A Quick Lesson on LIBRA
Not heard about Libra yet? Facebook announced details about its proposed cryptocurrency (Libra) this week, and set the financial services industry on fire! They could launch Libra as early as 2020, giving its 2.7 billion users the capability of paying and receiving money via WhatsApp or Messenger. Global transactions without fees!!!!
If you aren’t interested in listening to all the analysts and reading all the articles posted within the first 24 hours, here are the basics that I have been able to glean from this information. (My first exposure to Libra was on NPR, but you might want to check out Bloomberg, where you can listen to several analysts give their expert opinions on the subject.)
Is it like bitcoin?
Both bitcoin and Libra are fall under the classification of “cryptocurrency” and are based on block chain technology. Regulators would prefer neither one to exist, citing concerns about money laundering and black market usage. However, that is where the similarity ends.
Libra is considered to be “stablecoin.” What does that mean?
This means that the currency will be backed by government regulated currency and securities. The supply will not be limited. You won’t need to kill the environment to mine more currency, you simply exchange currency for more Libra. The value will be stable because it will be backed by an international basket of currencies and assets (it may fluctuate much like the value of the dollar fluctuates), unlike bitcoin, the supply of which will be capped and the value of which is speculative. The stable value of Libra will enable its use in everyday transactions.
Who will control Libra?
At the time of the announcement, Facebook plus twenty-seven other organizations, including Visa, Mastercard, and Uber, are part of a non-profit partnership based in Switzerland that will govern the currency. Building the currency with blockchain technology will allow for decentralized governance, according to analysts. This non-profit partnership is expected to grow to about 100 by the time Libra is launched. Facebook will simply be just one vote of at least twenty-eight. (This addresses the issue that most would not trust Facebook to essentially operate as a global central bank.)
What will have to happen before Libra launches?
According to the NYT and WSJ, Libra’s debut is not a slam-dunk. The organizations in the partnership have to agree on the final design of the currency. Then they have to find banks willing to hold that basket of currencies that support the currency. The final, and perhaps most difficult hurdle will be to get regulators on board with the whole idea. The UK and France have voiced concerns, as have US regulators (Rep. Maxine Waters, and Jerome Powell) and the Senate Banking committee has already scheduled a hearing!
Why are regulators so fearful?
Think about the potential size of what could end up being an alternate global financial system!!!! It is little wonder they are fearful! (Think systemic risk and "too big to fail.") Of course, money laundering and dark web transactions are also reasons given to stop Libra before it starts, but Libra’s David Marcus explained how Libra addresses this. Link to interview with him on Bloomberg and CNBC for more detail. I did my best in the next paragraph to summarize the explanation.
In today’s world, much of the money laundering happens in cash. By making all Libra transactions digital, there will be a record of each one. While a single authority may not see all transactions, each transaction will be recorded. Moving currency into and out of Libra will be regulated. Anyone using Libra will have to provide some form of government issued ID. The system will not allow “shielded” transactions (which bitcoin does).
What about my privacy? Can I trust Facebook?
The Libra operation has been and will remain firewalled from Facebook. Financial data will be kept separately from any personal data Facebook currently has. Now, in terms of whether or not you trust Facebook to maintain data and privacy at all, that will be the call of every individual. The NPR piece mentioned that the door will be left open for Facebook to track and sell transactional data if the customer agrees (with personal information blocked.) To me, that means the data will be tracked regardless.
Does a business have to be part of the partnership to use the system?
No. It looks like anyone will be able to build a wallet/key on the system.
How will you actually use Libra?
There is a separate subsidiary called Calibra that will be the consumer-facing entity managing the system. Basically, you need a Libra Wallet, as does anyone you are trying to pay. When you purchase Libra, a bank will have to hold the basket of currency/assets equal in value. (The NYT explains this part well.) The initial transfer is from a bank account or debit card. You then use your “wallet” to pay or receive Libra from other people.
What is still not clear to me is how exactly this might serve the 1.7 billion people world-wide who are “unbanked.” I am wondering of the overlap between this group and the 2.7 billion Facebook users. At a minimum, someone will need to be a user of Whats App or Messenger to create a “Wallet” to engage in transactions with Libra. I’m just not sure how one might “cash out” their Libra without a bank. (Remember that Marcus explained everyone using Libra will need a government issued ID.)
What is the competition?
In terms of transactions, Libra will compete with many of those in the partnership, like Visa, Mastercard, Paypal, Stripe, etc. However, by making global payments as simple as sending an email or message, the potential market is huge. The partners will have potentially enjoy a share of a much bigger pie.
It is also expected that Google and Apple will eventually come up with something as well, as they have been dabbling in the field already.
About the Author
Beth Tallman entered the working world armed with an M.B.A. in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducting student workshops, and developing finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.
To get access to NGPF answer keys, assessments, and teacher-only resources: create a FREE Teacher Account