Facebook has finally revealed plans for a cryptocurrency called Libra, one of the worst-kept secrets in the history of virtual money.
After six months of news leaks, the massive social network and 27 other partners are touting the Libra digital coin and Facebook’s corresponding digital wallet, Calibra, as a way to make sending payments around the world as easy as it is to send a photo. The new currency—linked to a basket of major currencies, like the US dollar and perhaps the euro—could make it cheaper and easier to transmit money across borders, as well as to pay for things on the internet. The partners say they plan to launch the Libra ecosystem in the first half of next year.
If successful—a big, humongous if—Libra could bring millions of people into the digital financial system, allowing them to leapfrog costly banking infrastructure and avoid smaller, volatile currencies. It could also make Facebook’s platform of 2.7 billion users (including WhatsApp, Instagram, and Messenger) more powerful than ever, creating a new, widespread digital money that challenges scores of financial institutions.
Or it could sputter out, like so many overhyped projects that came before it. Consortiums with powerful partners can be unwieldy. Consumers might avoid it because of a lack of trust in a globe-spanning effort led by a Silicon Valley titan. Ambitions to bring bitcoin into the world of Wall Street have mostly fizzled.
But Facebook and its family of apps, which have more monthly active users than the populations of China and the US combined, occupy a unique place in human history. The Menlo Park-based company and its partners can learn from the shortcomings of other crypto projects. Thanks to the combined might of Facebook and its Instagram and WhatsApp units, it can roll out a new payments network to consumers and merchants on a scale that no government or company has ever been able to match.
It could also allow Facebook to hit the reset button on an important global shift that it has mostly missed out on. While super apps like China’s WeChat have successfully bundled chat services with payments, tech giants like Facebook and Google have struggled to convince Western consumers to transact via their message systems. Integrated messaging-payment systems could bring with them new ways to keep users engaged, as well as produce potential new revenue streams.
Now that Facebook and its partners—including the likes of Visa, Spotify, and Women’s World Banking—have drawn back the curtain, we’ve discovered a bit more about what could be one of the most ambitious currency experiments in history. Here’s what we know (and don’t know) so far.
What’s the big idea?
Led by Facebook, a group of organizations is creating the Libra Association, a non-profit based in Geneva, Switzerland. The association will oversee the Libra, a global cryptocurrency backed by traditional currencies and government bonds.
Here’s the goal, as described by the Libra Association’s white paper:
“A stable currency built on a secure and stable open-source blockchain, backed by a reserve of real assets, and governed by an independent association.”
The Libra Association says it hopes “to create more access to better, cheaper, and open financial services—no matter who you are, where you live, what you do, or how much you have.”
“We see a huge opportunity for financial inclusion,” said Pete Lewis, an executive at Mercy Corp, one of Facebook’s NGO partners and a prospective founding member. Of the 1.7 billion people who don’t have bank accounts, one billion have a phone which could probably support this system.
Which organizations plan to be part of the association?
The association plans to have 28 members at its outset to develop its charter, but the intention is to increase membership to 100 or so organizations. Curiously, none of the initial members are banks, and Facebook is the only social network to join so far. Organizations that become founding members will contribute $10 million, and in return will receive interest on the reserves used to back the Libra.
What’s in it for Facebook?
A lot, potentially. Founder and CEO Mark Zuckerberg has publicly discussed (pdf) his ambitions for payments and commerce to become a bigger part of the social network. Consumer habits are hard to change, but Libra could (in a wildly optimistic scenario) reset the playing field, tilting payments away from today’s large financial services companies and giving big tech another chance to weave them into their message systems.
If Libra catches on, Facebook’s users could interact with its suite of apps more often, making them more valuable to advertisers—though Facebook claims it will not use Libra payment data for targeted advertising. The company and its partners could eventually pull in revenue from interest gained on underlying reserves and (perhaps) transactions fees users pay on the Libra network.
