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Facebook lifts lid on Libra crypto-currency

Facebook has finally taken the wraps off its worst-kept secret: Libra, its global crypto-currency. After months of leaks, it’s formally out in the open and we can take a closer look at the ambitious project. Facebook and its partners have created an organisation, the Libra Association, to manage the technical aspects of the project and work with regulators to ensure that everything is up. Libra also has some built-in safeguards, which have been used in the real world, to make sure the value of the crypto-currency stays stable.

Whether Libra will be successful or fizzle out is anyone’s guess. Facebook’s giant size, particularly in developing countries, might get people on board, especially if it can create services those people want to use. That said, crypto-currencies haven’t upended conventional finance, despite all the hype. Libra is expected to launch sometime in the first half of next year. Until then, here’s what you need to know.

This isn’t actually Facebook’s crypto-currency. It’s the project of the Libra Association, which Facebook co-founded. The association, which will serve as a monetary authority for the crypto-currency, says Libra’s purpose is to “empower billions of people,” citing 1,7 billion adults without bank accounts who could use the currency.

But Facebook has its own interest in digital cash that predates Libra. The social network ran a virtual currency, called Credits, for four years as a way to make payments on games played within Facebook. In May, CEO Mark Zuckerberg said at F8, the company’s annual gathering of developers, that sending money online should be as simple as sending photos. Libra is designed to make it easier and cheaper for people to transfer money online, which might attract new users to the social network.

Facebook may also have bigger plans for Libra, though it hasn’t shared them yet. A new subsidiary, called Calibra, will run a wallet that will be necessary in the initial rollout. “Facebook created Calibra, a regulated subsidiary, to ensure separation between social and financial data and to build and operate services on its behalf on top of the Libra network,” according to a document. Analysts at RBC Capital Markets say those services will likely include games and commerce.

Will Facebook have direct control over the new cryptocurrency? No. Facebook is one of the members of the Libra Association, the nonprofit that will serve as a de facto monetary authority for the currency. Other founding members include MasterCard, Visa, PayPal, Uber, eBay, Vodafone and Mercy Corps. The association hopes to grow to 100 members, most of which will pony up $10 million to get the project going. Each member has the same vote in the association, which is headquartered in Switzerland. Facebook won’t have any more say over the association’s decisions than any other member.

That said, Facebook will play an outsized role in the initial phases of the Libra project. In addition to running the Calibra wallet, Facebook expects to “maintain a leadership role through 2019.” After the network is launched, Facebook says its role and responsibilities will be the same as those of any other founding member.

How is Libra different from other crypto-currencies? Let’s start by addressing how Libra is similar to other crypto-currencies, such as bitcoin and ether. Like them, Libra exists entirely in digital form. You won’t be able to get a Libra note or coin. And like other crypto-currencies, Libra transactions are recorded on a software ledger, known as blockchain, that confirms each transfer. The Libra blockchain will be managed by the founding members in the early stages, but evolve into a fully open system in the future.

Unlike bitcoin, ether and some other cryptocurrencies, which aren’t backed by anything and swing wildly in response to speculation, Libra will be pegged to a basket of assets that will anchor its value. The Libra Association hasn’t said what those assets will be but indicated they will include “bank deposits and government securities in currencies from stable and reputable central banks.” That suggests major global currencies, like the dollar and the euro, which don’t fluctuate violently day to day.

The supply of Libra will grow or shrink based on how popular it is. If people want to use Libra, the association will buy more of the underlying assets and create, or “mint,” new Libra. If people want to cash out of Libra, the association will pay them and destroy, or “burn,” the proper amount of Libra.

Backing a currency with an asset isn’t anything new. In fact, it used to be common. The US dollar was backed by gold until 1971. The value of the Hong Kong dollar is pegged to the US dollar and managed by a currency board, which can only issue new notes if it has enough in reserves.

How do Libra and other crypto-currencies compare to the US dollar? The US dollar is tried and true, and pretty much accepted anywhere in the world. Some countries like the greenback so much that they use it instead of their own money. And dollars earn interest, although at current rates that won’t be very much.

Of course, the dollar has weaknesses. Using dollars, particularly across borders, can be expensive because banks take a cut to convert them into local currencies. If you’re using dollars on a prepaid card, the credit card company is probably charging the merchant a portion of your purchase. And if the US government prints too many dollars, inflation could follow.

Despite the hype, crypto-currencies aren’t widely used. The value of crypto-currencies is volatile, often rising or falling more than 5 percent a day, making it difficult to get a sense of the long-term worth of the asset.

Crypto-currencies can make it easy to send money directly to someone. Though not private, crypto-currencies can be pseudonymous. No one needs to know your name. And some crypto-currencies, notably bitcoin, have a cap on the number that can be minted, meaning that owners of existing coins don’t have to worry about the arbitrary creation of new coins.

Is this just a ploy so Facebook can get its hands on my financial data and send me even more precisely targeted ads?
We hear you. Facebook doesn’t have a great reputation for privacy protection. It’s probably going to get some side eye when it starts asking folks to trust it with their financial activities.

Facebook says don’t worry, not that you expected it to say anything else. Calibra, the maker of the wallet you’ll need to use Libra, is set up as a subsidiary of Facebook. The arrangement allows for Calibra to be regulated by authorities to prevent money laundering and other financial crimes. But it will also keep Calibra’s financial data separate from Facebook’s social data, according to the company.

Calibra says explicitly that customer data won’t be used to improve ad targeting, Facebook’s money spinner. “Calibra customers’ account information and financial data will not be used to improve ad targeting on the Facebook Inc. family of products,” it said in a release.

The company says it will only share customer data with third parties in limited cases, such as to comply with the law, prevent fraud or facilitate payments. It also says Calibra will seek customer consent before using Facebook data to improve features.
What’s in a name? A lot. Libra is an astrological sign that represents justice. It’s an ancient Roman unit of weight. And it means “free” in French though it’s spelled “libre.” What do politicians and regulators think about Libra? The initial reaction has been chilly.

In Washington, politicians were quick to complain about the crypto-currency and Facebook’s track record for protecting user privacy.

Maxine Waters, the California Democrat who chairs the House Financial Services Committee, asked Facebook to pump the brakes on development of Libra until Congress could learn more about the project.

“The crypto-currency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy,” Waters said in a statement. “Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cyber-security risks, and trading risks that are posed by cryptocurrencies.”

Sherrod Brown, a Democrat senator from Ohio, tweeted that Facebook couldn’t be trusted to run a crypto-currency on its own.
“Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy,” Brown tweeted. “We cannot allow Facebook to run a risky new crypto-currency out of a Swiss bank account without oversight.”

In Europe, the reaction was similar.
Bruno Le Maire, France’s finance minister, told Europe 1 radio that Libra was fine if its use was limited to transactions, according to AFP. But the social network shouldn’t be allowed to create a “sovereign currency” that could be used to issue debt or serve other functions associated with government-issued money.

“It cannot and must not become a sovereign currency, with all of attributes of a currency,” Le Maire reportedly said in a broadcast. “The aspect of sovereignty must stay in the hands of states and not private companies which respond to private interests.”

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