Facebook project: What is Libra cryptocurrency?
In 2019, Facebook announced its own digital currency called Libra. Since then, it’s been buzzing on the Internet and intriguing everyone. So what is Libra and how does it work? How will it affect the global financial industry? Should governments be worried? Should you be excited about it? Here’s everything you need to know about it!
What is Libra?
Libra is ‘a simple global payment system and financial infrastructure that empowers billions of people.’ Its network is built on a secure, scalable and reliable blockchain designed for anyone to participate and build on it.
Backed by the Libra Reserve, a reserve of assets, Libra coins are anticipated to have a stable value, making it a ‘stablecoin’ -a specific type of digital coin that’s backed by one fiat currency or a basket of multiple currencies. This stable value is what differentiates it from other cryptocurrencies such as Bitcoin and Ethereum whose prices are subject to supply and demand.
Tasked to oversee the Libra network is the Switzerland-based non-profit organization called the Libra Association. Comprising global companies, the Libra Association facilitates the operation of the Libra payment system and ensures that everything goes smoothly.
Pioneered by Facebook, Libra’s whitepaper was published last June 2019 and the digital currency is set to be up and running by late 2020.
How does Libra work?
The Libra payment system makes low-cost transactions possible within seconds with the use of blockchain technology. People will be able to send, receive and spend their money instantly without going through tedious and time-consuming banking procedures. Through phone applications, Libra coins can be converted into fiat currencies within a matter of seconds and sent to anyone in the world.
Once it’s up and running, the Libra payment system will be able to support single-currency stablecoins such as ≋USD, ≋EUR, and ≋GBP.
You can instantly convert your currency into Libra coins and vice versa anytime you want through Calibra, the Libra wallet. With Facebook’s wide range of applications, soon enough, you’ll be able to use Facebook Messenger and WhatsApp in sending and receiving money.
What makes Libra work?
There are three main aspects that work hand-in-hand to make Libra an inclusive global payment system:
It’s powered by blockchain
It’s backed up by the Libra Reserve
It’s governed by the Libra Association.
Together, these three aspects make instant and low-cost money transactions possible in the Libra network.
The Libra blockchain
Like all other digital coins, Libra is built on a blockchain, making it secure and reliable. What’s different about Libra is that it aims to move from traditional to liberal: its ‘permissioned blockchain’ will eventually transition to become a ‘permissionless blockchain’.
Libra plans to begin as a permissioned blockchain with the Libra Association overseeing the network’s overall performance. This means that Libra is not as decentralised as other coins such as Bitcoin and Ethereum.
Bitcoin and Ethereum are examples of permissionless blockchains, where anyone can be a part of the network and start mining whenever they want. They won’t have to ask for anyone’s permission to start crunching codes and adding to the blockchain.
An example of a similar permissioned blockchain is Ripple, where a company oversees the blockchain and not just anyone can become part of the network. Only banks and financial institutions approved by the company can be part of the network.
After five years, once the network has stabilized, Libra intends to proceed to become a permissionless blockchain where the public can join and contribute to maintaining the network. This gives Libra the opportunity to have faster transactions and bigger scalability of up to 1,000 transactions verified per minute.
The Libra Reserve
Libra Coins are backed by the Libra Reserve, which is made up of a basket of fiat currencies and short-term government bonds. The value of your Libra coin will remain the same from the moment you send it to the moment it is received, so you don’t have to worry about fluctuating prices.
This ensures that your Libra coins will hold water and always be worth real money. Whenever you choose to convert your coins back to your local currency, they won’t shrink in value.
The Libra Association
The Libra Association is an independent non-profit organization based in Geneva, Switzerland. It is a membership group made out of global companies and founding partners, for example, Spotify, Coinbase and Uber, social organizations and academic institutions.
The Libra Association is in charge of the Libra protocol and managing the Libra Reserve. It has a number of responsibilities, such as:
Providing a framework of governance decision-making for the whole network
Overseeing the operation and progress of the Libra payment system
Facilitating the provision of services on top of the Libra blockchain
Establishing a social impact grant-making project in support of financial inclusion
To be a part of the Association, there are certain specific requirements that companies and organizations have to meet:
They have to be recognized as top performers in their respective field
They have to have at least 10 million US dollars in their operating budget
They need to have a large audience and a wide reach of impact
Although Facebook is the initial founding member of the Libra Association, it doesn’t have any special powers and privileges over controlling the network. Every member has equal commitments and financial obligations as everyone else with a stake in the Libra project.
Spearheading the Association’s tasks is the Libra Association Council, a group that’s made up of one representative per association member. Each member in the Council is entitled to a vote in every matter of discussion brought to the Council for approval. Together, all representatives decide which policies will affect the governance of the Libra network, the Libra payment system, and the Libra Reserve.
How is Libra similar or different from other cryptocurrencies?
Cryptocurrency by definition is a decentralised digital coin that isn’t governed by any central authority, for example, banks and governments. Each transaction is added to a block and listed in the blockchain.
Unlike banks where there are headquarters and a governing administrative body, cryptocurrency draws strength from its decentralisation. As a counterpart to the faulty traditional banking system, the blockchain gives power and control back to the people. With low transaction fees, fast time, and transparency as its main marketing points, digital coins garnered and still continues to draw a huge following over the years.
