Cryptocurrency is only in its early days, but already it's easy to see how its mission to democratize the financial system might be co-opted. And do currency reformers really need Facebook, with all of its baggage, leading this Libra effort?
With Visa and MasterCard supporting Facebook’s new cryptocurrency initiative, you have to wonder just how disruptive it will be, so get ready for the establishment’s version of cryptocurrency.
Libra, which will be backed by “a reserve of real assets,” will collaborate with regulators, and has the support of MasterCard, Visa, Paypal, Booking Holdings, Uber, Lyft, and Spotify, among others.
Libra, which will be set up by the Libra Association and its corporate members, and aims to launch in 2020, positions itself as a responsible cryptocurrency in contrast to the renegades who abhor regulation, although the social network doesn’t articulate it in precisely this way. Not that there aren’t plenty of scammers in the crypto world.
“Unlike the majority of cryptocurrencies, Libra is fully backed by a reserve of real assets,” the association wrote in its own announcement. “A basket of currencies and assets will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value.”
Among the news bits in the announcement:
- Libra will be backed by “a reserve of real assets,” called the Libra Reserve, in contrast to most digital currencies trying to get traction. The reserve will include a “basket” of bank deposits and short-term government securities,
- The foundation of the new digital currency will be the Libra Blockchain.
- The Libra Association will work with regulators to gain acceptance.
- The programming code for developers will be open source with an Apache 2.0 license.
Booking Holdings clearly sees Libra as a contributor to solving a big problem: the fragmented and ever-growing numbers of disparate payment systems, including WeChat, Alipay, GrabPay, and tons of others, in emerging markets. It’s unlikely that one new currency would be a panacea for such a complex issue as payments, but it could help spur new solutions.
“Financial inclusion and economic empowerment are complex issues, but this is a great initiative, bringing together a lot of trusted global companies to help solve a global need,” said Booking Holdings spokeswoman Leslie Cafferty.
Merchant Model Helps With Payments
The company’s Booking.com unit helped create the world’s largest accommodations site by using a pay-at-the-hotel business model. But Booking Holdings, especially its Singapore-based Agoda brand, has been increasingly using the merchant model, where the online travel agency processes the payments.
In 2018 Booking Holdings grew its merchant revenue 40 percent to nearly $3 billion.
Especially as Booking Holdings digs deeper into alternative accommodations it becomes more important for the company to develop alternative payment systems because many vacation rental owners aren’t set up to accept credit cards themselves.
Facebook, which is a major player in travel advertising, sees the need for a new global payment system in a similar way.
The idea behind the Libra currency is that large swaths of the world’s population are still left behind with little access to the world financial system, and the new currency would let them participate.
As envisioned, according to published reports, consumers around the world would be able to use the Libra digital currency to pay for goods and services across the internet; although Facebook is the key driver behind Libra’s formation, the currency is not meant just for use on Facebook and its various platforms such as Instagram and WhatsApp.
The day before its Tuesday announcement, Facebook declined to comment on Libra.
Dave Montali, the chief information officer of Winding Tree, said Libra could provide much-lower payment fees than standard 2 to 3 percent credit card fees.
“If they can lower that substantially, there’s probably a lot of cost-savings opportunity in the general payment landscape,” Montali said. “That’s what makes MasterCard and Visa participation in the network interesting.”
The Libra Association released a whitepaper about its project, and recruitment of corporate, tech, and nonprofit vendors will undoubtedly continue.
While this solution could run the middle ground between traditional banking and the wild west of traditional cryptocurrency, it’s unclear how the move is less of a strategic hedge for Facebook against competitors and more of a transformative payments solution for vendors and customers.
Buy-in from the finance world will certainly help, perhaps with incentives and anti-fraud measures. It will be interesting to see how the cryptocurrency is received by the public, which has grown wary of Facebook’s manipulation and anti-competitive behavior. There is also the question of how many transactions the blockchain will be able to handle at a time, particularly if Libra takes off.
“I’m curious to see how they progress from a legal and regulatory perspective,” Montali said.
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Photo credit: Facebook co-founder and CEO Mark Zuckerberg is behind the planned launch of a new digital currency, Libra. Lionel Laurent / Bloomberg