Should Libra become popular in the developing world, it could also help Facebook grow its user base even further. Facebook could potentially serve as a means of verifying identity in places where government ID isn’t commonplace. Although the social network sometimes feels necessary as a communications platform, it could become essential as a payments portal around the world.
Is this really a Facebook coin?
Sort of, for now. Facebook appears to be Libra’s principal architect, but the company is keen to point out that the Libra Association “will be responsible for facilitating the development of the Libra Blockchain and managing the Libra Reserve,” according to a statement. Eventually, the Libra Association says it would like its management to be fully decentralized, meaning that individual validators—the nodes that confirm and secure transactions—could freely join or leave the blockchain network.
Facebook says its team had a key role in fostering the Libra Association and the Libra blockchain, and will remain a principal developer for the rest of this year. After the network launches in 2020, Facebook will have the same governance privileges as other founding members.
Do you have to be on Facebook to use Libra?
No. The Libra Association says anyone can use the currency. Third parties—from nonprofits, to startups, to Google, to Indian fintech PayTM—will be able to build their own apps, wallets, and marketplaces around Libra. That’s the beauty of an open-source payments network.
If you want to, though, you can use Facebook’s digital wallet, Calibra, a regulated subsidiary. In the US, Calibra is registered as a money service business, and will be overseen by the US Treasury.
Is Libra really a “cryptocurrency”?
Probably not, but it depends how you define “cryptocurrency.”
If you define a cryptocurrency by how you sign transactions—or approve payments—then the Libra is a cryptocurrency. It uses a consensus algorithm called HotStuff, developed by VMWare. But if you define a cryptocurrency based on how the network is managed, then it’s probably not. Bitcoin purists, for example, are unlikely to consider the Libra a full-fledged “crypto.”
From a network management perspective, the Libra is somewhat decentralized to start. In the beginning, the Libra blockchain will be a “permissioned network,” meaning that only founding members, who hold Libra Investment Tokens (distinct from Libra itself), will be able to process and secure transactions. However, if the network eventually becomes “permissionless” as planned, meaning that anybody is able to process transactions, then the Libra would be one step closer to the crypto ideal, from a technological standpoint.
A permissionless network would prevent any company or collection of companies from holding a concentration of power or cutting off access to any others, but the obstacles to a permissionless architecture are steep. It’s hard to achieve scale and speed. Typically, the more nodes you add to a network, the slower it becomes, a clear problem for a cryptocurrency with global aspirations. These factors—and security concerns—have hampered many cryptocurrencies from becoming practical alternatives to government-backed currencies. If you consider how the Libra might aim to integrate with the Internet of Things one day, a fully permissionless network seems, well, extremely ambitious.
What about the reserves?
Even if technological management of the Libra is eventually decentralized, potential users still must consider how the underlying reserves are managed. The reserves are why the Libra is worth anything and a key difference between bitcoin and the Libra. Nobody has to exchange traditional currencies for bitcoin—its value is socially contrived, independent of any formal organization—but the Libra is redeemable. Those underlying, “real” assets (and who controls them) matter. We don’t know which financial institutions will custody Libra reserves, but the cryptocurrency is only as safe as those entities.
The basket of currencies hasn’t been disclosed either. Libra says the funds will be placed in bank deposits and high quality government securities.
Will Libra be just like a bank account? What about the Calibra wallet?
No. Even though there are underlying assets, the Libra isn’t backed by government deposit insurance, for example. However the ambition is to bundle it with the type of safeguards people typically expect from a checking or bank account, like fraud refunds, live support, and systems for lost passwords.
Do you have to manage your own crypto wallet?
Not unless you want to. Calibra, the digital wallet, appears to mimic the newer digital payment and banking apps like Venmo. The idea is that you don’t need to know anything about blockchain (or any backend infrastructure) to use it.
What else do we know about Calibra?
It’s a regulated subsidiary of Facebook, and says it will not share any data or information with Facebook unless required by law or for limited technical reasons. It will be available on Messenger, WhatsApp, and as a standalone app.
