Why does Facebook want to launch a new digital currency?

Monday, 24 june 2019 | Redacción CEU

"Libra has the ambitious goal of reinventing money". Although this headline can be confused with a strange prediction of a daily horoscope, this statement has nothing to do with the world of astrology. Libra is the new digital currency that aims to transform the global economy model. Last week, the media of half the world spread the details of the upcoming launch of a cryptocurrency backed up by the Mark Zuckerberg’s social networking site. However, there are still many doubts about this announcement: Why do its promoters believe that this currency will achieve what other popular cryptocurrencies such as Bitcoin have not? What challenges does Libra pose and how do its backers expect to overcome them? Will this financial model be safe for users? Today, on our CEU IAM Blog, we try to clear up some of the main doubts about this new digital currency.

For some time now, Facebook has shown signs of aspiring to be something more than just a social networking site. A clear example of it is its recent commitment to becoming an integrated video platform and also a marketplace. Everything seems to indicate that the company has found in WeChat, the Chinese multi-purpose social platform, a model of inspiration. Given the success of the implementation of its WeChat Pay feature, it should surprise no one that Facebook also wants to bet on its own payment system. In this case, the novelty is the creation, together with other partners, of a new virtual currency that is highly likely to become the core of a decentralized model, which is very similar to the well-known Bitcoin.

Why a new currency?

Based on the foregoing, a question arises: Why design a completely new currency if there is already a wide variety of cryptocurrencies in circulation? Libra shares certain attributes with other currencies such as Bitcoin (Libra is also based on a blockchain), but it is also true that it has significant differences with a large part of cryptocurrencies. For example, one of the great advantages of Libra is its low volatility. This digital currency will be supported by tangible assets such as bank deposits in different currencies and sovereign debt from different countries. This is the reason why it is considered a stablecoin. Of course, this does not mean that it cannot fluctuate, but it is considerably less volatile.

One of the best chances of Libra is that it has the support of large companies and organizations in sectors as different as payment platforms, technology and marketplaces, telecommunications, blockchain, capital funds, NGOs and academic institutions. Some of them are well-known firms such as Mastercard, Paypal, Visa, Booking Holdings, eBay, Spotify AB, Uber Technologies,  Vodafone Group y Women's World Banking. Undoubtedly, this circumstance will help Libra have greater strength and trust. This may also lead to it being used by users who have not had any contact with cryptocurrencies before. Moreover, we should not forget the potential that it may have as a payment currency for WhatsApp and Facebook Messenger.

The "who is who" of Libra

To understand well what Libra is, we must take into account what is the responsibility of the different actors who are involved in the development of this currency. On the one hand, there is  Libra Association, an entity which is composed of 28 members at the moment (it aims to reach 100 members) which has control over Libra Blockchain and Libra Reserve and develops both. It is presented as a non-profit organization and is responsible for making the decisions. Among its most prominent members is Facebook which, in addition to being the promoter of this initiative, will keep the leadership of this project throughout this year. From 2020, the firm will become one more of its many founders. Decisions will be made democratically.

On the other hand, Facebook has created a financial and independent subsidiary called Calibra which is headed by David Marcus, the former president of the online payment company PayPal. The firm was born with the sound purpose of managing and serving as a digital wallet for this currency. This service will be available in Messenger and WhatsApp and as an independent app on iOS and Android.