The stars are aligning for crypto to go mainstream as Facebook has announced the launch of Libra, a new digital currency that could revolutionise the way payments work — and have a huge impact on the developing world in the process.
Based on similar technology to that used by Bitcoin, Libra is being positioned as a more stable alternative. Though Facebook birthed the new currency, it will be governed independently by an association composed of Facebook and 27 partner companies, which includes Visa, Mastercard, Uber and Women’s World Banking.
These partners will help stabilize the currency, avoiding the volatility that has plagued Bitcoin and other cryptocurrencies, as Libra will be backed a mixture of bonds and bank deposits from “stable and reputable central banks.”
The expectation is that Libra will enable a global payments system that is both faster and more secure than existing systems – and one that doesn’t charge extortionate transaction fees too, which particularly hurts poorer customers.
Perhaps the biggest question hanging over the currency is that of regulation. Unlike most crypto ventures, the Libra association has suggested that it is keen to work with regulators – but it remains to be seen exactly how and where regulatory scrutiny will be applied due to the unusual nature of how the currency is designed and governed.
“The main regulatory risk is money laundering,” explains Hadar Jabotinsky from Tel Aviv University, who points out the currency may run against existing laws. “Facebook will have to make sure that anyone who joins [its] Blockchain is identified face-to-face and fills out a Know-Your-Client questionnaire, as well as employ an army of anti-money laundering officers.”
While the company has yet to share full details, a Facebook profile could be potentially used to verify a person’s identity, based upon their connections and interactions, similar to how Alibaba Group’s Sesame Credit in China counts verified friends as a way to boost its user’s credibility.
Gina Reinhardt, who runs the Global South Academic Network, is intrigued by the prospect of Libra.
“A good and reliable cryptocurrency could help people extend their vision of the future, which means they might actually be able to save resources now to use later – the very definition of sustainability,” she explains.
This ability to plan is crucial for development. As Libra will not be affected by the whims of any given local government, and will instead be tied to a basket of stable currencies, it means there is no risk of a sudden revaluation. It also conceivably subverts the rules in countries that have closed currencies, where it is difficult to transfer money and trade with the wider world.
A stated goal of the new currency is to help the “unbanked” — people who do not currently have access to a bank account or financial tools, and all of the benefits that they bring.
“We could have a financial revolution here in Kenya,” says Will Ruddick, the director Grassroot Economics, a non-profit foundation that seeks to empower marginalised communities with economic tools. The group is already using Blockchain to create a mutual credit system used by thousands of people in Kenya.
He foresees a future where anyone with a Facebook Group could create their own tokens of exchange, essentially micro-currencies for communities. With the Libra acting as a reference currency — something that the micro-currency is pegged to — a new fractional reserve system would be created, enabling communities to access credit more easily. His organisation already has 3,000 small businesses and schools using such micro-currencies – and connecting it to Libra would enable it to scale even further as it would mean tokens can be exchanged.
Crucially, even if Facebook did not decide to go down this specific group-based path itself, the beauty of the proposed Libra system is that such tools could be built by other developers using the Libra Blockchain.
Ruddick believes it may help fill the existing $2 trillion funding gap that the UN’s Sustainable Development Goals require if they are to be met by the 2030 target.
More Power to Facebook?
If Libra is successful, it would change the world — something that could be a good thing, but may also have unintended consequences. One only has to look back to how the introduction of Facebook to Burma may have contributed to the genocide there against the Rohingya minority.
Similarly, if Libra takes off in a big way, it would unleash a powerful new economic force that will inevitably challenge existing institutions and power dynamics in many countries. Reinhardt speculates that Libra may lead to potentially dangerous shocks in local currencies if it isn’t handled well by local central banks.
What’s certain, though, is that if Libra does take off it will further entrench Facebook into the plumbing of the internet.
Though it has committed to being only an equal member of Libra’s governing body, rather than its ruler, Facebook’s role as a virtual wallet for the new currency, as well as that of an identity provider, may hand the company even more power in the long run.