Financial news

What is Facebook’s new digital currency Libra?

The currency has some heavy-hitting companies behind it — the independent association governing the currency from Geneva, Switzerland will be made up of representatives from an initial group of 28 companies including Mastercard, Visa, Paypal, Uber, Vodafone, Thrive Capital and Spotify to name a few.

Those companies will also contribute to the currency and each run a part of the currency’s network.

Facebook also is creating a subsidiary company, Calibra, that will offer digital wallets to spend the new currency. The wallets will be connected to other applications such as Messenger and Whatsapp.

The social media giant has been criticised heavily in the past few years over its handling of personal data and privacy.

Moving into the territory of cryptocurrency, experts say, could be a way to offset advertising losses.

But what is this new virtual currency and how is it going to work in practice? Euronews spoke to digital currency and economic experts about it.

What is a cryptocurrency?

A cryptocurrency is a type of virtual or digital currency designed to be secure for financial transactions.

“It doesn’t have a coin or physical banknote in our pockets like the national currencies we’re more familiar with,” said Dr Garrick Hileman, head of research at crypto company Blockchain.

It’s also a currency that isn’t run by a single bank or institution but instead by a computer network.

“A cryptocurrency is built on a blockchain which is a distributed database. It’s a ledger or you can think of it even as a spreadsheet that basically keeps track of who owns what that runs on in some cases thousands of computers,” Hileman explained.

How did cryptocurrency emerge?

The idea of electronic currency has been around for a long time.

In the early 1980s, a computer science student at the University of California, Berkeley published a paper describing electronic cash but early digital currencies failed.

It wasn’t until 2009 that the first cryptocurrency really succeeded with Bitcoin.

The idea was to “create a politically independent currency that would not be printed by any existing government,” wrote Dr Natacha Postel-Vinay, an economic history professor at the London School of Economics, in an email to Euronews. “There is, therefore, an anarchist origin to the plan.”

There are now thousands of different cryptocurrencies in the world.

What are the potential benefits of cryptocurrency?

Experts say cryptocurrencies can make international transactions easier.

You can “transfer money more quickly and at a lower cost, than say using traditional wire services or even traditional payment networks,” Hileman said.

People can also bypass bank exchange fees all the while remaining anonymous.

“Normal currency transactions are also regulated and can be traced to someone’s identity, which reduces possibilities for what to do with the money. Bitcoin is anonymous which appeals to certain people,” Postel-Vinay wrote.

In some cases, it removes the middle man, banks or institutions, from transactions.

“Until now, we were always linking our trust to the institutions that vouched for it with their reputation, such as banks, agencies, companies, etc. With the blockchain technology, trust becomes part of the system itself,” Tomaž Levak, of OriginTrail, a blockchain tech company focused on delivering secure data sharing, told Euronews in 2018.

How does Facebook fit into this?

Facebook is launching a cryptocurrency that will be based on real assets. That means it’s essentially what’s known as a “stable coin” which has either traditional currency (USD, euros) or government debt backing it. That would make it less volatile than Bitcoin, experts say.

Facebook developing a cryptocurrency with support from powerful companies like Visa, MasterCard, and PayPal is “a real validation for cryptocurrency that these are full of potential, hold great promise. Many do see them as a cornerstone of the financial infrastructure of the future,” Hileman said.

Spencer Bogart, a general partner at venture capital firm Blockchain Capital and a former Bitcoin analyst, wrote on Twitter that it will be a “bullish catalyst” for Bitcoin by helping to force companies to build infrastructure such as digital wallets to support these virtual currencies.

What does the future hold?

“Our financial services system really has not been disrupted in the same way that media and other industries have with the arrival of the internet and digitisation. Payment, currencies, and banks haven’t really changed a whole lot since the arrival of the internet and since the 2008 financial crisis,” Blockchain’s Dr Hileman said.

Libra “could potentially offer a faster better cheaper form of currency and payment than what the banks have offered,” he continued.

But, LSE professor Postel-Vinay contends that governments try to control money supply for economic and political reasons.

“If it turns out that the Libra isn’t just a new means of payment but turns into a proper new currency with a life of its own (inflation rate, fluctuating exchange rate etc.), governments will find ways to crack down on it”.