Facebook has finally revealed details about its global payments plan with the announcement of Libra, a digital currency built on the foundation of the blockchain technology. Libra will debut as a blockchain network with permissions but can eventually transition to a permissionless network within five years. The Libra blockchain will be open for anyone to build products and services on top of it.
The Libra Association is an independent not-for-profit organization, headquartered in Geneva, Switzerland. It will govern Libra and oversee the overall ecosystem. There are 28 (Exhibit 1) founding members backing the Libra Association, which includes Visa, Mastercard, PayPal, Uber, and others. It is estimated to reach 100 members by the first half of 2020, by which time the currency will make its debut in the market. Facebook also has created a subsidiary, Calibra, which will let users participate in Libra network. Calibra’s first product will be a digital wallet for Libra and available in Messenger, WhatsApp, and as a separate app.
Exhibit 1: Libra’s Founding Members
Source: Libra Whitepaper
What’s in it for Facebook
Facebook has played a key role in the creation of Libra Blockchain, even though the Libra Association is being shown to be a not-for-profit organization. As per whitepaper, Facebook is expected to maintain a leadership role through 2019. Even after that, Facebook will remain as one of the key founding members. Once Libra launches, Facebook and its affiliates, will have the same commitments, privileges, and financial obligation as any other founding member. This is a smart move by Facebook. Decentralization in the form of the Libra Association means that Facebook has distanced itself from being tagged as a company behind the cryptocurrency and driving the same, especially when the company is facing scrutiny over user privacy. Additionally, its regulated subsidiary, Calibra, will have certain obligations not applicable to the parent company.
From a business point of view, Facebook is likely to bet big on commerce. Enabling transactions is a natural synergy for the company, especially when it has millions of small-medium businesses (SMB’s) relying heavily on its platform for promoting products and buying ads. Facebook has more than seven million advertisers on its platform and 90 million SMBs. More than two billion people use at least one of its services every day. This is undoubtedly the biggest platform for the introduction of any new service on this planet. This can work in favor of Libra as no other cryptocurrency like Bitcoin or Ethereum has managed to get such a large platform. From a consumer perspective, the digital payments piece can fit well with Facebook’s marketplace and future monetization opportunities for WhatsApp.
Libra Set Certain Things Right From Start
Libra has not done any fundamental changes to the existing concept of Blockchain. The software that implements Libra Blockchain is open source. This means the ecosystem is likely to evolve with the scale with developers leveraging the Libra network to develop certain products and services on top of it.
Libra is designed to handle 1,000 transactions per second, much faster than Bitcoin (7/sec) and Ethereum (15/sec), but slower than the traditional payments systems like Visa, which can do around 3,000 transactions per second.
Another thing that works in favor of Libra is that it addresses the unpredictable nature of other cryptocurrencies by reducing volatility. Facebook has designed Libra as a stable cryptocurrency that will be fully backed by a reserve of real assets, The Libra Reserve. Further, a competitive network of exchanges buying and selling Libra will also support the value of the new cryptocurrency.
Libra will be aiming for financial inclusion of the 1.7 billion unbanked people. Reaching this user-base is easier for Facebook. Eight out of 10 leading countries in terms of Facebook usage is a developing country. In most of these countries, users send money outside the countries of origin. Libra will incentivize users to use its payments to services to avoid hidden transaction charges.
The regulatory stance of some countries and financial institutions will be one factor which Libra needs to address carefully. Regulatory pressure might end up limiting Libra’s reach as it varies from country to country. Plus Facebook has a lot to learn from FreeBasics here. Additionally, adhering to local KYC (know your customer) requirements regarding customer onboarding will be a daunting task, and it will again vary significantly from country to country.
The Libra Association also needs to understand that Libra is aiming to reach the unbanked, who are also the least tech aware users, with one of the most sophisticated technologies in the payments space. Interface and making the user aware of the benefits involved will be key.
The biggest competition for Libra is from existing wallet companies. They have a headstart and already seen wide adoption. Unless there is a simplicity to use Libra and the benefits attached to it, there can be some barriers to adoption.
Other challenges will come in the form of fraud and ransomware. Cryptocurrencies have become a preferred route for ransomware. There is a chance when tech laggards adopt Libra, the tech-savvy use it for illegal buying and selling and even for ransomware.
However, we believe that this is one of boldest attempt from Facebook in recent years. Payments and commerce is a big opportunity area for Facebook. The combined user-base of WhatsApp, Instagram, and Facebook is close to 2.7 Billion. Hence, this can be the moment when cryptocurrencies see a mass scale adoption. But a lot will depend on whether regulators across the world choose to question Libra or partner Libra.