Facebook announced the launch of its own cryptocurrency, Libra
Opinions diverge on blockchain currencies…
From the lighthearted —
“It’s gold for nerds.”
–Stephen Colbert, Comedian, April 17, 2013
To the foreboding —
“The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.”
Satoshi Nakamoto, Founder of Bitcoin
And everything in between…
Since the inception of Bitcoin, blockchain technology has garnered tremendous support and criticism alike. In the ten years since an unknown Satoshi Nakamoto mined the “genesis block” of Bitcoin, the world has seen a digital asset gold rush.
Although thousands of different altcoins have popped up, some with cult-like followings, cryptocurrency has not yet fully delivered its many promises. The mass adoption of cryptocurrencies still has many obstacles: speculation-driven volatility, regulation, security, and utility are still major factors impeding further use of digital assets.
The entrance of such a massive and influential corporation such as Facebook represents a huge milestone within the cryptocurrency timeline. Whether it will spark a digital currency revolution or be the coin that breaks the market, here’s what you need to know:
What is cryptocurrency?
The word cryptocurrency comes from the combination of the words cryptography and currency. Cryptography is the art of writing or solving codes, essentially converting ordinary plain text into unintelligible text and vice-versa. Cryptocurrency is digital currency that uses cryptography and encryption to regulate the supply of currency and to verify funds transfers. The use of digital currency is similar to fiat currency, however, the cryptocurrency issuers are decentralised from a governing authority, such as a bank or central reserve.
What is blockchain?
Cryptocurrency could not exist without blockchain. A blockchain is a public ledger that records cryptocurrency transactions. Each “block” in the chain is a transaction. The blockchain is a chronological list of the transaction records. Cryptography allows this transactional record to be secure and tamper-proof. One of the key properties of a blockchain is that it is not stored on a single set of central servers under the control of a single entity. Blockchains utilise a vast and distributed network of private computers around the world.
What is a cryptocontract?
Another feature of digital currencies is their potential to be encoded in digital contracts. Imagine a contract that executes like a computer program with an “if, then” loop. If the Australia Post package number 56789 is marked as delivered, then pay Alice $100 in Bitcoin. Humans need not apply: no lawyers, no bankers, no clerk for accounts payable. Digital contracts are pure computer code.
Facebook’s Libra Cryptocurrency: Blockchain Friend or Foe?
1. What is Libra?
Libra is a cryptocurrency or “digital asset designed to work as a medium of exchange that uses strong cryptocurrency to secure financial transactions, control the creation of additional units and verify the transfer of assets.”
The coin is expected to launch in 2020 and will be used to buy products and transfer money from a smartphone. Libra can be used with a digital wallet application called Calibra. It will also be connected to WhatsApp and Messenger. In Facebook’s whitepaper, the goals stated for the coin include transforming the global economy and empowering the unbanked community — the nearly 2 billion people worldwide that do not have access to financial services.
Essentially Libra wants to make an upgraded version of PayPal . Facebook hopes that Libra will be easier to use, more widespread, efficient and flexible.
2. How will Facebook’s Libra help the spread of cryptocurrency?
When a social media giant like Facebook launches a new service, people pay attention. Facebook has unprecedented reach, which theoretically should trickle down to Libra. For context, imagine that the total number of people worldwide that hold blockchain “wallets” with cryptocurrency are 35 million. Facebook’s user base alone is nearly 2.5 billion. Facebook’s Libra is also backed by a strong group of corporations. The Libra Association, which will focus on fundraising and governance is currently backed by fellow giants such as Visa, Mastercard, Uber, Spotify, and eBay.
Although users can already spend and share money digitally using Venmo or Facebook Messenger’s peer-to-peer transfer, these methods require a bank account. Developing countries where many people lack access to a bank account could use Libra as a potentially stable alternative to local national currencies. Although several other crypto projects have attempted to reach the global “unbanked” market, none have had even a fraction of Facebook’s influence.
3. Is this just another way for Facebook to get personal data?
Possibly. One of the core values of blockchain is transparency, which by definition means less privacy. Blockchain technology records transactions into a public ledger. Just like other blockchain networks, the Libra network will allow access to the public data chain. Although user ids are not tied to transactional ids directly, companies and governments have been able to identify specific users due to patterns in transaction history. Facebook has stated that users’ financial data will not be used for targeted advertising, but will there ever be a way to make sure?
Facebook has a track record of privacy violations. Spending data on the Libra network will be easily accessed and could be used to personalise advertising and more. In reality, there may be no way to verify that data on Facebook’s network remains private.
Facebook’s launch of Libra has led to unprecedented interest from governing bodies and financial institutions. By far the most concerning roadblock for Libra’s launch is legislation.
US Senator Sherrod Brown, who sits on the Senate Banking Committee stated, “We cannot allow Facebook to run a risky new crypto-currency out of a Swiss bank account without oversight.”
The banking community has also raised concerns about Facebook’s reach.
“They’re not the first company to launch a crypto payment solution, but they do have immense reach obviously through their Facebook platform. With a billion plus users on its platform, it is clearly a threat,” National Australia Bank’s (NAB) business banking head Anthony Healy said to Sydney Morning Herald.
Considering that The Libra Association does not have a bank within its ranks, financial institutions might be right in viewing Libra as competition.
Many cryptocurrency platforms have tried to replace the traditional banking system, however none of them has Facebook’s influence or size. Whatever Facebook’s intentions, their goal is to create a payment system that allows users to spend money more easily and more quickly. That fundamentally challenges the current bricks and mortar banking system. Are we facing a bankless future? Only time will tell.
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