits was implemented to enable people to purchase items on social networking sites. It was available in 15 currencies throughout the world. However, the project failed to gain traction and was then shut down less than two years later.
When the launch of Libra was made public, the list of backers included many prominent companies who were called founding members and were tasked with boosting the public profile of Libra. By the time of the signing, the 27 big participants had already reduced in number. PayPal, Visa, and MasterCard have already backed out. The Californian technology company, Stripe, also declined to participate by saying that Libra has potential, and they would be open to collaboration at the later stages.
Later on, the travel site Booking.com, Mercado Pago and online auction site eBay have also quit the team. In January 2020, Vodafone also abandoned the Libra Association. With this much-diminished group of members, the Libra mission might not be well-received either in the financial circles or by the regulators.
Though the initial plan was to release the digital currency in the first half of 2020, so far, there is little to no clarity on what the regulations would be or how the launch would be executed.
What to Expect in 2020
Regardless of the backlash, the Facebook team still seems to be fairly confident of their cryptocurrency project. According to David Marcus, the head of the Facebook Messenger Unit, the Libra project will continue to stick to its original purpose, to offer a gateway to the unbanked and build a new protocol to disrupt how money is handled worldwide.
Meanwhile, the Libra Association is still gathering new partners, with no strict timeline or explicit information on who would become block producers. When launched, the cryptocurrency would be used within the Facebook ecosystem, with the potential to reach millions of people without access to banking facilities in the world.
Facebook and the Libra Association have to overcome several regulatory hurdles before even attempting to launch the currency. The concerns about fraud and money laundering would then follow. This is particularly necessary for launching in developing countries such as India, which is the primary target for Libra’s market. With these countries undertaking a hostile approach towards cryptocurrencies in recent years, clearing the regulatory hurdles is going to be crucial.
It is impossible to say at the moment whether the launch will happen as predicted in 2020. The project still seems to be vague, and the acceptance by regulators is still under debate. The main question is acceptance – not only from the public but also from the regulatory bodies.
The widespread opinion is that Facebook jumped on the blockchain wagon without proper planning and has certainly stained the company’s reputation. The question of when Libra will launch will certainly not be answered in the immediate future.