Crypto commentary: Facebook’s Libra

By Connor Pattison | 5th December 2019

Due to be released in 2020, Facebook’s Libra has caught media attention as stakeholders speculate its potential ramifications. With its goal to: “empower billions of people” the digital currency aims to solve the problem of an estimated 1.7 billion adults not having access to a bank account. But will Facebook manage to take this idea to market? Are consumers going to make the switch?

As an alternative to any commonly accepted form of money, Cryptocurrencies have been gaining large traction in recent years. They are digital and unregulated by any governing authority, with computer software called Blockchain used as a record base for all transactions to occur, replacing the traditional need for any third-party intermediation. Without this need, current financial regulation imposed by governments is redundant. This has naturally led to resistance towards Libra because of Facebook’s huge influence over the world with an estimated 2.45 billion active users. If even a small fraction of this number starts to use the proposed currency, the disruption of an established financial system is a likely outcome that is feared by all major economies.

In Mark Zuckerberg’s hearing with US congress on October 23rd, numerous concerns were raised that have casted doubt over the project: 

Privacy was a strong topic of discussion that must be addressed. Zuckerberg was faced with the overarching question: how will Facebook ensure the safety of user’s financial information following release of the Cryptocurrency? If its involvement in the Cambridge Analytical scandal early last year is anything to go by, how can we trust the company with our money?  

Furthermore, flaws in the Cryptocurrency market were raised as it is more likely to facilitate fraudulent and illegal activity due to transactions not being regulated. As these currencies cannot be held in a conventional bank or trading account, users also need to have some means of storing them. If Libra is introduced, Facebook is said to launch its unique wallet, Calibra, which would come in the form of an app that users would download to hold and send the currency to each other. With new code required to design this wallet, Calibra would be inherently vulnerable to hackers, stealing user’s currency for their personal gain.

Zuckerberg’s response to these matters were as follows:

Not Facebook but the Libra association, an independent body based in Switzerland, would administer the cryptocurrency. The financial data would be separate to the social data Facebook manages on its platform and the 21 firms that make up the association include non-profit groups and financial firms. The negative reputation of Facebook regarding this area in the past can be seen to be less relevant as it will share this responsibility with all other members.

To address fraudulent activity, Facebook states that Calibra will use the same verification and anti-fraud processes as banks and credit cards, combined with automated systems that will be proactive in monitoring activity and preventing fraudulent behaviour. There will also be “live support” which will help users who have lost access to their accounts and, if and when fraud occurs, Facebook is said to offer refunds to the user.

However, the Libra association used to have more members. Over the past couple of months, Mastercard, PayPal, Visa and 4 other distinguished brands have pulled out. The pressure that is felt by those that support the project is immense as governments continually stress to make it seem more unlikely.

Facebook is also a founding member of the association and therefore has a largely influential stake in its matters, calling into question if other members will really have a strong impact on overarching decisions.  

In addition, the underlying volatility of the Cryptocurrency market questions why the average investor would take the gamble with Libra. This can be seen by looking at the trend in Bitcoin’s price (refer to graph below), the oldest and most popular currency on the market.

The surge in Bitcoin's price, Source: Coinbase 2019

In mitigation of this risk, the Libra association has agreed that the currency will be backed against a reserve of low volatility assets, including bank deposits and short-term government securities in currencies from stable and reputable banks. As a weighted average, this would aim to stabilise fluctuations in Libra’s value in an attempt to capture consumer confidence.

But despite all proposed solutions, is Libra actually going to succeed?

Taking into account current affairs, the odds are stacked against Facebook which make this seem unlikely. Zuckerberg vows to ensure appropriate US regulatory approval before Libra’s launch and, considering all concerns aired on October 23rd, this will be difficult to achieve. Potential demand for Libra has definitely suffered because of this. However, if regulators somehow warm to the idea and those estimated 1.7 billion adults are made aware of the currency; much like the surge in demand for bitcoin, it is probable that Libra would also follow suit. After all, these people would technically be provided with access to financial markets for the first time. What have they got to lose?