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Libra: Why Facebook's billion dollar bet on its own digital currency will pay off

Libra
Libra’s value will not fluctuate dramatically like Bitcoin’s, nor will it be pegged to the dollar. Instead, its value will be based on a basket of currencies, backed up by real assets

At the start of 2018, Mark Zuckerberg first signalled his interest in cryptocurrencies, digital coins that were designed as money for the internet age.

“There are important counter-trends to [the growing power of big tech companies] - like encryption and cryptocurrency - that take power from centralised systems and put it back into people's hands,” Facebook’s chief executive wrote. 

The launch of Libra, the result of a special blockchain project at Facebook that began a year ago, aims to deliver on that promise. 

The cryptocurrency has been spearheaded by Facebook, and the underlying technology developed by it, and although the social network is positioning itself as just one of the many companies involved in the project, it is clearly the most enthusiastic. The company is believed to have ploughed up to $1bn (£800m) into the project. 

Both WhatsApp and Facebook Messenger will support peer-to-peer payments in Libra, and the company will launch its own digital wallet, Calibra, where people can store their cryptocurrency.

The company is also arranging for users in emerging markets, where cash still rules, to go to kiosks where they can convert their physical money into Libra. And for many smartphone owners for whom Facebook has been one of their first interactions with the internet, the social network’s stamp of approval will in theory give them the confidence to adopt the new system.

Facebook may also give discounts to advertisers who choose to pay their bills in Libra, and will accept the currency in its growing shopping business.

The launch does, however, represent Facebook’s first major foray into financial services. Peer-to-peer money transfers may only be the start, with financial products and high-street payments also on its radar. The company has studiously followed the Chinese messaging app WeChat, which has become a financial giant that lets users pay bills and order taxis.

But the company is going to great lengths to demonstrate that Libra is about more than Facebook. Its wallet app will be siloed from Facebook’s own systems, with the two not sharing data that could be used to target adverts (sceptics will point out it said the same thing about its acquisition of WhatsApp, a promise it has since reneged on).

But signs indicate that Libra will be far more than just the “Facebook coin” or “Zuckerbucks” that has been rumoured.

The Libra Association that will run the currency is comprised of 28 companies and is expected to expand to 100 by the time it launches in the first half of next year. The association is centred in Switzerland, rather than Silicon Valley, a decision made partly to emphasise its independence.

It is comprised of an impressive list of names that includes digital services companies like Uber, eBay and Spotify, and payments companies like Visa, Mastercard and PayPal.

Tellingly, no major banks have signed up to the initiative, fueling speculation they are likely to view Libra as a threat to lucrative areas of their business such as cross-border transfers and payment processing. 

Besides Facebook, the companies involved have not outlined concrete plans for how they will use Libra. A spokesman for Uber said the taxi app was excited about its potential but did not say if or when users would be able to pay for rides with Libra. The same was true of Lyft, Spotify and eBay.

Nonetheless, their founding role means Facebook will not be able to control how Libra operates. The association positions it as a “global currency”, a borderless, fee-free method of exchange, as well as a store of value to the 1.7bn or so people in the world without bank accounts or a place in the financial system.

To that end, Libra’s value will not fluctuate dramatically like Bitcoin’s, nor will it be pegged to the dollar, as some so-called “stablecoins” are. Instead, its value will be based on a basket of currencies, backed up by real assets.

The design of the Libra blockchain, the ledger of transactions maintained by its members, is also less wasteful and slow than Bitcoin’s whose energy demands dwarf most countries, and has often struggled to match the demand on its network.

These characteristics suggest that at a technical level at least, Libra is better positioned to succeed as a true financial alternative than other cryptocurrencies and it could be a global currency worth buying. Part of the reason Bitcoin has not lived up to the hopes of its anonymous creator is that few major retailers or services have accepted it.

But support from backers other than Facebook will be essential if Libra is going to succeed. Otherwise, perhaps Zuckerbucks would have been a better name.

Will Facebook succeed in their bet on digital currencies? Are digital coins and crypto-currencies the future of money? We want to hear from you in the comments section below.