Libra as a ‘stablecoin’
The prices of most cryptocurrencies in the market today are produced by the supply and demand law in economics. Stablecoin is backed by the Libra Reserve which is a basket composed of the world’s biggest currencies such as the US dollar, Euro, Japanese yen, Pound sterling, and Singapore dollar.
It’s also composed of low-volatility assets such as bank deposits and government bonds. This serves as Libra’s store of value that will protect the coin’s price from high volatility. What you can expect from this is Libra’s price will be much more stable than other digital coins.
Making Libra a stablecoin also paves the way for widespread mainstream adoption. Without the risk of prices dropping, people can rest assured that the price of their coin won’t change because it doesn’t rely on supply and demand.
Stablecoins are considered an in-between of cryptocurrency and fiat currency. It retains the stability of fiat currency while utilizing the decentralised nature of cryptocurrencies.
With Facebook’s large user-base, Libra is expected to contribute to the mainstream adoption of digital currencies. Additionally, Libra being a stablecoin poses as a reassuring point to people who are sceptical about cryptocurrencies.
Libra is designed for day-to-day use by everyone. At its core, Libra’s vision is to provide financial services to the billions of people around the world who don’t have access to traditional banking.
Winning over the unbanked, Libra is focused on helping the 1.7 billion people around the world who are vulnerable in terms of security and mobility.
How can we use Libra?
To provide a space where Libra transactions can be securely made, Facebook has created a digital wallet subsidiary called ‘Calibra’. It also serves as a cross-currency exchange platform where you can convert your US dollars into Libra.
When creating your Calibra account, you’ll need to provide a government-issued ID to ensure the legitimacy of your account. This serves as a precautionary measure against fraudulent attacks on financial apps.
Can you buy Libra coins now?
Not just yet! Facebook announced their Libra project in June 2019, and plan to have it launched by late 2020. So currently, Libra is not yet operational and there are no Libra coins available for sale or conversion.
The Association is still working to develop and improve the Libra network and its global payment system.
How much is Libra?
Right now, Libra does not have a price since it’s not launched yet. The Libra Reserve has ensured once the network goes live, the Libra cryptocurrency price won’t be subject to fluctuations seen on typical crypto markets since it will be backed by fiat currencies.
Concerns about Libra and Facebook
Since the announcement of Libra, numerous governments and regulators have voiced their concerns over Facebook’s venture into the financial system.
The US government has called David Marcus, the co-creator and board member of Libra, to testify before the Senate and answer inquiries about the digital asset. Global regulators have also been vocal in their demand for more information regarding the privacy implications of Libra.
With Facebook’s track record in security and privacy, it’s no wonder the authorities are worried about private financial information being leaked to corporations who can benefit from this.
But more than that, many regulators are worried that with Facebook’s billions of users around the globe, Libra’s massive adoption can cause the deflation of the US dollar. These are claims that Facebook and the Libra Association have debunked again and again.
Facebook CEO Mark Zuckerberg said his company is willing to wait however long it takes for lawmakers to be convinced that Libra should be launched. The COO of the Libra Association, Bertrand Perez, remains unfazed by the criticism and says the project does not pose a threat to monetary stability. Zuckerberg retaliates because Libra can bring accessible financial services to unbanked individuals around the world.
There were also concerns about the Libra Association and its members. Senators have pressured big-time payment companies to reconsider their membership in the Association.
While a number of members have withdrawn their membership, there are still companies and organizations that believe in Libra’s vision of bringing financial services to the world’s unbanked population.
Despite a tirade of criticism and attack towards Libra from governments and central banks across the world, more and more companies are joining the Libra Association. Heifer International, a global non-profit organization, Checkout.com, a payments processor company, Singapore state-owned Temasek and San Francisco-based Paradigm and Slow Ventures are the Association’s latest members, bringing its total membership to 27.
This goes to show that support for Libra remains strong despite its complicated relationship with the authorities.
What’s next for Libra?
Facebook CEO Mark Zuckerberg and David Marcus have made it clear in their senate hearings that they are going to comply with regulatory laws to ensure Libra won’t break any rules.
As an answer to Libra’s so-called attack on monetary sovereignty, the Libra Association altered the project’s white paper to appease global regulators. Instead of multiple currencies backing every Libra coin, each coin will now be backed only by a single currency. For example, one libra coin can only be tied to the US dollar and another coin to the euro, etc.
They still want to issue a stablecoin backed by multiple currencies, but rather than being pegged to different fiat currencies, their multi-currency coin will now be backed by a series of new stablecoins.
Amidst the attacks, Libra Association remains steadfast in its goal of launching this year. They have not mentioned any specific date for the launch since Zuckerberg specifically said that they’ll have to make sure that the project is accepted by global regulators before it becomes officially live.
Again and again, Libra spokespersons insist that the Libra network’s vision is to complement fiat currencies rather than compete with them. What’s next for the Libra cryptocurrency project may be a little unclear, but one thing is for sure, Libra will not back down until its vision comes to life.
Words by: Leann Padilla