It’s official: Facebook is pushing for its own currency, Libra.
It may have done so without clearing regulatory hurdles, and it may have done so with the help of some influential friends (including Spotify, Uber, Mastercard, to name a few). But it has done what many view as the next logical step for a platform that has 2.4 billion users (the combined users of Facebook itself, Instagram and WhatsApp).
On June 18, 2019, the so-called Libra consortium led by the social media giant unveiled its long-awaited white paper, in which it introduces the ambitious plan to create a global fiat-backed blockchain currency.
Let’s be clear: this is only the first step toward a digital currency that could eventually become a full-out payment system on its own.
Yet, if you talk to people in Silicon Valley, Libra represents an important milestone. For those who have invested in cryptocurrencies over the last couple of years, it is proof that it was worth betting on the next generation of digital currencies (after Bitcoin and others). Especially after a pretty bad year in 2018, crypto investors look at Libra with heightened spirit.
For those who are working on distributed ledger technologies (DLT) and its many (highly complex) software applications, it represents the hope that it will increase awareness and that it may convince mainstream consumers that blockchain applications are not only for large corporates or nerds.
A banking alternative
Put simply, Libra wants to replace the cash in your wallet for a digital equivalent. But unlike other cryptocurrencies, like Bitcoin and Ethereum, Libra will be backed by assets. This makes the cryptocurrency suitable to serve as a medium of exchange. According to Facebook’s white paper, Libra aims to enhance greater financial inclusion and disrupt the current payment system by offering an alternative to the existing banking system. This way it aims to provide easier and cheaper access to financial services.
As upbeat as Silicon Valley’s crypto community is, some regulators and financial institutions in the US and elsewhere are equally worried. For years they anticipated a possible move by tech giants to shake up the financial industry. With Libra, Facebook (and Libra’s founding members) think they have found a way. Not surprisingly, the plans immediately attracted scrutiny from regulators and ran into political opposition. Even President Trump tweeted about the announcement.
If Libra succeeds, it would instantly become one of the largest financial entities and an immediate competitor of banks. This can, on the one hand, bring a consumer revolution by offering new and cost-efficient financial services. On the other hand, the prospect of a tech firm with billions of users launching its own money is indeed a headache for many.
Still, there are serious and legitimate concerns around privacy and security given Facebook’s questionable track record when it comes to handling user data. Central banks also feel the pressure of Libra because the potential scale of the cryptocurrency poses a real threat to the integrity of the monetary system. Federal Reserve Chairman Jerome Powell stated that Libra can have significant implications for monetary policy, reduce governments’ economic sovereignty, and undermine the stability of the global financial system.
Right after the unveiling of Libra, the so-far skeptical Bank of International Settlements (BIS) released a statement that central banks should start thinking about issuing their own form of digital currency.
To Facebook, criticism toward Libra does not come as a surprise. For the tech giant, too much is at stake, and the company is prepared to push ahead despite regulatory hurdles. In a first move, its leadership promised to work with regulators before launching its cryptocurrency. The jury is out whether this will be a fair fight. Regulators will have to work hard to keep up with the legal might of Libra’s backers. Meanwhile, Libra might find loopholes in the medium term that allows it to start operating in different forms in different markets.
In the long term, there is an even more fundamental issue, an issue that is of great interest to Silicon Valley entrepreneurs, too: digital identity. In the Libra white paper two sentences hint that there are grand ambitions: “An additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.”
This is not the first time the social media giant hinted at aspirations of developing digital identity standards. In February 2019, Facebook CEO Mark Zuckerberg said he was investigating blockchain’s potential to allow internet users to log in to various services via one set of credentials without relying on third parties.
This is a problem almost as old as the internet itself. As the classic New Yorker cartoon put it, “On the internet, nobody knows you’re a dog.” This is the reason why companies need to protect their online business against fraud. This brings about large amounts of personal user data, which is shared for identification. All this data, in turn, leaves them vulnerable to identity theft.
While others have tried to develop standards for a digital ID, none had the reach of Facebook. With 2.4 billion users worldwide, it may be able to succeed where others have failed in jump-starting a globally accepted digital ID.