Facebook’s recent announcement that it is creating a cryptocurrency called Libra has caused immediate concern for many. This, coupled with their plans to launch a subsidiary called Calibra in 2020 which will develop financial services based on the Libra network, has drawn attention from the President of the United States and the Chairman of the US Federal Reserve, to name a few.
These figures and regulators are right to voice serious concerns around privacy, money laundering, consumer protection and financial security. However, if (and it’s a big if) these could be overcome, the project has the potential to improve both financial inclusion and lower the costs of cross-border payments. Mark Carney, the Governor of the Bank of England, has summarised his position as keeping ‘an open mind, but not an open door’.
How will Libra compare to Bitcoin?
In the original Bitcoin whitepaper Satoshi Nakamoto (2008) viewed bitcoin as a decentralised and secure alternative to make and receive peer-to-peer payments. This concept hasn’t been broadly achieved due to several significant challenges, including the high volatility of value and low transaction processing speeds.
Facebook has compromised on some of the more libertine design aspects of Bitcoin to create something that could just work.
First, Libra is a stable coin, which means that the value of the crypto-currency is pegged to real-world assets. This removes the wild price fluctuations which have been a feature to date and put people off using them as means of payment. Instead people have tended to hold cryptocurrencies in the hope their value will increase.
Second, the Libra network is a permissioned blockchain, which means transactions are validated by a closed group. This avoids the requirement for ‘miners’ and the associated unsustainable energy requirement. This, along with other technical features, means that Libra can process transactions quickly and at scale.
An entirely new network
It is clear that Facebook sees the opportunity to create another platform business based on Libra. Many recent payment innovations, such as PayPal or Apple Pay, have provided better interfaces over existing systems and infrastructure. Peer to peer payment companies, like WorldRemit, have utilised mobile technology to try and solve this problem, but Libra has the potential to create an entirely new network, with the opportunity to build innovative services and products (perhaps using smart contracts) from scratch.
So, should the banking and payments industry sit up and take notice of Libra? The fact that it is being launched by the technology behemoth that is Facebook certainly gets our attention. If Facebook can overcome regulatory challenges and persuade consumers that they can be trusted with their money in the wake of the Cambridge Analytical scandal, there is the real possibility that we are witnessing a significant disruptor of the banking industry. For customers, this could be great news if Libra is able to provide fast, cheap and frictionless services (including for those currently under or un-banked). For the large banks and payment companies, there is the risk that Facebook could link Libra payments to their other services (WhatsApp, Messenger, Facebook etc) to create a truly global alternative to banks through leveraging the network effect.