Facebook's Libra Cryptocurrency Explained

Facebook's Libra Cryptocurrency Explained

The world's largest social network is taking a bold step, creating its own cryptocurrency called Libra.

Facebook (ticker: FB) is already one of the largest companies in the world. Now it wants to help create a new ubiquitous cryptocurrency, too. The name, the social media company says, will be Libra.

What Is Libra?

Unlike most famous cryptocurrencies – Bitcoin, Litecoin, Ethereum, etc. – Libra is backed up with real, cold hard assets. It’s a so-called “stablecoin,” meaning its value is linked to a basket of diversified global currencies and low-risk bonds, providing a lower bound, or floor, on price levels.

This is one of the core areas where Bitcoin and other popular cryptocurrencies have failed. For years, successful currencies have been thought to possess at least three traits, and arguably several more. But three of the most necessary traits for a successful currency have been thought to be durability, acceptance and being a store of value (i.e. stability).

After infamous incidents like the guy who bought a pizza for thousands of Bitcoin years ago, only to watch it run up to $20,000 a pop, it’s no wonder many Bitcoin owners are reluctant to spend the currency.

Facebook isn't going it alone with Libra; it's leading a consortium of companies including Visa (V), PayPal Holdings (PYPL), eBay (EBAY), Uber (UBER) and a handful of others in creating the new stablecoin.

With a network of more than 2.2 billion users globally, Facebook's ubiquity, along with the presence of its partners, will help spread Libra far and wide. The benefit for users will be to send money all over the world at the drop of a hat for negligible fees. Western Union (WU), you've been put on notice.

Facebook won’t use Libra itself for moneymaking purposes, but the digital wallet Facebook plans to create, called Calibra and run by an eponymous new Facebook-owned entity, will be a for-profit venture.

Facebook may be thinking of Libra as a way to disrupt payments in emerging markets, especially as this hopefully ubiquitous new proxy for a pool of currencies becomes more and more widely accepted – and simultaneously holds its value far better than notoriously volatile currencies in some emerging markets.

Facebook's Libra: A Major Threat to the Status Quo

There's no question that the idea for Libra – and particularly Facebook's involvement with it – is controversial. The thought of a new cryptocurrency potentially displacing a foreign country's sovereign currency – even, perhaps, the dollar itself – is unsettling at the very the least.

If Facebook and a pool of other private companies essentially become central banks or do an end-run around the Federal Reserve, global governments won't be too pleased.

Plus, in the wake of massive privacy concerns and confirmed breaches as well as new antitrust heat from the U.S. government, the G-men don’t want to turn around and give FB a blank check to create its own dominant cryptocurrency that could challenge the dollar for supremacy.

And Facebook's Libra move hasn't gone unnoticed; 10 days after it was announced in mid-June, the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, began tweeting cynically about the concept.

Days later, U.S. lawmakers did something more dramatic: They asked Facebook to halt its Libra project to give Congress time to look into the idea and identify risks related to financial markets, national security and cybersecurity.

So for the time being, project Libra is on hold as Washington takes some time to examine and understand the newest high-profile cryptocurrency on the block. Given Facebook's ambitions, reach and several notable, large-scale security breaches in recent years, perhaps it is wise to examine Pandora before letting her loose from the proverbial box.

For something referred to as a stablecoin, it sure seems to spark a lot of fear.

One thing is certain: Facebook is ready to debut its new digital currency when the politicians are. This lawmaker examination phase is unlikely to be a death knell for Libra, so keep an eye out as it seeks to become the latest mainstream entrant into the fast-moving world of cryptocurrencies.

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