This guest post was written by Caleb Danziger, co-owner and editor of thebytebeat.com.
Facebook recently became one of the latest brands to announce a cryptocurrency capturing headlines and curiosity in the process. The currency is called Libra, and it should launch sometime next year.
More convenience for the unbanked
Facebook intends for its cryptocurrency to replace paper money and even credit cards. It’s specifically targeting the unbanked population and other people who find themselves overly dependent on money transfer services that charge excessively high fees. Users will reportedly be able to go somewhere locally, such as a convenience store, and cash in their local currencies in exchange for Libra.
They can then access it on their smartphones through Facebook’s cryptocurrency wallet, called Calibra. It’ll also be possible to use Calibra — as well as third-party cryptocurrency wallet apps — to transfer Libra between users. It’s easy to see, then, how Libra could bring convenience to people who ordinarily use costly and sometimes slow money transfer services to send and receive money.
A different kind of blockchain
The blockchain for Libra functions differently than what many people are already familiar with. Rather than being a traditional distributed ledger system, the blockchain will have a single data structure that stores all transactions over time. Rather than being stored in blocks on a chain, data gets assigned sequentially to validators that have numbers associated with them.
The resulting validator network means only entities with permission can see the ledger. On a related note, Facebook created a nonprofit organization called the Libra Association to oversee Libra’s development. Each founding member paid $10 million to join the validator network.
Spotify, PayPal and Mastercard are among the members so far. In addition to using the millions of dollars in investments into the Libra Association to help Libra get off the ground, the cryptocurrency has backing from well-known brands that could potentially help people see it as a legitimate project. There are currently 28 founding members, and one of the roles of the Libra Association is to recruit more.
Libra is a stablecoin cryptocurrency
Something that makes many people hesitant to use cryptocurrencies is that they can fluctuate wildly and lose or gain value with little or no warning. But, Libra is a cryptocurrency called a stablecoin. A range of real-world assets will back it, which helps keep the cryptocurrency’s value more constant.
The assets behind many stablecoins, including Libra, back them on a one-to-one basis. The Libra Association maintains a basket of assets comprised of historically stable currencies, including the U.S. dollar, euro, Swiss franc and yen. That organization also has the authority to change the composition of the assets if one of the respective currencies goes through a substantial change in value. That power makes Libra’s value remain consistent.
Some predict Libra’s connection to assets in several currencies instead of only one should make Libra more useful than a national currency. If it catches on, Libra could even overshadow the dollar if users get into the habit of primarily using Libra instead of traditional forms of money.
The assets stay in the Libra Reserve, and whenever a person cashes out their currency to receive Libra in return, that money goes into the Reserve, and an equivalent amount of Libra gets minted and distributed to the individual. The Libra Association has not yet decided on the starting value for Libra, but it’ll likely be close to the worth of a U.S. dollar.
It’s also worth pointing out here that each member of the Libra Association receives Libra investment tokens when they join. A member’s share of the total tokens equates to the proportion of the dividend earned from interest on the Reserve’s assets. The Libra Association only pays out interest after taking care of things like operating expenses and engineering research. But the payouts could be lucrative to founding members if Libra becomes popular.
Rewards for merchants and customers
The Libra Association also has ideas for making it more appealing for people to use Libra. One of the downsides of many cryptocurrencies is that merchants don’t accept them yet, leaving people with no choice but to use debit cards connected to cryptocurrency wallets they can use at places that accept major debit card brands like Visa and Mastercard.
There are no specifics yet, but the Libra Association wants to offer incentives to the merchants and developers who are early adopters of Libra. For example, a retailer could pass the rewards to their customers who pay with Libra, probably in the form of discounts.
Resistance on the horizon
Supporters of Libra believe it will provide much-needed assistance to people who need to send or receive money regularly, such as migrants who move to find better opportunities and send some of their earnings home to their families. Then, as mentioned earlier, Libra could be life-changing for those who do not have access to bank accounts.
But, Libra’s rollout most likely won’t be entirely smooth. People who are suspicious or blatantly critical of the cryptocurrency say now is the time for regulators to get serious about overseeing cryptocurrencies, including Libra. Facebook has found itself in hot water a lot lately, receiving scrutiny for privacy concerns, among other shortcomings. Those issues make some people wary of Libra, and some legislators want Congress to review Libra.
Facebook cannot offer Libra in areas subject to U.S. sanctions, and it will also encounter obstacles in nations that have banned cryptocurrency, such as India. Competition could create roadblocks, too. Citizens of some countries have already widely adopted money-transfer and payment services, and those people may not want to switch.
Will people trust Facebook?
Some individuals are already reluctant to use cryptocurrency, and others have a dismal view of Facebook. It’s too early to say whether these sentiments will hurt Libra, but it’s worth staying abreast of the news to find out.