Facebook’s latest venture into cryptocurrency
Facebook’s latest venture into cryptocurrency has been met with some hot opinions on both sides (here’s looking at you AOC ).
We separate the facts from the fabrications and give you the lowdown on what Libra really means for the world’s financial future.
What is a cryptocurrency anyway? Isn’t that what made 50 Cent even richer? 💸
Essentially, a cryptocurrency is a digital asset which has real-world value. It’s a fairly new invention, with the first cryptocurrency, Bitcoin, first released back in 2009. It takes its name from the cryptography, or secure code, which is used to protect the creation of assets, transactions, and withdrawals. Cryptocurrencies are decentralized and work through distributed ledger tech, also known as a blockchain. There are over 4,000 different cryptocurrencies now in existence.
And yes, American rapper 50 ‘Fiddy’ Cent has done pretty well out of the most commonly known cryptocurrency, Bitcoin. Having agreed to accept digital payments for his 2014 album Animal Ambition, Fiddy promptly forgot about the accumulating Bitcoins and let them increase in value. The result is 700 Bitcoins which are now worth around $7million.
How is Libra different from the other cryptocurrencies out there? 🤔
For starters, Libra is more environmentally friendly than Bitcoin as it doesn’t need to be ‘mined’. The process of mining coins requires energy-intensive computer calculations; between 2016 and 2018 this mining produced up to 13 million tons of carbon dioxide. Facebook has also created a bespoke blockchain from which Libra will be run in order to scale users more quickly. #optimism
Initially this network will be closed so that only a select number of people can power the software and verify transactions; again, this a change from typical cryptocurrency behavior which allows the blockchains to be run by anyone with computer access and some IT skills.
Libra may also be less volatile than other cryptocurrencies because it’s tied to a mix of global assets: it functions as a ‘stablecoin’ which tracks the value of currencies the dollar or euro with the aim of eliminating the fluctuations in value many other cryptos experience.
When can we expect to see Libra launching? ⏰
It’s to be expected that Covid-19 will disrupt even the best laid business plans, but Facebook is still making progress even now. Although initially scheduled for launch in summer 2020, it now seems more realistic that we’ll see Libra fully emerge in 2021; a team in Dublin are already working on Libra’s digital wallet, Calibra, and 50 more hires are planned by the end of 2020.
However, the health crisis may have less impact on Libra’s debut than the regulators. Despite Facebook making concessions such as scrapping its ‘permissionless’ system to tighten security, enhancing scrutiny of wallets and users, and abandoning attempts to create a ‘floating’ currency as opposed to one tied to government currencies, regulators in countries such as France and Germany are still trying to block its launch. Some countries, like India, are also tightening their restrictions for digital currencies. For now, we’ll all just have to wait and see how Facebook maneuvers Libra past the politicians and into the mainstream.
Why is Facebook venturing into finance? 💰
Clearly Facebook has done fairly well in its main business – getting ever-more users to join and engage with its social media platform. However, its growth has slowed as it attracts fewer users each year (mainly because everyone we know is already on Facebook). This means Facebook must diversify in order to keep shareholders happy and maintain healthy growth; hence, the so-called ‘Zuck Buck’.
During a speech to Congress at the end of last year, Facebook’s supreme ruler Mark Zuckerberg stressed the importance of the continual American innovation needed to remain ahead of
China other world powers. Despite the US Federal Reserve having no plans to issue a digital currency soon, Zuckerberg believes that China’s impending digital renminbi poses a threat to American financial dominance. In fact, April saw China’s digital currency enter the market testing phase, so they may yet beat Facebook to the finish line.
Facebook is also claiming that Libra will be for the good of developing economies too. Providing access to “better, cheaper, and open financial services” is the flag they’re flying to justify their foray into finance.