The display automatically shows balances and payments in domestic currency exchange rates. Users will not earn any interest on balances (and any interest generated by the assets backing Libra coins will accrue to the operators of the system). Calibra says it will follow global guidelines for avoiding money laundering or terrorism financing. The Facebook subsidiary also says it hopes to eventually offer all sorts of other services like paying bills and public transit (which sounds a lot like WeChat or Alipay.)
For users with a bank account, the process is similar to linking any other financial account. People without an account can sign up for Calibra using a basic smart phone, and then fund the account with cash or withdraw physical money from it via an authorized distributor. From the sound of things, this could be something like a Western Union outlet or a similar company.
Will Libra be available in places that don’t allow cryptocurrencies?
The Calibra wallet, as a regulated entity, won’t be available in these locations. However it’s hard to see how Libra would be kept out of these jurisdictions if people decide to break local laws.
Will Libra be available in India?
The first reports about Libra suggested that it would be used for remittances in India. However, the Indian government has been staunchly opposed to cryptocurrencies, even proposing a 10-year jail sentence for people who handle them.
It’s not immediately apparent whether the Libra will be considered a “crypto,” especially in view of its underlying reserves. Considering that the Libra could reduce transaction fees for Indians sending money to their families, it’s possible that the population may pressure the government to allow use of the digital units.
That said, the Indian government has held firm against WhatsApp Pay, refusing to approve the platform’s launch due to data compliance problems. Last month, WhatsApp told the Indian Supreme Court it would only launch the payments feature—which remains in beta—after reaching full compliance with the country’s central bank.
How long has this been going on?
News has been trickling out since at least December, but speculation has been mounting since David Marcus, previously head of Messenger and president of PayPal, was reassigned to lead Facebook’s blockchain research in May 2018. The trickle turned to a torrent as the announcement date got closer, with links springing up all over the internet.
What does this mean for Visa and Mastercard?
In the opinion of Harshita Rawat, a Bernstein analyst, not much for the next five years or so, if ever. The existing card payment systems in the US and Europe, for example, aren’t broken. Rawat pointed out in a recent report that much of the cost of card payment fees goes towards rewards (points, for instance) and fraud protection. Libra and Calibra might have to offer similar benefits and protections in order to be a suitable alternative.
In emerging markets, or places with undeveloped consumer payment systems and unstable currencies, Libra may be more popular. These are the markets that the Libra Association says it plans to primarily target.
What does it mean for cryptocurrencies like bitcoin?
Depending on what currency pairs become available on exchanges, cryptocurrencies that facilitate privacy protections may become increasingly important. Indirectly, Libra may cause a resurgence of bitcoin buyers as Facebook’s implicit endorsement of crypto may drive interest, but there’s little to materially link the two.
Bitcoin and the Libra are fundamentally different because of the Libra’s reserves and the Libra Association. Arguably, there’s a place in the world for both of them, but at its core, bitcoin remains a speculative asset.
What does this mean for Chinese payment systems like WeChat Pay and Alipay?
Facebook doesn’t operate in China, and no Chinese entities are part of the Libra Association so far. China also employs capital controls and has had tight grip on cryptocurrency usage and trading.
At the same time, digital wallets like Alipay and WeChat Pay are proliferating, bringing many Chinese nationals into the financial system and the digital economy. Libra isn’t an obvious fit for China.
Is financial inclusion really a problem?
Money tends to cost more when you have less of it, as banking and transaction fees weigh most heavily on the poor. This is a real problem that some of the world’s biggest financial institutions—from the World Bank to the Bank for International Settlements—are focused on solving. Some $530 billion was transmitted last year, and on average it cost $14 to send $200 across borders. (It can easily cost double that.) Approximately 1.7 billion people around the world remain without bank accounts.
Why is it called Libra?
The name was inspired by the Roman unit of weight measure, which was eventually used to mint coins, according to a spokeswoman. Libra the astrological symbol is the balance of justice, and phonetically it sounds like libre, which is French for free or freedom. The name is a combination of money, justice, and freedom.