With an estimated 2.5 billion users worldwide, the recent announcement by Facebook that it is developing a new currency is a big deal. If it takes off in the coming years, it has the potential to disrupt banking, payments, and the way people and businesses move money around the globe. Let’s be more specific: Facebook is developing a new cryptocurrency called “Libra” and a digital wallet called “Calibra,” which will be governed by a Swiss nonprofit association backed by companies like Visa, Mastercard and Uber.
Confused? Let’s try to make sense of this.
First, let’s start with some basics. Think of a cryptocurrency (you may have heard of Bitcoin, for example) as a purely online form of money. Unlike cold, hard cash, cryptocurrencies do not rely on banks for either their role as a trusted party and place to store money, or to provide the means to move funds globally. They are also unregulated, and their value is not backed by a central government.
Paying for something with a cryptocurrency relies on a huge network of computers to publicly validate each transaction for everyone to see, building a digital paper trail in a way that is very transparent, secure and unalterable. It’s also much faster and cheaper than the way money moves today.
However, there are a number of challenges cryptocurrencies face to gain wide acceptance: Because they are not backed by a government, cryptocurrencies like Bitcoin have no inherent value, and are thus extremely volatile. As they are unregulated, investors can be reluctant to put money into a system without rules, and consumers may not want to risk making transactions in a system without recourse if something goes wrong. Also, because it’s easy to be anonymous online, cryptocurrencies like Bitcoin are popular mediums of exchange for people looking to bypass the rules or engage in illicit activities.
The value of Libra, on the other hand, will be linked to several more stable currencies — like the U.S. dollar — which would certainly help avoid the wild swings in value Bitcoin investors have endured. And the founders of Libra have announced plans to form a self-regulatory structure and have oversight by a European regulator to help ease those concerns.
But perhaps the biggest challenge for Libra is the albatross of Facebook’s poor reputation. Not many policymakers trust Facebook after their numerous high-profile privacy missteps and well-documented abuses of consumer data. With Facebook-targeted privacy legislation and antitrust talk heating up on Capitol Hill, it’s no surprise that the Libra announcement was given an icy reception by policymakers and regulators.
There is a silver lining for consumers: If Facebook and Libra can resolve the trust questions and find a way to exist within a government-regulated framework, Libra could end up being a cheap, safe way for the two-thirds of Americans on Facebook and all of Facebook’s services (Instagram, WhatsApp, etc.) to buy and sell things, and send money to friends. More important, Libra has the potential to reach the large population of consumers around the globe that don’t have traditional bank accounts, but do use digital devices with Internet access.
Even with an initial launch planned by mid-2020, Libra is likely many years away from being part of our daily lives. As I wrote in my last column, financial innovation is not without its challenges, but often presents tremendous opportunity. This could certainly be the case for Facebook’s Libra.
The writer, who resides in Mount Vernon, serves on the Fairfax County Consumer Protection Commission.