Behind Libra, Facebook's new digital currency
Libra will use the same security and record-keeping principles as Bitcoin.
NEW YORK (AP/Reuters) — Facebook is unveiling a digital currency called Libra as the company seeks to make its ads more valuable by enabling smoother transactions and payments online, particularly among those without credit cards or bank accounts.
Libra will use the same security and record-keeping principles as Bitcoin, the most popular digital currency system today. But unlike Bitcoin, Libra is backed by several traditional financial companies, including PayPal, Visa and Mastercard, and will base its value on multiple real-world currencies such as the U.S. dollar and the euro. Libra also faces additional scrutiny over privacy, given Facebook’s poor record on the matter.
Here’s a look at Libra and other cryptocurrencies.
WHAT’S A CRYPTOCURRENCY ANYWAY?
It’s a form of digital cash that uses encryption technology to make it secure. Cryptocurrencies exist not as physical bills or coins but rather as lines of digitally signed computer code. Records are typically kept on ledgers known as blockchain.
People can store their cryptocurrency stashes in virtual wallets that resemble online bank accounts. Facebook is developing a wallet app for Libra. As with other cryptocurrencies, people will be able to buy and sell libras on exchanges for traditional currencies. It’s not clear what fees, if any, consumers will have to pay for such transfers, although Facebook says they should be low.
WHY NOT USE BITCOIN?
Although Bitcoin has gotten a lot of attention, it isn’t widely used. For one thing, its value fluctuates wildly, meaning that $100 in bitcoins today might be worth $300 a month from now — or $2.50. Only a handful of merchants accept bitcoins as payments.
Facebook is hoping to keep the libra’s value stable by tying it closely to established currencies. Unlike most other cryptocurrencies, the Libra will be backed by real-world bank deposits and government securities in a number of leading currencies.
Facebook is also recruiting partners ahead of time. Lyft, Uber and Spotify already have joined the Libra group. They will likely accept libras when the system launches. They’ll also help fund, build and govern the system. That’ll make Libra less of a free-for-all than Bitcoin. Facebook says Libra will embrace regulation, but it isn’t providing many details on how.
With most cryptocurrencies, including Bitcoin, anyone can lend computing power to verify transactions and to prevent anyone spending the same digital coin twice. With Libra, the verifications will initially be managed by its founding companies, such as Facebook and PayPal. Facebook believes the closed approach will mean better security.
ARE CRYPTOCURRENCIES ANONYMOUS?
Although it’s possible to trace bitcoins and some other cryptocurrencies as they are spent, owners of accounts behind the transactions aren’t necessarily known. That makes such currencies a favorite among certain cybercriminals. But it is sometimes possible to tie cryptocurrency transactions to a real person who has cashed out digital coinage into a traditional currency.
And if someone spends libras while logged onto Facebook, it’s theoretically possible Facebook could tie it back to a real person. Facebook says it won’t be able to see this data when someone uses a third-party wallet, although it hasn’t yet explained why that is.
Facebook says it won’t use Libra data to target ads, but may share data “to keep people safe, comply with the law, and provide basic functionality.” Facebook is creating a subsidiary, Calibra, to try to keep the operations separate.
GETTING STARTED
Libra is scheduled to launch publicly in the first half of next year. Whether consumers will embrace it is another matter. Discounts potentially offered by Uber and other partners might be enough to get people to at least try the system. But many people find it easy enough to pay for goods and services online with credit and debit cards.
There could be greater appeal among people who don’t have bank accounts. Libra could open up e-commerce to them.
Though Libra could be a way for Facebook to drive spending when people interact with Facebook ads, the company says the currency will be independent and won’t require a Facebook account to use.
The name “Libra” was inspired by Roman weight measurements, the astrological sign for justice and the French word for freedom, said David Marcus, a former PayPal executive who heads the project for Facebook.
“Freedom, justice and money, which is exactly what we’re trying to do here,” he said.
Facebook also appears to be betting it can squeeze revenue out of its messaging services through transactions and payments, something that is already happening on Chinese social apps like WeChat.
The Libra announcement comes as Facebook is grappling with public backlash due to a series of scandals, and may face opposition from privacy advocates, consumer groups, regulators and lawmakers.
Some Facebook adversaries have called for the company to incur penalties, or be forcibly broken up, for mishandling user data, allowing troubling material to appear on its site and not preventing Russian interference in the 2016 presidential election through a social media disinformation campaign.
It is not clear how lawmakers or regulators will react to Facebook making a push into financial services through the largely unregulated world of cryptocurrency.
In recent years, cryptocurrency investors have lost hundreds of millions of dollars through hacks, and the market has been plagued by accusations of money-laundering, illegal drug sales and terrorist financing.
Facebook has engaged with regulators in the United States and abroad about the planned cryptocurrency, company executives said. They would not specify which regulators or whether the company has applied for financial licenses anywhere.
Facebook hopes it can bring global regulators to the table by publicizing Libra, said Kevin Weil, who runs product for the initiative.
“It gives us a basis to go and have productive conversations with regulators around the world,” said Weil. “We’re eager to do that.”
MAJOR PARTNERS
Bitcoin, the most well-known cryptocurrency, was created in 2008 as a way for pseudonymous users to transfer value online through encrypted digital ledgers. Early developers believed that the world needed an alternative to traditional currencies, which are controlled by governments and by central banks.
Since then, thousands of bitcoin alternatives have launched, and Facebook is just one of dozens of blue-chip companies dabbling with the underlying technology. But its status as a Silicon Valley behemoth that touches billions of people around the world has created significant buzz around Libra’s potential.
Partners in the project include household names like Mastercard Inc, Visa Inc, Spotify Technology SA, PayPal Holdings Inc, eBay Inc, Uber Technologies Inc and Vodafone Group Plc, as well as venture capital firms like Andreessen Horowitz.
They hope to have 100 members by Libra’s launch during the first half of 2020. Each member gets one vote on substantial decisions regarding the cryptocurrency network and firms must invest at least $10 million to join. Facebook does not plan to maintain a leadership role after 2019.
Though there are no banks among the inaugural members, there have been discussions with a number of lenders about joining, said Jorn Lambert, executive vice president for digital solutions at Mastercard. They are waiting to see how regulators and consumers respond to the project before deciding whether to join, he said.
The Libra Association plans to raise money through a private placement in the coming months, according to a statement from the association.
PRIVACY, REGULATORY CONCERNS
Although Libra-backers who spoke to Reuters or provided materials are hopeful about its prospects, some expressed awareness that consumer privacy concerns or regulatory barriers may prevent the project from succeeding.
Calibra will conduct compliance checks on customers who want to use Libra, using verification and anti-fraud processes that are common among banks, Facebook said.
The subsidiary will only share customer data with Facebook or external parties if it has consent, or in “limited cases” where it is necessary, Facebook said. That could include for law enforcement, public safety or general system functionality.
Transactions will cost individuals less than merchants, Facebook said, though executives declined to provide specifics. Each Libra will be backed by a basket of government-backed assets.
The company plans to refund customers who lose money because of fraud, Facebook said.