Does the world need better access to financial services, or is this a marketing ploy? 🤨
In fairness to Facebook, their advertised goal is a noble one. Around 1.7 billion people don’t have access to a bank account, which excludes them from the world’s economy and makes it very difficult for them to improve their situation. Far from being a developing-world problem, this figure includes 14 million people in the USA and nearly 40 million in Europe. However, most of these people do have access to a mobile phone. Facebook’s goal is to put all the banking services they need right in their hands.
To further prove our pal Mark Z’s point, The Financial Times released data showing that money sent home by migrant workers now exceeds foreign direct investment – this is huge. Also known as remittances, these funds, often sent by those who can least afford to give away money, now make up to a third of some developing countries’ economies. As we wait to see what economic impact Covid-19 will leave in its wake, a tool such as Libra could present a lifeline to those without access to traditional financial systems.
Before we start tearing up over Facebook’s noble agenda, it’s important to note that there already many non-profit organizations and programs dedicated to achieving the same goal as Facebook. As a company worth close to $100 billion, give or take a few billion, it’s worth asking why Facebook isn’t investing in one of these charitable missions instead of developing its own proprietary technology.
Will Libra be linked to Facebook’s social network? 🤳
On the surface of it, no. Facebook announced that Libra will not be managed by Facebook, nor will data be shared between social platforms and Libra – Facebook merely assisted in the genesis, creation, maintenance, facilitation, and financing of the project 🙄. The pseudonymous nature of Libra (users can use fake names) means that, in theory, user data cannot be associated with any social media profile.
As for who will be managing Libra and its associated crypto wallet Calibra, that falls to the Libra Association. A collective of financial, not-for-profit and commerce organizations, the Libra Association includes 22 paid-up members such as Uber, Lyft, PayU, Women’s World Banking, and micro-loan platform Kiva. Mastercard, PayPal, eBay and Visa were all previously attached to the project but have since abandoned their involvement. Each member has reportedly contributed a minimum of $10 million to the venture, giving Libra a healthy bank balance before they’ve even got off the ground. The Association will base themselves in Geneva and, according to Facebook, will be independent from both Facebook and governments.
Libra transactions will also be available to make via Facebook’s apps. These include WhatsApp, Facebook Messenger and most likely Instagram too. David Marcus, the man in charge of Facebook’s Libra project, says that although it’s a Facebook-led initiative, it will not be a Facebook-controlled one. Critics say that there are still several privacy and data concerns, including how Facebook will silo users’ data.
Hasn’t Facebook been in trouble over misusing data before? 🕵🏼
That’s putting it mildly. The well-publicized Cambridge Analytica scandal in 2018 saw a British political consulting firm manipulate voters using data mined from Facebook. The incident left Facebook in major hot water with several governments, and users were furious that Facebook had allowed a third party to abuse its platform.
There has since been increased scrutiny over the use of data ever since, and US congresswoman Maxine Waters, chair of the House Financial Services Committee, called for Facebook to halt Libra until regulators can conduct a thorough assessment of the project. She aimed both barrels at Zuckerberg and Facebook during a hearing this month, saying that “Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data… it would be beneficial for all if Facebook concentrates on addressing its many deficiencies and failures before proceeding any further.” Ouch.
Although Facebook has agreed not to proceed until regulators give them the A-OK, a cryptocurrency may still be a hard sell for a company with such a checkered past. The ‘deficiencies’ Waters is referring to include concerns over terrorists using the platform to organize, radicalize, and recruit new members, as well as the facilitation of child abuse and political interference. Consequently, neither governments nor the general public are particularly confident in Facebook’s ability to keep them or their data safe.
What’s Facebook doing to try and regain some trust? 👀
In a bid to appear as transparent as possible, Facebook is making Libra an open source platform with a ‘bug bounty’. This means that anyone who discovers a design or security flaw will be rewarded for alerting Facebook to the vulnerability rather than exploiting it for nefarious purposes.
It’s also been announced that Libra will use the same anti-fraud and verification processes as banks and credit card operators. Users will also be reimbursed if they are defrauded or have their digital wallet hacked. However, questions have already been raised around how a pseudonymous account can be adequately protected from fraud, criminal activity and the funding of terrorism.
