Social media has exploded with the news that social media giant Facebook plans to launch a global cryptocurrency by next year.
Called Libra, the digital currency will have its own place in the company’s planned digital wallet, called Calibra.
With the same name as the astrological sign, which is represented by the scales of justice, Facebook says the new currency’s mission is to “empower billions of people” and to “reinvent money” and “transform the global economy so people everywhere can live better lives”.
Reaction to the news has ranged from blisteringly critical to ravenously complimentary, as some politicians and banks condemn the move as subversive and destabilising, while supporters call it an important step in a new, freer world order.
Facebook itself is not pulling any punches when it comes to calling it a global gamechanger. Its White Paper on the issue states the aim is to create a more equitable economic system that makes international money transfers easier and cheaper, boosting global trade.
It has also been criticised for suggesting a political goal lies behind the creation of Libra, given recent public statements such as: “We believe that people will increasingly trust decentralized forms of governance”, and; “We believe that a global currency and financial infrastructure should be designed and governed as a public good”.
But how will Facebook’s new cryptocurrency work and why are opinions on it so divided?
— Justin Sun (@justinsuntron) June 18, 2019
How it works
Facebook will build its own digital tracking system for the currency, called the Libra Blockchain.
A blockchain is a highly secure way of keeping track of who has how much of a particular online currency.
“Blocks” of encrypted information, such as purchases or currency transfers, are linked in “chains”, a huge database, and transactions are processed and stored across thousands of computers spread around the globe.
To be able to earn and spend Libra, users would have to have the financial management program called Calibra. It’s like a bank account, but only online, and only for Libra currency.
While Libra is a separate entity from Facebook, Calibra will be owned and run by the social media company.
Eventually, consumers could use Libra “dollars” via their Calibra accounts to pay for goods purchased online, or to transfer Libra anywhere in the world.
Libra will have its own competitive “money market” of buyers and sellers, and therefore an exchange rate, so users can convert their local currency to the new money.
“From the beginning, Calibra will let you send Libra to almost anyone with a smartphone, as easily and instantly as you might send a text message and at low to no cost,” the Facebook announcement states.
“And, in time, we hope to offer additional services for people and businesses, like paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.”
Unlike some other cryptocurrencies, however, the currency is backed by more traditional assets so that its value stays stable, the company says.
That asset base will earn interest. Those combined assets are called the Libra Reserve, spread across different countries in a “network of custodians with investment-grade credit rating”.
The entire system will be overseen by The Libra Association, which Facebook says is an independent Swiss not-for-profit organisation with the mission to “empower billions of people through the creation of a simple global currency and financial infrastructure”.
The governing Council, and, from that, The Libra Association Board, will be made up of people with a sizeable financial stake in the currency ($US10 million at start-up stage).
What’s all the fuss about?
Whether they are for or against the launch of Facebook’s currency, commentators seem to agree that Libra will change the way the world does money.
The Australian finance sector is watching developments closely. NAB’s Business Banking chief Anthony Healy told The Sydney Morning Herald: “With a billion plus users on its platform, it is clearly a threat” to the banking industry.
However, Reserve Bank of Australia governor Philip Lowe told the Committee for Economic Development Australia this week that he didn’t want to “jump to conclusions” before seeing how regulatory issues were addressed by the company.
“I have long thought that a kind of cryptocurrency would not take off in Australia because we already have a very, very efficient electronic payments system that allows anyone of us to make bank payments to another person in five seconds just knowing their mobile phone number,” Bloomberg reports Lowe as saying in a Q&A session after his official speech.
But some other world leaders are a little more ruffled by the news.
In the US, the House Financial Services Committee chairwoman Maxine Waters was scathing, asking Facebook to stop developing the cryptocurrency until the government can investigate what it means for financial markets.
The US Senate Banking Committee will hold a hearing to discuss it next month.
“Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action,” Ms Waters said in an official statement.
“Facebook executives should also come before the Committee to provide testimony on these issues.”
In Europe, the French Finance Minister Bruno Le Maire slammed the plan, saying that Libra should never be allowed to become a sovereign currency.
He has asked the Group of Seven central bank governors to look into it and report back to him with haste. He’s also worried about the data the company will collect, and how it will be used.
Facebook has been in significant trouble in the past year about data and security issues, including accusations of harvesting of personal data for political use, attacks by hackers, and system bugs that published private posts.
German MP Markus Ferber said he believed Facebook was set to become a “shadow bank”, and that the world should be worried about that.
But not all of the press was bad.
The new Facebook-backed cryptocurrency Libra could be a big step for the hundreds of millions of unbanked around the world. It’s use of the blockchain makes a lot of sense. Could even curb corruption as a lot of int’l aid money intended for impoverished people never reaches them.
— Andrew Yang (@AndrewYang) June 18, 2019
Boston University senior lecturer Jay L. Zagorsky, on opinion website The Conversation, said while there were “some potential big downsides”, there were some good points about the new currency.
He wrote that because it was backed by assets held in a number of different countries, it would not be tied to the success – or failure – of any one government’s economic policy. He even suggested that it might actually help “lower the risk of high inflation in countries across the world”.
But, he warned that there were many risks, including that it would speed up a cash-free world. This would disenfranchise the “poor, elderly and unbanked, who would be pushed further to the margins of society and possibly become unable to take part in modern commerce”.
Professor Zagorsky also noted that there are costs to entering the currency ecosystem, such as having to purchase a mobile phone and internet service.