What is the Libra?
The Libra was created in hopes of making a substantial impact in the emerging cryptocurrency market. The Libra, however, is slightly different than the traditional cryptocurrency that we are familiar with because it is considered to be a hybrid cryptocurrency, a type of currency that is backed by both centralized and decentralized exchanges. The Libra is designed to be a cryptocurrency that is backed by a portfolio of diverse government securities and low interest deposits, called the Libra Reserve, and is built on a hybrid blockchain. Since the Libra will be backed by physical assets, it has a much lower probability of fluctuation than other cryptocurrencies like Bitcoin. This, in turn, gives value to the currency, and the reserve is to be controlled by a Swiss non-profit organization called the Libra Association.
The Libra Association is comprised of 28 different organizations, one of them being Facebook, that are investing in the new cryptocurrency. Each of these organizations had to meet specific requirements in order to become one of the first 28 investors in the Libra, requirements such as businesses must hit two of three thresholds of a $1 billion USD market value or $500 million in customer balances, reach 20 million people a year and/or be recognized as a top 100 industry leader by a group like Interbrand Global or the S&P. The Libra consortium with its 28 members allows for well known financial and technology companies to invest in and back a hybrid cryptocurrency and pool resources and finances in order to back the cryptocurrency. By the time that the Libra is ready for the open market, Facebook stated that it would like to have 100 investors including the original 28 investors.
Currently, the fees that are applied to cross-border transactions are typically accompanied with an up to 5% fee per transaction. The Libra could virtually eliminate this fee and, therefore, cause up to $30 billion savings each year. The potential for the Libra to become a globally recognized and usable currency is extremely high, but there are also a lot of questions and concerns to be posed prior to its official launch in the first half of 2020.
How to use the Libra
In order to buy and use Libra, one will need to download either the Calibra app or a different digital wallet app and create an account in order to send and receive money. Here, the user will be able to convert their currency into Libra. Once the user is verified, they are ready to send and receive the cryptocurrency through Calibra, Whatsapp, or Facebook Messenger. Sending money within these wallets will be as simple as sending a text message and will operate very similarly to sending a text. This service is open to everyone in the world as the intentions behind creating the Libra was to have a cryptocurrency that is available to people all around the globe.
The Market Potential
Libra’s potential to become an internationally recognized and utilized currency is something that cryptocurrencies have not been able to achieve yet. This is mainly led by Facebook’s global reach in terms of users, as well as the company becoming the face of this project. As of the first quarter of 2019, Facebook had 2.38 billion users, and this coupled with the approximate 1.7 billion people in the world without bank accounts, gives Libra the potential to become a global currency and pseudo bank for many. Expanding the reaches of banking to those without access to it will create a more globalized world economy and will potentially accelerate the world economy to a higher place than it has ever been. While many have been comparing Libra to the likes of Bitcoin and other cryptocurrencies, the Libra and its backers are planning to differentiate it through cooperation and collaboration with financial institutions, unlike most other cryptocurrencies. This would allow regulation and legitimization of the Libra, which would then propel it past competitors such as Bitcoin, as many governments disallow Bitcoin from being used for financial transactions in order to prevent fraud and money laundering. In terms of potential, Libra has the opportunity to break into a market with government support and with high powered investors backing the currency.
Risks
Since its announcement, there have been many concerns regarding the new cryptocurrency. One of the biggest concerns is Facebook’s incentives behind leading the development of the Libra. Potential users have concerns over the privacy of their financial data and what would happen with it if it were to be accessed by Facebook considering Facebook’s history with the Facebook-Cambridge Analytica scandal. This fear, however, has been negated by many reports that state that all financial data will be stored in the Calibra app where Facebook would have no access to.
A concern that regulators have is the lack of regulation on this cryptocurrency also leads back to the ethical uses of the financial data that the Libra would be gaining from its users. Maxine Waters, chair of the House Financial Services Committee, has similar reservations regarding the Libra and has requested for Facebook company executives to testify before Congress and defend their viewpoint.
Another concern is what the fee will be for each transaction will be when paying with the Libra. The Libra Association has yet to shed some light on this topic. Speculators are curious as to whether it will be low like WeChat Pay and Alipay (around 0.1%) or much higher like Bitcoin.
Differentiating Libra and Bitcoin
The two main differentiating factors between Libra and Bitcoin are the existence of the Libra reserve and the privacy levels between the two cryptocurrencies. Because the Libra is backed by 28 different companies, there is less confidence in the users privacy in comparison to Bitcoin. Bitcoin allows users to anonymously buy and sell the cryptocurrency without a consortium regulating transactions. On the other hand, the Libra, while decentralized, will have more regulations and monitoring on transactions. The main tradeoff between the two cryptocurrencies is that Bitcoin offers more privacy while the Libra offers less volatility due to its reserve.
Tradeoff is that Bitcoin is more secure and private, but it is not backed by any sort of reserve which makes it susceptible to volatility. The Libra is backed with almost $3 billion in government assets which allows for a more stable price, but the users sacrifice privacy for stability.
Conclusion
Cryptocurrencies can be volatile and allow for significant gains or losses on a transaction, which is why many businesses be hesitant to engage in transactions with cryptocurrencies. While the idea of the Libra is seemingly brilliant and well thought out, it is essential that the currency gain traction and stability within the market before many businesses and financial institutions begin implementing it into their business model. The main concern in the cryptocurrency market is consistently the issue of price stability and currency drivers in the market. However, there is a possibility that once the Libra officially launches that it will gain a positive reputation and be extremely successful. We, however, recommend to err on the side of caution in order to mitigate risks and potential losses.
Libra is a potential disruptor for many weak and expensive payment systems and also for weak currencies. So let’s stay ahead for further developments!
Written by: Rebecca Leitner and Michael Romanelli
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Wilberding, Kurt. “Facebook’s Libra Cryptocurrency: How It Stacks Up to Bitcoin and PayPal.” The Wall Street Journal. June 28, 2019. Accessed July 02, 2019. https://www.wsj.com/articles/facebooks-libra-cryptocurrency-how-it-stacks-up-to-bitc oin-and-paypal-11561714204.
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