While these efforts are all well and good, cryptocurrencies have typically been volatile, and some prominent early investors lost money to theft. Whether due to a lack of understanding or a lack of transparency, cryptos are still mistrusted by many. It could be argued that launching a cryptocurrency is therefore a strange move for a company which is already battling to appear more trustworthy.
Although ostensibly Facebook’s mission is for social good, few will be surprised to hear that Facebook hopes to make profits from its involvement. Mr Zuckerberg
(under)stated that the company “may see a positive business impact” due to higher ad prices paid by businesses which want users to buy directly from them using Libra.
It’s too early to say what Facebook’s user education concerning Libra would be, but steps will have to be taken to ensure that Libra users know exactly what they’re signing up for. Any heavy ‘encouragement’ from Facebook’s platforms for users to buy the cryptocurrency would no doubt have legislators baying for blood.
Why is the US government on such a downer about Libra? 🙁
Aside from genuine concerns about privacy and the misuse of data, the US government knew that Libra’s former incarnation posed a real risk of causing instability in markets and sovereign currencies. The decentralization of currency (meaning it’s not attached to any bank or state) can be a good thing because it keeps dominant financial forces in check and frees up access to markets. On the other hand, it is vulnerable to misuse and volatility.
The revisions recently made to Libra – namely ensuring Libra coins are backed by a reserve of assets made up of cash or cash equivalents and very short-term government securities – should help to reduce the threat of instability, but regulators still aren’t convinced. Mark Zuckerberg stated that Libra is “not an attempt to create a sovereign currency”, but it’s easy to see how such a financial vehicle could become a preferred method of moving money across borders.
Why doesn’t the US government launch their own digital currency and take the power out of Facebook’s hands? ✊
There are a few reasons why the government isn’t in a position to launch a digital dollar. Firstly, the expense and resources required to develop, build and maintain something as complex as a cryptocurrency are likely to be beyond the US government’s reach at this point. Outsourcing is fast becoming the government’s main approach to innovation and tech, as evidenced by the 2019 fracas surrounding their $10 billion cloud contract, which has since been awarded to Microsoft.
Unlike the US government, which funds itself through taxation, Facebook and the members of the Libra Association are all private organizations, giving them the power to make a profit from any product or service they offer. Libra will be funded not only through the initial member investment; it’ll also charge a small fee on every transaction. While this may seem to go against the ethos of a ‘liberalized cryptocurrency’, Facebook claims it is necessary to prevent spammers and denial-of-service (DNS) attacks on the system. As with credit card terminal providers and services such as PayPal, vendors can then either absorb the charges or pass the cost on to consumers.
Furthermore, pushing out a digital dollar before regulators have tested and assessed the risks involved wouldn’t be smart. Patrick Harker, president of the Philadelphia Federal Reserve, said earlier this month that he doesn’t think “we should be the first mover as a nation to do this”; meaning it’d be nice if some other country took all the risks first so that the USA could see what not to do. Mr Harker did, however, admit that it was “inevitable” that central banks including the Fed will begin issuing digital currencies.
· Facebook has formed an alliance with several other organizations to create the Libra Association, which will be responsible for the roll out and management of their new cryptocurrency.
· Libra has been developed to provide “better, cheaper, and open financial services”, and will allow people without bank accounts access to the world’s economy via mobile technology.
· Facebook has developed its own blockchain platform and digital wallet (Calibra) from which Libra will be run.
· US regulators and congress are concerned about Facebook’s ability to keep user data safe; there’s a lack of trust from government and the public due to Facebook’s recent scandals.
· Facebook will not be involved with the launch of Libra until US regulators give them the go-ahead.
· Libra will be entirely independent of Facebook, with CEO Mark Zuckerberg assuring US legislators that data will not be shared between Libra and Facebook’s other platforms.
 ‘Mining’ Bitcoin takes more energy than mining gold, Nature, accessed 25/10/19, https://www.nature.com/articles/d41586-018-07283-3