Libra, the Facebook-led cryptocurrency, could start as early as January, according to The Financial Times, as the project is likely to be even more limited than its already scaled-down plan.
The Libra cryptocurrency is likely to be backed one-to-one by the US dollar, the newspaper reported on Thursday. In April, the association that launches Libra announced it would create multiple stable coins in one currency backed by major currencies such as the dollar, euro and pound, as well as a basket-based coin. A stablecoin is a cryptocurrency that links its market value to an external source such as the dollar.
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The cryptocurrency launch is still pending regulatory approval, the newspaper said, citing three unnamed people. Facebook and the Libra Association, which manages the project, declined to comment on Friday.
Facebook didn't get much love for Libra, which has since changed its goals and scope Association launched publicly in mid-2019. Have partner screwed out of the project, Details have shifted and the legislature has criticized the plans. Nevertheless, Facebook has announced that it will continue. Here's what you need to know.
Why does Facebook want a cryptocurrency?
This is actually not Facebook's cryptocurrency. It's a project by the Libra Association, which Facebook co-founded. The association, which will act as the monetary authority for the cryptocurrency, says Libra aims to "empower billions of people," citing 1.7 billion adults without bank accounts who could use the currency.
But Facebook has its own interest in digital money, which is on the scales. The social network operated a virtual currency called credits for about four years to make payments for games on Facebook. Facebook CEO Mark Zuckerberg said sending money online should be as easy as sending photos. Libra is designed to make it easier and cheaper for people to transfer money online, which may also attract new users to the social network. However, Zuckerberg conceded that Facebook's use of the scale would likely help make social media advertising more desirable, and therefore more expensive.
Facebook may have other plans for Libra as well. A new subsidiary will operate a wallet for holding and using the digital currency. Originally called Calibra, the wallet was named Novi in May to "make it easier for people around the world to access affordable financial services". Analysts at RBC Capital Markets said these services will likely include gaming and trading.
Will Facebook have direct control over the scales?
No. Facebook is one of the members of the Libra Association, the nonprofit that will de facto act as the monetary authority for the currency. (Membership on Facebook takes place via Novi.) The association hopes for it grow to 100 membersMost of these will raise $ 10 million to get the project off the ground. Every member has the same vote in the association based in Switzerland. Technically speaking, Facebook does not have more influence on the decisions of the association than any other member.
Even so, Facebook played an oversized role in the early stages of the Libra project. Once the network starts, Facebook says the social network's roles and responsibilities will be the same as any other founding member.
Why did club members drop out?
Some of the larger founding members seem to have gotten cold feet. Seven of the original 28 founding members - that's a quarter of them - left before the opening meeting of the Libra Association in Geneva. Exits included PayPal, eBay, Stripe, and financial services giants Visa and Mastercard. The departures are big losses as these members brought with them expertise in payment and transfer technology. The other dropouts are Mercado Pago, the online payment platform of the Argentine Mercado Libre marketplace, and Booking Holdings, an online travel company that operates sites like Priceline, Kayak and OpenTable.
The association currently has 27 members.
How is Libra different from other cryptocurrencies?
Let's start with the question of how similar the scales are to other cryptocurrencies like Bitcoin and Ether. Like them, Libra exists entirely in digital form. You cannot receive a physical banknote or coin. And as with other cryptocurrencies, Libra transactions are recorded in a software ledger called a blockchain, which confirms each transfer. The Libra blockchain is managed by the founding members at an early stage, but is set to evolve into a fully open system in the future.
The Libra will be tied to real assets, a format commonly known as stablecoin. This is in contrast to bitcoin, ether, and some other cryptocurrencies that are not supported by anything and sway wildly in response to speculation.
The original plan was to use a basket of assets to anchor the value of Libra. The Libra Association did not specify how much these assets would be, but did state that they would be denominated in major global currencies such as the dollar and euro, which do not fluctuate widely on a daily basis. The association will buy more of the underlying assets to create or "coin" a new Libra if people want more of the cryptocurrency. When people pay out money, the club will sell those assets and "burn" the scales.
Securing a currency with an asset is nothing new. In fact, it used to be common. The US dollar was backed by gold until 1971. The value of the Hong Kong dollar is pegged to the US dollar and is managed by a currency board that can only issue new bonds if it has sufficient reserves.
How do cryptocurrencies compare to the dollar?
The US dollar is tried and tested and accepted all over the world. Some countries like the dollar so much that they use it in place of their own money. And dollars earn interest, albeit at current rates that don't add up very much.
Of course the dollar has weaknesses. Using dollars, especially across borders, can be expensive as banks make cuts to convert them into local currencies. If you're using dollars on a prepaid card, the credit card company will likely charge the merchant for a portion of your purchase. And if the US government prints too many dollars, inflation could follow.
Despite the hype, cryptocurrencies are not yet widely used. Try buying a cup of coffee with ether. (Yes, it is possible, but not widely available.) The value of cryptocurrencies is volatile and often goes up or down more than 5% per day, making it difficult to get an idea of the long-term value of the asset.
Cryptocurrencies can make it easy to send money directly to someone. Bitcoin transactions are actually not undetectable, although they can be very difficult to track down. Likewise, the use of Bitcoin is not completely anonymous. It's pseudonymous, which means that your Bitcoin address is recorded even though your identity isn't there.
Some cryptocurrencies, especially Bitcoin, have a cap on the number of coins that can be minted, which means that owners of existing coins don't have to worry about creating new coins at random, although doing so could cause other problems in the future.
Is this just a trick to allow Facebook to get my financial information and send more targeted ads?
We hear you. Facebook doesn't have a good reputation for privacy protection.
The social network says don't worry - not that you expected them to say otherwise. When the Libra's plans were first revealed, Facebook made an effort to point out that its wallet was housed in a subsidiary of the social network. The agreement should allow the wallet company to be regulated by the authorities and prevent money laundering and other financial crimes. The company also said it would separate financial data from Facebook's social data.
Is Facebook spying on you?
