Facebook has spurred a lot of mixed reactions from governments, banks as well as from the general public since their announcement to introduce their cryptocurrency, the Libra. Libra is meant to be a stable coin based on the blockchain technology to take care of the volatility that is a significant characteristic of most cryptocurrencies such as bitcoin.
Facebook claims that their crypto, Libra, will be used for everyday transactions such as buying your morning coffee, groceries as well as paying for your ride at Uber. Libra will be launched in 2020, but it already has people raising eyebrows. Is it disapproval, or is it worry?
Libra Cannot Replace the Sovereign Currencies
There is a lot of hype surrounding Libra coin. Some people think of it as the beginning to the end of the sovereign currencies. This is because Libra draws people towards cryptocurrencies, while others view it as a way of wiping out the banking system as we know it. When you think about sovereign currencies, it is almost impossible to wipe them out. This could only happen if governments were to accept Libra in place of their currencies, which is not likely to happen any time soon.
Libra will be pegged to low-risk securities and several currencies, which means that changes occurring within the said currencies will result in a difference in the value of the Libra. People who choose to buy Libra for transaction use will, therefore, be exposed to the risk of foreign exchange. Primarily Libra is not looking to wipe out these currencies as it is tethered to them.
Help for the Unbanked
The benefit seems to come in for the unbanked, especially in developing countries where most people do not have active bank accounts. People who will benefit include those who do not have access to banks, people with bad credit histories, those without genuine identification documents, those with criminal records, and those who do not have permanent addresses. All these people are unable to meet the know your customer requirements with the banks. These requirements are put in place to prevent money laundering and fraud. The Libra might come close to the pre-paid cards, but if Libra complies to the know your customer requirements, then these people are shut out.
The unbanked in developing countries are mostly poor people who have no business making international payments. Most of these people live from hand to mouth. Usually, these people earn money in their local fiat and use the same currency to buy daily essentials. They, therefore, do not need a bank account.
A Closed-Loop System
Libra will operate in a closed-loop meaning that it can only be used to pay for goods available on the Facebook platform and the associated apps. If you need to purchase something through a different platform, you will be required to convert your Libra into another currency. The problem is that Facebook is mainly an in-ads for companies, not a marketing platform the likes of Amazon. This is a problem as it means there is not nearly enough merchandise for people to buy through the Facebook platform. This problem hinders the usefulness of Libra. This issue can be solved, however, depending on the change with the partners to join in.
According to Libra, the identity of anyone transacting should not be revealed. It should be just a regular exchange like when using a dollar to purchase some dress in a store you need not identify yourself. However, online transactions are quite different. Different people like Donald Trump, the US president, have shown concerns towards Libra. Trump has said that it could provide a platform for illegal transactions such as terrorism and drug trade. The privacy given to operations will enable such activities to be conducted on this platform.
The large size of Facebook’s network would be enough to cause worries as sighted by Powell. He stated that illicit activities would be on the rise with the use of Libra coin. Study shows that about half of bitcoin’s transactions are involved in illegal activities. Bear in mind that bitcoin has a public ledger where a deal can be tracked down, unlike what Libra is suggesting. With its privacy measures, illegal activities will most likely go undetected.
Facebook has not shown proper protection of its users’ data as it has repeatedly suffered data privacy incidents. The most significant event is the 2018 data breach. This has resulted in concerns of how they will safeguard the financial data of the users with the Libra coin. In response to these concerns, Facebook states that all Libra activities will be conducted via the Calibra. Thus the data they have on their users do not mix at any point.
Libra uses rather new technology. The laws and regulations governing the new currency are still evolving, bringing about a lot of scrutiny from government and regulators. India’s economic affairs secretary, Subhash Garg, stated that Libra’s design had not been fully explained, which makes them uncomfortable with it. Due to Facebook’s broad base, among other factors, such a project needs high regulations to operate. The head of House Financial Services Committee, Jerome Powell, has called for the project to be halted for the time being as the concerns are being addressed. This will impact on the launch plans.
Libra was thought to possess the potential to bring billions of Facebook users to the crypto side. However, regulatory issues and other concerns present a huge barrier. This barrier may not only delay the launch but may also cause the death of the Libra coin before it can launch.