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After months of rumors, Facebook has finally unveiled Libra — its ambitious plan to transform how people use and send money globally using cryptocurrency. The company has released a white paper introducing the crypto, how it works, and 28 partner companies and organizations that are members of the Libra Association, an independent consortium that’ll govern the crypto.
Here’s what we know about the project:
- Libra will be launched in the first half of 2020 and will be pegged to a basket of global currencies and short-term government securities. Pegging the crypto in this way is meant to reduce the volatility that’s resulted in wild price swings for other cryptos. However, Facebook’s approach means the crypto will not have a fixed exchange rate against a traditional currency, as stablecoins do. The crypto will operate on the Libra blockchain that is designed to handle 1,000 transactions per second, significantly higher than the seven that the Bitcoin blockchain manages in the same period, although still short of the 1,700 transactions Visa averages per second.
- Libra will be run by the Libra Association, an independent nonprofit organization headquartered in Switzerland. Members of the Libra Association range from payments giants Visa and Mastercard to ride-hailing firms Lyft and Uber. And they’re expected to commit $10 million each to the project, as well as integrate the technology into their services, per the Financial Times. Libra Association members will also act as nodes — participants in the blockchain network that verify transactions and maintain records. While Facebook is the driving force behind the project, each member of the association, including Facebook, will have an equal say in the governance of the crypto, in a one-member-one-vote-style system. The consortium aims to have over 100 members by the time Libra is released.
- Facebook, however, still plans to profit from the project.The social media giant has set up a separate subsidiary, dubbed Calibra, which will release a wallet app for Libra. The app will enable Facebook Messenger and WhatsApp users to buy, sell, and transfer Libra to other users. Facebook says it plans to extend functionality to include letting users borrow money, make purchases, and pay bills using the crypto.
Here’s our take on the top five questions surrounding Libra:
What is Facebook hoping to achieve by launching Libra?
- Facebook’s been looking to diversify its revenue streams beyond advertising.Integrating payments solutions and e-commerce into its platforms can enable the firm to generate new income, not least by taking a cut of transactions. But traction for the crypto could also open up vast opportunities for the firm beyond transactional revenue, such as enabling it to move into services like consumer lending, according to David Marcus, head of Calibra, cited by CNBC. In fact, the firm could generate as much as $19 billion from the project by 2021, per Barclays data cited by the outlet.
- And the success of integrating payments systems within social media platforms has already been proven. What makes Facebook’s payments ambition notable is the technology in use — cryptos and the underlying blockchain technology. But the concept of integrating payments systems into popular messaging platforms isn’t new, with super apps like Tencent’s WeChat demonstrating how lucrative the strategy is.Business Insider Intelligence
Where will it catch on?
- Emerging markets appear to offer the biggest opportunity for Libra. Globally, 1.7 billion people don’t have access to bank accounts, according to World Bank data cited in the Libra white paper. Meanwhile, 70% of small businesses in developing countries lack access to credit, per Facebook. This financial infrastructure scarcity provides a huge gap for Facebook to plug. In these markets, the company anticipates physical stores that can enable users to purchase Libras.
- In mature markets, the road to adoption appears to be more complex.Libra can offer cheap services, like remittances, in these markets, and reduce the need for users to leave Facebook to make purchases or transfer money to each other. But with a glut of financial options, it remains to be seen whether there’ll be sufficient consumer demand.
What’s in it for Libra Association members like Visa, Mastercard, and PayPal?
- Joining the Libra Association may seem counterintuitive for the likes of Visa and Mastercard. Facebook’s plan to create an entirely new payments system would appear to threaten established players, raising the prospect of disintermediating them or, at the very least, eating into their revenue by pushing price points down considerably. But we’ve already seen these players invest in services that appear to be cannibalizing their business — Mastercard’s acquisition of Vocalink is a prime example — potentially to ensure participation in the industry’s disruption.
- But the project offers these firms access to new markets. Emerging markets are difficult for the likes of Visa to crack because they lack the card penetration that’s necessary to generate meaningful revenue. In fact, these payments firms typically compete only on 15% of global transactions, because 85% are made in cash, according to Jorn Lambert, executive vice president for digital solutions at Mastercard, cited by the FT. However, these players can use Libra to tap into this huge market. Moreover, it’s no secret that tech giants like Facebook have been increasinglymuscling into the financial services industry and threatening established FIs; joining the Libra project enables the likes of Mastercard to keep better tabs on Facebook’s efforts in the space.
How will Facebook’s data privacy issues affect Libra?
- The company’s damaging run with the public will be a major hurdle for Libra’s adoption.Facebook’s been mired in a slew of controversies in recent years, including a spat of data privacy failures. That, along with accusations of anticompetitive practices, has seen the firm face increased regulatory scrutiny that’s damaged its reputation among consumers. Facebook already appears cognizant of this, saying that it won’t share users’ account information with its social platforms or for targeted advertising. We’ll have to wait and see whether consumers will buy into Facebook’s claims of a more ethical approach to user data and trust it to handle even more personal information.
Will Facebook be able to handle the regulatory challenges involved?
- A lack of banks as Libra Association members points to regulatory uncertainty, which could become regulatory problems.The notable absence of banks from the initial list of members is likely due to the continued lack of clarity around the regulatory fate of the project. And questions remain as to whether the project can navigate the tricky regulatory waters needed to launch in 2020 and demonstrate how it plans to combat the use of Libras for nefarious purposes, like money laundering. To this end, European politicians have already come out to voice concerns, including France’s finance minister Bruno le Maire, who said he needed reassurances that Libra wouldn’t be used for illegal activity, per Business Insider. But the experience of the FIs that are members of the association and the fact that Facebook’s already talking to a number of regulators about the project should equip it well to overcome these hurdles.
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