Facebook’s Libra Currency: Implications for the World
Facebook’s Libra project has broad implications for the world, especially developing countries reliant on remittances, but it’s not all roses and rainbows.
The impact of Facebook on the world might become greater still with the launch of Libra, Facebook’s own cryptocurrency. For now, the announcement states that it will get here in 2020 and Facebook released a white paper that explains the upcoming digital currency in detail.
However, while Libra hasn’t even launched yet, it has already generated a torrent of controversy. Not everyone is happy with the prospect of it appearing and considering the political power of some parties that want it put on hold, there’s little doubt that the 2020 release might be postponed.
One thing is for sure, the impact of this cryptocurrency will be tremendous. In fact, it’s making an impact already as many regulatory and government bodies are now studying cryptocurrencies in-depth. This might be a major step that will push crypto to replace fiat money.
What Is Libra and Why It Matters
Libra is a cryptocurrency that Facebook will launch come 2020 and it has the potential to be a huge positive force for millions of people out there. That’s because it will make international money transfers quick and easy. This is a tremendous help for millions of migrant workers and students who all need to send money home or receive payments from abroad.
There are various methods for international money transfers today, but none of them are as affordable as Libra is going to be. And with this affordability also comes the fact that the amount of such transfers can increase. This, in turn, will affect the world economy as a whole.
You should be aware that there are entire countries where remittances are a major contributor to GDP, like India and a variety of African countries. All these states will immediately get a boost if the amount of remittances increases, which will happen because less money will be lost during transfer.
When people have more money, they spend more money and are more active in starting businesses, which means they contribute to the development of their country’s economy more. And this contributes to the world economy. So, in the end, everyone wins.
Libra has the potential to be the driving force that will power up this positive loop. Considering that it’s backed by Facebook, there’s little chance of it failing. It’s also guaranteed that about a quarter of the population will learn all about it through their Facebook accounts. This immediately solves the issue of awareness, which is one of the things hindering the popularization of cryptocurrency.
Using Libra is going to be extremely simple as Facebook develops a dedicated e-wallet for quick and efficient management of all crypto transactions with this new digital currency. It’s called Calibra and from what little is known, it should become an alternative to PayPal. Only, it won’t have huge fees, which are currently prompting thousands of PayPal users to seek other money transfer methods.
It’s important to note that while Libra is Facebook’s brainchild, it won’t be managed by the company in its entirety. It will be governed by a committee made out of founding members’ representatives, so Facebook will only have a single vote. However, it’s sure to have more of an actual influence that such a limited position seems to grant.
One of the most important benefits of Libra is the hype generated all around it. Of course, it helps the project itself, but it’s also drawing attention to cryptocurrency, in general. This is raising awareness that can end up pushing this entire sector forward. This means that not only will more people know that they have such an option to use for their financial transactions.
Businesses will also become more receptive to these currencies. Therefore, the number of ways in which people can actually use their cryptocurrency will increase. That’s the most important change that digital coins need because today they are hindered by the fact that people who use them can only pay a few vendors from their accounts.
Why Libra Isn’t All Roses
Libra aims to make money transfer services affordable, which is definitely a noble and commendable goal. It’s a fact that bank transfers are extremely expensive and inconvenient. You can see some of the numbers of just how expensive they can be on Libra’s own website. However, you shouldn’t forget that today there are specialized companies that offer cheaper money transfer services than before. TransferWise, Currencies Direct, OFX, and many other companies have already changed the international money transfer industry and impacted the global economy as a whole.
Due to these services, now many SMEs can go global and expand their business opportunities both by collaborating with foreign companies and by accepting payments from overseas. These companies charge very small fees, offer their clients a wide range of hedging tools to use, and have the currency exchange rate close to mid-market.
All this means that they offer the cheapest method of international money transfer that can be achieved today. And yet they are capped at current margins of about 0.5%. This is the lowest they can go in order to still make a profit as businesses because, for all that their overhead costs are low, they still exist.
Libra, and cryptocurrencies, in general, can reduce that margin because they don’t operate for profit as businesses do. Therefore, they can make international transfers nearly free. The implication of this, however, is that the money transfer companies will lose business and might cease to exist altogether.
Banks will take a beating too, due to some lost business. However, they are in a less precarious position due to the fact that the current financial system is, basically, built on banks. Going through them is a matter of legal requirement for some operations. Therefore, unless the laws themselves are changed, banks will continue to play a major role in the world of finance. Their excessively high fees and other disadvantages notwithstanding.
A much more concerning fact is that the launch of Libra might destabilize cryptocurrencies that already exist. That’s because Libra is not your regular cryptocurrency that will have the risk of huge value fluctuations, like the ones that dealt such a blow to bitcoin in 2018. Facebook’s cryptocurrency is a stablecoin, meaning its value is tethered to a fiat baseline. And this means that all cryptocurrencies that don’t have such an advantage, like Ripple that’s gaining strength now, will suffer greatly with the rise of a stablecoin, which is backed by not only Facebook but also Visa, Vodafone, Coinbase, and other huge corporations.
The white paper about Libra states that its creators hope to see people using it as a currency replacement in everyday transactions, so they can pay for a public transport ticket or coffee with nothing but their smartphone.
However, those words are impressive to no one because people can do this already. There are multiple solutions that allow anyone to pay using a contactless card or smartphone. And they’ll be using the money coming directly from their bank account, which can be protected by deposit insurance and has an infinitely smaller risk of losing value because of currency exchange rate fluctuations. Do bear in mind that Libra, for all its stability, is still reliant on those exchange rates and its value will fluctuate somewhat.
Therefore, it’s true that Libra for international transactions can be a great solution because it helps people save a lot of money. However, it doesn’t have all that many other advantages while it definitely poses some serious risks. That’s, probably, one of the reasons why the US Congress asked Facebook to temporarily stop the work on Libra’s implementation. The legislators will investigate the wide impact of cryptocurrencies, in general, and Libra, in particular, and determine whether digital currency is safe for the world economy and what legislation is necessary to regulate it efficiently.
The letter from Congress also mentions concern over the security of Libra citing past incidents where Facebook was unable to secure their users’ private data. And this is another concern that every cryptocurrency buff charmed by the idea of a supreme stablecoin should keep in mind.
Is Libra Good or Bad for the World at Large?
“Uncertain” is what Libra is for the world at this moment. There is no arguing the fact that it has tremendous potential. However, it might also come down to nothing and get forgotten as another ambitious project that never got to develop fully.
It’s too early to say what exactly this cryptocurrency will become, considering the amount of wariness it managed to generate before even launching. One would like to hope that Libra will redefine stablecoins and cryptocurrency in general and will give it the final push necessary to become a real alternative to cash.
Already, governments of the world are looking into ways to regulate cryptocurrencies as well as trying to understand their impact on taxes and money laundering (TAX3 study for the European Parliament). At the moment, the legal status of cryptocurrencies is uncertain, thus it leaves a lot of room for unlawful activities.
However, one needs to understand that no cryptocurrency is going to replace national currencies unless the nation’s government accepts it as such. Considering the lack of regulation or legislative base, this isn’t going to happen anytime soon. Therefore, no matter how much hype Libra generates, it won’t even become true equal to a national currency until people are able to pay their taxes and utility bills with this coin.