Facebook’s New Libra Currency Sends Shivers Through The Banking World

You may have read that Facebook is to launch a cryptocurrency, which is already creating a stir among world central bankers and G7 leaders.

This is not just a remittance service sending money via a smartphone, but a new currency.

However, some cryptocurrency purists could argue that Facebook’s new digital coin, Libra, is not a true cryptocurrency, although they admit that it could bring digital money into the mainstream.

Critics claim the plans for Libra, backed by a consortium of 28 groups including Uber, Spotify, Visa and Mastercard, is not a genuinely decentralised digital currency.

I’m not a crypto expert or even a fan of so-called currencies like Bitcoin. The price of bitcoin, which has been volatile over the past 12 months and passed $9,000 at the weekend for the first time in more than a year, has been flat since the announcement. Other major cryptocurrencies were also unmoved or only slightly down on the news.

The new currency system will allow users to convert US dollars and other international currencies into Libra, which will facilitate rapid money transfers and online transactions with almost no transaction fees. Which begs the question, if there are no transaction fees why are these companies investing millions into this project?

Facebook, which is leading the project, said Libra will be especially valuable to the 1.7bn people worldwide without bank accounts, who will be able to carry out payments via their phones.

While Facebook intends for Libra to eventually become decentralised, transactions will initially be validated by the founding consortium. 

Phil Chen, decentralised chief officer at phonemaker HTC’s blockchain-driven Exodus project, told the FT.

“This project is the antithesis of bitcoin and is another step towards total control of data and users,”

He added, “This global coin is the most invasive and dangerous form of surveillance they have devised thus far.”

“At the end of the day, Libra is not a true blockchain,” Mr Chen said.

On the online forum Reddit, one commenter described Libra as a “Silicon Valley surveillance paradise” but acknowledged that it was still a “pretty significant development in crypto”.

“Instead of a monopoly it’s an oligopoly,” said Gavin Brown, associate professor in financial economics at Manchester Metropolitan University and director of cryptocurrency hedge fund Blockchain Capital. But the structure might be sensible, he added:

“There needs to be some level of institutionalisation in order for adoption to happen and regulators to get comfortable.”

Another factor is that Facebook will not use the “proof of work” mechanism that underpins cryptocurrencies such as bitcoin, under which computers solve problems to create a block chain and be rewarded with newly-minted currency, because of its “poor performance” and “high energy (and environmental) costs”.

Richard Dennis, founder of crypto network Temtum, said the proof of work model had been shown to be inefficient, and that bitcoin would be “out of date” soon. But he added, along with others, that Facebook’s project had “rejuvenated” the crypto community. “I was told it’s crypto Spring,” he said. “This is starting to feel like 2017 again.”

Whilst central bankers, like the governor of the Bank of England Mark Carney, have given the currency a lukewarm welcome, I’m sure Facebook and its backers have already thought through the potential challenges that lie ahead, not least money laundering regulation.

Within Facebook — where engineers and product managers are more familiar with optimising advertising algorithms or simplifying photo sharing — creating a new currency was seen as a daunting challenge.  “I’ve been doing this for more than a year, like 20 hours a day, and I’m still wrapping my head around it,” said Kevin Weil, who moved from Instagram to become Facebook’s head of blockchain product in June 2018.  Libra was “unlike anything I’ve ever worked on before”, he added in an interview last week at the San Francisco Mint.  “The technology is basically brand new, and is evolving really quickly. No one has any experience with a global currency before. Any direction you look, it’s new — and that’s exciting.”   

Libra could open up opportunities for small online businesses to lower the cost of transactions, as well ease the process of selling online on Instagram and Facebook.

The news must have sent shivers through the banking and money transfer community. This will shake up the banks and the likes of Western Union, which takes a large chunk out of overseas workers remittances. They are all crying 'foul' about regulations and money laundering when it's the banks who have been fined for laundering! Apple Pay is not mentioned? This will be another step towards a cashless society, a one world currency and less control of our money and privacy.

Facebook has 2.7 billion active monthly users, and it knows a lot about us. It will know a lot more about us once we start using Libra, but has promised to keep this information separate from the social media business.

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