7 Things You Should Know About Facebook's New Cryptocurrency Libra

Facebook's Libra digital currency has the ability to disrupt the way we currently make payments, but will we trust it?

1. The Libra is the unit of the Libra cryptocurrency.

Just as the U.S. dollar is represented by the dollar sign ($), the Libra is represented by three wavy lines:

Libra symbol
Libra symbol Source: libra.org/Wikimedia Commons

Libra is Facebook’s global digital currency that is intended in part to create inclusion for those without access to banking services. It is estimated that 1.7 billion people lack a bank account. Libra was formally announced on June 18, 2019, and its first version is projected to be released in 2020.

RELATED: FACEBOOK JUST ANNOUNCED ITS NEW DIGITAL WALLET AND CURRENCY: CALIBRA

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2. Libra is backed by a basket of currencies and U.S. Treasury securities.

A currency basket is a group of selected currencies that is used to minimize the risk of currency fluctuations. The currencies backing Libra include the U.S. dollar, UK pound, euro, Swiss franc and Japanese yen. This means that while Libra's value relative to any one currency might vary, it won't vary to the aggregate. The amount of the reserve is estimated at $1 billion.

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A U.S. Treasury security is a financial instrument of government debt that is issued by the United States Department of the Treasury. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). The instruments are sold in auctions conducted by the Federal Reserve Bank of New York, and they trade on secondary markets.

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3. This backing means Libra has full asset backing from the day it goes live.

Full asset backing is the same as that provided by governments who issue currencies. In those cases, the currency is backed by the country's national treasury, its mint, its central banks and its commercial banks.

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Some currencies have intrinsic value, such as those made of gold and silver. Other currencies can be exchanged for a precious metal, such as gold, and this is known as the gold standard. Today, most countries issue what is called fiat money.

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This can be paper currency, base metal coinage, or data, such as bank balances and records of credit or debit card purchases.

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4. Libra is Administered by the Libra Association

Facebook doesn't control Libra, it is controlled by the Libra Association,  a not-for-profit organization which is headquartered in Geneva, Switzerland. Members of the Association include:
Payments: Mastercard, PayPal, PayU (Naspers’ fintech arm), Stripe, Visa
Technology and Marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc.
Telecommunications: Iliad, Vodafone Group
Blockchain: Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited
Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
Nonprofit/Multilateral Organizations and Academic Institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking.

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The Libra Association oversees the development of the Libra token, the reserve of real-world assets that backs the cryptocurrency, and the rules that govern the blockchain. The Association hopes to have 100 members by the time of Libra's launch.

To join the association, each founding member must pay a minimum of $10 million, which gives it one vote on the Libra Association council. Members can optionally become validator node operators, and they are entitled to a share, in proportion to their investment, of the dividends derived from the interest earned on the Libra Reserve. If people carry large balances of the currency, the reserve will grow and earn significant interest.

This Reserve is comprised of the initial reserve plus the money users pay in fiat currency to receive their Libra tokens. That money will then be "invested in low-risk assets that will yield interest over time."

5. The initial value for Libra will be close to the value of a dollar, euro or pound.

While the Libra Association hasn't set an exact amount yet, the initial value is thought to be close to that of a U.S. dollar, euro or UK pound.

You will be able to buy Libra using whatever is your fiat currency through a third-party wallet app, Facebook's Calibra wallet app, or a reseller, such as a grocery store or convenience store. You'll be able to spend Libra at accepting merchants and online services.

The Calibra Wallet will be a standalone app that will plug into Facebook Messenger and WhatsApp. The Calibra Wallet will store Libra and allow it to be sent just like a text message is sent at "low-to-no-cost," according to Facebook.

To protect user's privacy, Calibra will not share customers' account information or financial data with Facebook except in very limited circumstances.

When someone buys Libra, their fiat currency goes into the Libra Reserve, and an equivalent value of Libra is minted. When someone cashes out their Libra, the Libra are destroyed (burned), and the person receives the equivalent value in their local currency.

That means 100 percent of the value of Libra is in circulation, and it is backed by real-world assets held in the Libra Reserve.

Facebook is currently signing up merchants to accept the Libra token as payment, and may use the Libra Reserve to offer sign-up bonuses. Facebook also wants to roll out devices for ATMs that will allow users to purchase the cryptocurrency.

6. Libra will run on a blockchain platform called the Libra Network.

A blockchain is a system in which a record of transactions made in a cryptocurrency is maintained across several computers that are linked in a peer-to-peer network. The Libra Network is made up of a series of servers, also called "nodes", that record and validate every transaction made on the network.

The Libra Network is a "permissioned" blockchain, which means that only certain servers will be allowed to connect to the chain. That will allow the Libra Network to run much faster than the blockchains of other cryptocurrencies, and this will make Libra more practical for everyday uses. Libra will be able to do about 1,000 transactions per second while a traditional payment processor such as Visa does about 3,000 transactions per second. Bitcoin only does seven transactions per second, and Ethereum does 15.

How Libra works
How Libra works Source: Facebook Newsroom

The Libra Network is built with open-source code with an Apache 2.0 license. That means that any developer will be able to create a digital wallet or other tools for use on the network by using the Move coding language. The Move language isn't fully implemented yet.

7. Reaction to Libra hasn't been all positive.

In the U.S., the Chairperson of the House Committee on Financial Services, Maxine Waters, asked Facebook to halt development of Libra, saying that "the cryptocurrency market currently lacks a clear regulatory framework." Democrats on the House Committee on Financial Services cited concerns of privacy, national security, trading, and monetary policy.

On July 10, 2019, the chairman of the Federal Reserve, Jerome Powell, testified before Congress that the Fed had "serious concerns" as to how Libra would deal with "money laundering, consumer protection and financial stability." French Finance Minister, Bruno Le Maire, warned the French Parliament of concerns about Libra and privacy, money laundering and terrorism finance.

Bank of England governor Mark Carney said that "anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation."

German MEP Markus Ferber warned that Facebook could become a shadow bank, while Japan's government is investigating the effect Libra will have on Japan’s monetary policy and financial regulation. They hope to complete that analysis before the Group of Seven meeting in France on August 24 – 26, 2019.

In a July 2, 2019 story in The Guardian, writer Joseph Stiglitz stated that Libra's business model would encourage "nefarious activities — corruption, tax avoidance, drug dealing, or terrorism ..." Yikes!

The real danger is that Facebook has 2.38 billion registered users worldwide and the U.S. Senate banking committee is afraid this massive number of users could undermine the stability of the global financial system.

On the other hand, Facebook already has a relationship with 7 million advertisers and 90 million small businesses. Libra could power microtransactions that currently aren't feasible with a credit card, and these could be used to compensate content creators.

Bloomberg's Matt Levine has written: "The goal is for Libra to be more useful than any national currency, accepted in more places and with fewer complications ..."

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