Two weeks ago, Facebook and its consortium of 28 founding parties announced its long-awaited cryptocurrency: Libra. The consortium’s white paper suggests that it has tackled some of the main issues and concerns related to blockchain and cryptocurrency (e.g. speculation and volatility, privacy issues, fraud, money laundering and mining costs). In trying to solve these problems, Facebook has deviated from major blockchain principles and, some argue, the Libra may be better explained as a digital currency than a cryptocurrency. Still, some of the main characteristics of the Libra - such as financial inclusion, low (cross-border) fees and a consortium as the owner of the data – remain promising (although some disagree) and might be enough for the currency to thrive. However, this can only happen once the consortium clears the biggest hurdle yet: skeptical financial regulators and central banks who fear that Libra may compromise the financial system.
Although Facebook claims it has no intent to influence monetary policy, its sheer size, with 2.4 billion users, and Libra’s design as a “stablecoin” might affect the effectiveness of central bank’s policy either way. To prevent the kind of currency fluctuations that have plagued other (real) cryptocurrencies, every Libra is backed by a basket of multiple currencies and by liquid and low-risk assets including government bonds. As such, it could become a safe alternative in times of financial stress, potentially leading to a bank run and liquidity hoarding at the libra reserve. And there is more, although Facebook claims it has no intent to be a full-fledged bank, the transformation from a digital payment system to a bank is extremely attractive and fits the overall long-term strategy of building a digital metaverse. In the worst case scenario, Facebook could provide loans in the future, based on previous activity on the platform, with severe consequences for people with outstanding payments (e.g. limited access to apps and services).
The coming months will be decisive, congressional hearings are scheduled on the 16th and 17th July. If Facebook can convince governments and regulators that Libra is to function solely as an add-on to the monetary system and not as a replacement, Libra may get approval. Alternatively, it could position Libra as the Western alternative to Chinese fintech, which currently dominates digital finance (e.g. Tencent and Alibaba). However, if we take into account Facebook’s overall strategy, its questionable use of user data and other recent scandals, it remains to be seen whether Libra will actually get approval and gain a foothold in Western markets.