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Facebook cryptocurrency: how Libra will change the way you spend money

Libra - named after the Roman unit of measurement for coins - will differ from other major cryptocurrencies such as Bitcoin
Libra - named after the Roman unit of measurement for coins - will differ from other major cryptocurrencies such as Bitcoin

Facebook has unveiled plans for a global cryptocurrency which the social networking giant hopes will provide an alternative to cash, credit cards and bank transfers.

The Libra currency, which is expected to launch in the first half of next year, has been backed by 27 other companies and organisations, including Uber, Spotify, Mastercard, eBay and Vodafone.

It is by far the most heavily-supported and well-resourced effort to take cryptocurrency and blockchain technology into the financial mainstream since its invention more than a decade ago, and represents a major push into financial services from Facebook. So how will it change the way you spend money?

Instantaneous and cheap money transfers

Libra - named after the Roman unit of measurement for coins - will differ from other major cryptocurrencies such as Bitcoin in being backed by a group of currencies including the pound and the dollar, making its far less volatile.

To date, digital currencies such as Bitcoin have received widespread interest but failed to take off as a form of online payment, in part due to their wildly fluctuating costs.

The association behind the currency said it would mean instantaneous and cheap money transfers, even between continents, and hoped it would be widely used for shopping and payments.

A 'wallet' for buying and selling on apps

Facebook will launch a “wallet” app for buying and selling Libra, called Calibra, and will let people use it for payments over WhatsApp and Facebook Messenger. It said it hopes to extend it by letting people borrow money, buy goods and pay bills using Libra.

But the social network insisted that it would not use any financial data for advertising purposes, and that the currency will be independent from the company.

Instead, Libra is being managed by a consortium of major backers known as the Libra Association, which will exercise equal control over the network.

The Libra Association, the Geneva-headquartered organisation that will operate the cryptocurrency, hopes it will become used around the world to make payments over the internet, promising it will be faster, cheaper and more secure to send it than traditional forms of payment.

“The advent of the internet and mobile broadband has empowered billions of people globally to have access to the world’s knowledge and information, high-fidelity communication, and a wide range of lower-cost, more convenient services,” the Libra Association said in a paper announcing the cryptocurrency.

“Despite this progress, large swaths of the world’s population are still left behind: 1.7bn adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone.”

Cryptocurrencies operate on a blockchain, a record of transactions designed to be resistant to hackers. The design of Libra’s blockchain means that each of its 28 members will have equal control over the technology.

The association said it hoped to have more than 100 members by the time the currency is released next year.

Members of the association have invested $10m (£8m) each in setting Libra up, although it is unclear to what extent other companies plan to support it.

Vodafone said it may use the technology to improve its mobile money services such as M-Pesa, which is popular in Africa. Other backers such as Uber, Spotify and PayPal, said they did not have immediate plans to implement the currency on their services.

Governments and security services have voiced fears over cryptocurrencies and their potential to be used for criminal behaviour. The Libra Association said that while transactions would not reveal real-world identities, the exchanges used to buy and sell Libra would work with law enforcement services.

A Facebook coin

Facebook has been swift to emphasis that Libra is not owned or controlled by Facebook, but a group effort between members of the association. The design of the technology behind the cryptocurrency means that it only has one “vote” among the existing 28 members of the organisation when it comes to altering how it operates, for example.

However, the project has been driven by the social network, and it is its most vocal supporter. Last year Facebook set up a special blockchain team run by David Marcus, the former head of the Messenger app and a former PayPal executive. Facebook developers have also written much of the underlying code for the currency.

When Libra is launched next year, Facebook says it will debut its own digital wallet service, called Calibra, which will let users buy and sell Libra and sent it back and forth, as well as spend it in places where it is accepted. The company may also incentivise advertisers to adopt the currency by offering them discounts if they pay in Libra.

“Libra holds the potential to provide billions of people around the world with access to a more inclusive, more open financial ecosystem,” Mr Marcus said.

Calibra accounts will be separate from Facebook, and the company said it would not share data between them, except in certain circumstances such as when asked to by police.

How it will work

Although Libra will be a cryptocurrency, it will be very different to Bitcoin, the best known and most valuable digital coin.

While Bitcoin’s value has fluctuated wildly - it rose from $1,000 at the start of 2017 to almost $20,000, and currently trades at around $9,300 - Libra will be backed by a reserve of reliable central bank assets - such as pounds, dollars, yen.

This means that while its value against the pound may move marginally, as sterling’s value changes against foreign currencies, it will not suffer wild price swings.

The reserve of currencies will be invested in low-risk assets such as government bonds, interest from which will help fund the association.

The Libra Association says there will be tiny fees on sending money, since fees are necessary in cryptocurrencies to prevent cyber-attacks that flood a network with traffic, but will still be much cheaper than a retailer’s cost of accepting a credit card transaction, or a foreign exchange fee.

Another major difference with Bitcoin will be the underlying blockchain network that it runs on. While any computer can join the Bitcoin network, only the members of the association will be responsible for operating Libra, with each having a “node” on the network.

The association says it wants to eventually move to a “permissionless” system more similar to Bitcoin that will open it up to others.

The Libra Association

The currency will be governed and operated by the Geneva-based Libra Association, which will include Facebook and 27 other organisations and companies. The association said it hoped this would increase to 100 members by Libra’s launch next year.

Members include payments companies such as Visa, Mastercard and PayPal, apps like Spotify and Uber, and non-profits aimed at improving access to finance, as well as investors including Andreessen Horowitz, one of Silicon Valley’s most famous venture capital companies.

Most have invested $10m in the Libra Association, a pool of money that will be used to buy the foreign exchange reserves that will support Libra’s value.

Many of the companies backing it said that they are interested in the technology’s potential, but have not said how they plan to use it.

Would you use Facebook's global currency? Do you think it's a good idea? Let us know in the comments section below.