Facebook’s Libra: Questions Answered

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SEATTLE, Washington — The world of money is changing rapidly as digital finance becomes the new norm. However, economists and governments throughout the world still don’t know what role cryptocurrency may play in this digital shift. Facebook plans to launch the Libra in 2020. Many, including the U.S. government, are deeply concerned about what ripple effect this new currency could have on the world. Here are important facts to know about Facebook’s Libra and the controversy behind it.

What is Facebook’s Libra?

Libra is a cryptocurrency created by Facebook. While Facebook developed Libra, it will not govern it alone. Instead, 28 organizations, including eBay, Uber, MasterCard, Visa and PayPal, have partnered together and formed the Libra Association in order to govern Libra and oversee its launch. Facebook aims to partner with 100 organizations by the time of its launch.

The Libra Association will be considered an independent nonprofit with headquarters in Switzerland. In addition to Libra, Facebook has also developed Calibra, which is a cryptocurrency wallet that will be built into Facebook Messenger and WhatsApp in order to send digital currency with ease.

How is Libra different from Bitcoin?

Although Bitcoin and Libra are both cryptocurrencies, the two have notable differences. As explained by PC Magazine, Bitcoin and Libra are different in four significant ways:

  1. Centralization: Unlike Libra, which is controlled by the Libra Association, Bitcoin is fully decentralized. This means no single entity has control over it.
  2. Value: Bitcoin is also not backed or governed by any government currency; whereas, Libra is backed by the four leading national currencies the Dollar, Euro, Pound and Yen.
  3. Money supply: Since Libra is connected to other currencies, the Libra Association controls its money supply based on supply and demand fluctuations. Bitcoin, on the other hand, is capped at 21 million Bitcoins.
  4. Blockchain type: The blockchain platform that these two cryptocurrencies use to document transactions differ in one important way: Bitcoin uses a “permissionless” platform, and Libra uses a “permissioned” platform. Through this permissioned blockchain, Libra will be able to complete 1,000 transactions every second. Although more efficient, some worry the permissioned blockchain is less secure.

Where is Libra in the process?

Facebook has announced that Libra will launch in the first half of 2020. However, the U.S. government has many concerns about Libra, which could delay its launch or potentially eliminate the launch entirely. The concern about Libra is so great that Representative Maxine Water, the Chairwoman of the Financial Services Committed has stated that she is currently pushing legislation that will make it illegal for big tech companies to get involved in the financial industry.

Rep. Water made this announcement after Congress held a two-day hearing with David Marcus, a Facebook Executive, this past July in order to investigate Facebook’s intentions for Libra and Facebook’s past mishaps with security. Not only did Congress have concerns about the repercussions of Libra but also about Facebook’s role in controlling Libra.

What are the concerns?

As explained by Federal Reserve Chairman Jerome Powell, Libra raises concerns regarding “privacy, money laundering, consumer protection and financial stability.” Although Marcus testified that the Libra Association will not compete “with any sovereign currencies,” Congress still fears that Facebook’s Libra will undermine central banks and sovereign currencies, including the U.S. dollar. Marcus also stated that the Libra Association and Facebook’s Calibra have full intention of complying with all U.S. tax, anti-money laundering and anti-fraud laws.

Furthermore, Congress also has concerns regarding scamming due to a limited vetting process for developers. Marcus explained that the Libra Association would promote “financial literacy” and work to educate users on how to avoid scams. Senator Sinema of Arizona stated that this will actually increase the likelihood of people being “scammed using Libra.” Lastly, Congress has deep concerns about the potential for money laundering due to the anonymity of cryptocurrency transactions. Congress fears that Libra would be helping drug dealers, tax evaders and terrorists

Financial Inclusion

The two primary appeals for services like Bitcoin or Facebook’s Libra are that they could provide financial inclusion for those who do not have access to a bank and it could lower transaction costs. Through the promotion of digital finance, these kinds of services could help provide access to financial services for 1.6 billion people in developing countries. Anyone who has access to a computer or smartphone can store and manage their money through these apps.

An increase in financial inclusion has the potential to boost annual GDP in developing countries by $3.7 trillion by 2025. Approximately one-third of this boost would come from the additional investments the broader financial inclusion of people would bring. An increase in the GDP in the developing world could help “create up to 95 million jobs across all sectors.”

One potential benefit of Facebook’s Libra and Calibra is lower transaction costs for sending money across borders. Currently, sending money costs 3.5 percent per transaction on average. In 2018, people sent $689 billion to family members in other countries, creating $25 billion in transaction fees. The Libra currency would be a considerably cheaper way to send money.

Facebook’s Libra has the potential to promote economic development and reduce poverty throughout the world by increasing financial inclusion. Many individuals and governments, nevertheless, are cautious about Libra because they fear the potential repercussions are simply too high to justify. However, it’s too soon to determine whether these concerns will be enough to prevent Libra from launching in 2020.

Ariana Howard
Photo: Flickr

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