Facebook’s Libra Cryptocurrency May Revolutionize E-Commerce

Facebook on Tuesday released details about Libra, its long-rumored cryptocurrency.

The company outlined plans “for a new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.”

The aim is to help people worldwide, especially in developing nations, gain access to a cheaper, more connected global financial system.

Libra “is the first viable cryptocurrency that’s backed by a social network,” noted Ray Wang, principal analyst at Constellation Research.

“It is going to enable cross-border commerce and peer to peer payments,” he told the E-Commerce Times. “This allows for easier transactions without the onerous middleman fees, and will reduce fraud, which can take up to 25 percent of a sale. If you had to start from scratch and reimagine P2P (peer-to-peer) payments, you’d want the attributes Libra and Facebook offer.”

Among those attributes:

• Privacy
• Cross border capability
• A data driven digital network
• A partner ecosystem
• Backing by existing financial firms
• A developer community

The Libra Blockchain

The Libra cryptocurrency is built on the Libra Blockchain, which uses open source software. The blockchain prioritizes scalability, security, efficiency in storage and throughput, and future adaptability.

Any consumer, developer or business can use the Libra network, build products on top of it, and add value through services.

“At the end of the day, Facebook wants everyone to use its currency,” said Michael Jude, program manager at Stratecast/Frost & Sullivan.

“If it attempted to leverage it to exclude certain etailers, then it wouldn’t be as useful,” he told the E-Commerce Times.

The value of one Libra in any local currency may fluctuate, as it is not pegged to a single currency. It’s backed by a collection of bank deposits and short-term government securities, in currencies from stable and reputable central banks, held in the Libra Reserve. The reserve assets are chosen to minimize volatility.

Support also will come from a competitive network of exchanges buying and selling Libra, Facebook said.

The Libra Reserve will be governed by the independent, not-for-profit membership Libra Association, set up by Facebook in Geneva, Switzerland.

Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to Libra Association members, and support further growth and adoption.

Facebook’s Digital Wallet

Facebook created Calibra, a regulated subsidiary, to ensure separation between social and financial data, and to build and operate services on its behalf on top of the Libra network.

Its first product will be a digital wallet for Libra.

The wallet initially will be available on WhatsApp and Facebook Messenger. It also will be offered as a standalone app on iOS and Android.

Calibra will let users send Libra to almost anyone with a smartphone at low to no cost. In time, Facebook plans to offer additional services such as bill pay, making purchases, or paying for rides on public transportation.

It will use the same verification and antifraud processes as banks and credit cards, and will monitor activity proactively to detect and prevent fraud.

Calibra will not share account information or financial data with Facebook or any third party without customer consent, except where it is needed to keep people safe, comply with the law, and provide basic functionality to Calibra users, Facebook said.

The Libra Association

So far, 27 firms and organizations have invested about US$10 million each to back Libra and work on finalizing the Association’s charter. They will become founding members upon the charter’s completion.

The members, listed by industry:

• Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
• Telecommunications: Iliad, Vodafone Group
• Blockchain: Anchorage, Bison Trails, Coinbase, Xapo Holdings
• Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
• Nonprofit and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking

Final decision-making authority rests with the association, but Facebook will maintain a leadership role through 2019.

Libra will be launched in several countries in the first half of 2020. Facebook hopes to expand the Association’s membership to 100 by the target launch date.

“The Facebook brand and their track record will calm the fears of many merchants reluctant to get into cryptocurrency, said Steve Wilson, principal analyst at Constellation Research.

“Merchants will be led to believe that the presence of MasterCard and Visa as Libra founding members means that if you are set up to accept these credit card brands, then Libra will be just another sticker on the virtual store window,” he told the E-Commerce Times.

However, it is too early to predict the impact of Libra on e-commerce as a whole.

Possible Problems

“The problem here, like all cryptocurrencies, is at the interface between the cyberspace and general markets,” Frost’s Jude pointed out.

“Unless you plan to do all of your business using Libra, at some point you will need to convert them into dollars or whatnots,” Jude said. “How does a bank assess the value of the Libra in relation to a fiat currency?”

Facebook’s plan “seeks to give each Libra a basic value backed by assets, but those assets are ultimately going to be sufficient to give only a very minimal value to each Libra,” he said.

“In a blockchain there is no ‘full faith and credit’ clause backing each Libra like there is for a dollar,” Jude pointed out. “So if there is a run on the Libra, who is going to stand behind it? Ultimately, the answer is that no one will, because there will be insufficient fiat funds to pay off the demand, and none of the partners will want to put their entire assets behind the currency.”

Association members “want limited liability and a guaranteed rate of return,” he said. “Effectively, the partners are investing in the scheme — not ensuring that it will succeed.”