"Traditional"cryptocurrencies (Bitcoin was created only a little more than a decade ago) involve distributed governance and record-keeping (via blockchains,or digital and unchangeable histories of transactions) of the issuance of digital tokens,with generally only a finite number of tokens ever to be created.
They aren’t true mediums of exchange – they aren’t readily or generally accepted as payment for goods and services other than for drugs,or money-laundering or other illegal activities – and,because they have no intrinsic value,their"value"fluctuates wildly. That’s a reason why they aren’t a functioning medium of exchange.
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The governance of Libra won’t be distributed. It will be essentially a privately owned,centrally governed and initially"fully permissioned’’ platform. Facebook and its partners,which include Mastercard,Visa,eBay,Paypal,Spotify,Uber and Vodafone,will initially,at least,control access to it.
There will be no limit to the amount of Libra that can be issued and,unlike a Bitcoin,it will have real,readily exchangeable and relatively stable value. It will be backed,on a one-for-one basis,by holdings of securities in a range of fiat currencies.
Unlike most cryptocurrencies,anyone seeking to buy Libra will have to provide proof of identity,the platform will be regulated and it will have to be able to convince the regulators that it has robust privacy and security protections,complies with anti-money laundering laws and will undertake credible auditing of its activities.
Facebook is attempting to head off the privacy issues by quarantining the currency from its existing operations and promising that customer data within the digital wallet it has developed for its own family of apps,like Facebook Messenger,Instagram and WhatsApp,will also be kept separate and not used for targeted advertising.
That’s an assault on the establishment that none of the participants in the existing global payments system will take lightly.
That wallet,Calibra,would,in conjunction with Libra,give Facebook functionality very similar to that of China’s social media and e-commerce giant,WeChat,whose users can chat,shop using its proprietary digital payment services and order services on the one platform.
Global financial regulators,and central banks,have been devoting considerable intellectual muscle to investigating the potential of digital currencies but without any particular urgency because of the lack of traction existing cryptocurrencies have been able to achieve within mainstream finance.
The very clear ambition of Facebook and its partners to create a global currency on a global platform – an ambition possibly realisable because of the clout of the companies involved and their existing roles within the financial system or relationships with merchants – will galvanise the regulators and those already regulated. It is instructive that there is no bank within the initial group of partners.
David Marcus,the head of Facebook’s blockchain research,described Libra as something that could be"a profound change for the entire world"and made it very clear that Facebook believes it could displace existing payments systems and materially undercut regulated institutions on transaction costs.
Facebook's David Marcus:Libra could be ''a profound change for the entire world''.Credit:Bloomberg
At its most grandiose,the ambition is to create not a shadow bank or shadow banking system,but a global shadow financial system.
The prospect of banks being dis-intermediated,central banks sidelined and the role of fiat currencies diminished could be strengthened if the other big US technology companies such as Google,Amazon or Apple either join the Facebook partnership or,more likely,replicate it. It is either an exciting prospect or a disturbing one,depending on whether you are a beneficiary or casualty of disruption.
That’s an assault on the establishment that none of the participants in the existing global payments system will take lightly. The initial reaction from the establishment signals that Libra isn’t going to have the easy gestation that the confident announcement from Facebook and friends might have suggested.