Facebook's cryptocurrency could be groundbreaking – but winning people over might be another story

If the social media company can gain the public's trust, when the books of financial history are written, Libra could easily go down as one of the big contributors towards global financial inclusion

Jason Choi
Wednesday 19 June 2019 09:57
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Introducing Libra Cryptocurrency

Facebook just announced its cryptocurrency project – titled Libra – backed by an impressive list of supporters. The vision is grand: to create a global reserve currency, built on a proprietary blockchain, and connect the 1.7 billion unbanked people with the rest of the world.

If anyone has what it takes to create a global reserve currency and get it in the hands of millions of users overnight, it’s Facebook. With giant mobile payment applications already permeating societies (e.g. WeChat Pay in China), it’s not too far-fetched to see Facebook leveraging its 2 billion monthly active users (100 million on Messenger and 25 million on WhatsApp, both of which Facebook owns) and relationships with over 7 million advertisers and 90 million small businesses to create a digital economy powered by its own native currency. Payments are the big opportunity in Silicon Valley that social media platforms have yet to crack, and Libra may just be Facebook’s shot at winning.

But make no mistake – Libra is not here to displace Bitcoin.

Before we get to that, let’s take a look at how Libra works. Facebook’s cryptocurrency is supposedly a stable value asset fully backed by a diversified reserve of global fiat currencies. In other words, its price should not be subject to wild volatility that many cryptocurrencies are known for. The promise is that you can use Libra as you would your Dollars, Euros or Yuan today. You can move Libra as easy as you send a text, send money to your friends abroad without paying exorbitant international wiring fees, and pay anyone via your mobile phone.

Behind this reserve-backed currency is the Libra Association, a standalone entity that comprises of the who’s who of relevant industries – from payments (Mastercard, Stripe, Visa); consumer technology (Uber, Facebook); telecommunications (Vodafone); venture capital firms (Andressen Horowitz, Union Square Ventures), to non-profits (Kiva) and blockchain companies (Coinbase). Facebook aims to have 100 members in the Libra Association by the first half of 2020.

Decisions about the Libra blockchain will be voted upon by this 100-member oligarchy, with not one member’s vote exceeding 1 per cent of all votes (including Facebook itself). With the sheer reach of this initial group of supporters, Libra seems poised to get into the hands of users and be used at a scale that few cryptocurrency projects have currently.

But Libra is not a Bitcoin killer – quite far from it. Libra is supposedly a cheap, borderless, fast and fairly accessible cryptocurrency, and posts a legitimate threat to legacy players such as Western Union and MoneyGram. But its value proposition is almost diametrically opposed to Bitcoin, the first cryptocurrency that popularised the breakthrough technology of blockchain.

Unlike Libra, Bitcoin is not backed by a single company, or even by 100 entities. To date, over 10,000 nodes across the world maintain the Bitcoin network in a permissionless fashion – meaning Facebook does not have to approve someone before they can participate in maintaining Bitcoin’s global ledger. Because no one owns Bitcoin, anyone can use Bitcoin – there is no gatekeeper (unless you purchase Bitcoin off centralized exchanges), and no one can shut the network down per their whims.

Instead of being backed by a reserve basket of currencies, Bitcoin is backed by a transparent monetary supply defined in transparent, publicly viewable code – code that has functioned for over a decade in ensuring Bitcoin remains a network not controlled by a company, a consortium, a state or even a country.

On a wider economic point, the only way to acquire Libra for investors and users alike is to swap Libra for fiat currencies, which go directly into the Libra Reserve backing the cryptocurrency. This means owners of Libra are essentially holding a special drawing right backed by a fiat currency basket.

While bank deposits and short-term government securities in currencies from reputable central banks are by and large stable assets, the value of Libra is still directly tied to traditional financial assets and foreign exchange market movements. Meanwhile, Bitcoin’s status as an “outside the system” asset with a standalone monetary supply defined by computer code makes it an effective hedge against failures in our legacy financial system – something that Libra does not offer.

Additionally, to use Libra, users have to verify their identities via applications owned by Facebook – the upcoming Calibra wallet, Messenger and Whatsapp. Even if Facebook promises to not share individual data related to the use of Libra, and even to gradually distribute the rights to govern the system, Libra still exists to grow users’ dependence on the products of a company that has for numerous times failed the trust of the public and violated its privacy.

Bitcoin, on the other hand, remains trustless and permissionless – anyone can purchase Bitcoin through a multitude of ways, and fully own their wealth in Bitcoin without any need to trust a third party. Not one single company owns Bitcoin as it is a public commons – its ownership is shared by all who wishes to own it.

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The fundamental differences between Bitcoin and Libra stretch much further than the economic and ideological, but these differences alone are enough to warrant a strong case for both. When the books of financial history are written, Bitcoin will be a milestone in the evolution of money, and Libra can easily be seen as a big step towards global financial inclusion.

Libra’s existence only further validates the view that there is value in decentralisation (i.e. no central authority) – even if gradual. By exposing millions – even billions – to the idea of cryptocurrencies, it is only natural that the appreciation for Bitcoin will grow too.

As for the rest of the decentralised cryptocurrencies with earnest goals of becoming household names, the future is still bright. Though the tailwinds of mass adoption favours the solution with the most convenience to users rather than the one with the most decentralisation for now, the value of a censorship-resistant, trustless form of new money is still clear.

I look forward to a future where financial innovation can fully manifest the ideal of financial inclusion, freedom and self-sovereignty.

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