For something that doesn’t exist and won’t appear until next year, Facebook’s Libra cryptocurrency has generated a huge amount of comment, not all of it favourable, as we shall see. But that is hardly surprising, given Facebook is probably the best-known name in social media and digital currencies such as Bitcoin have been big news for a while.
Put the two together, and the result, in terms of both calm analysis and excitable chatter, is entirely predictable.
To tech pundits, Facebook’s announcement earlier in the summer that it intended to break into the world of cryptocurrencies was of a piece with the “convergence” of different aspects of the digital world. These are the “multi-functionality” of devices that work as mobile phones, cameras, radios and the rest, or the expansion of one-time book retailer Amazon into everything from CDs and DVDs to groceries.
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In this view, Facebook’s executive chairman Mark Zuckerberg and his colleagues are simply going with the flow.
But there are critics of the Facebook crypto project. They fall into two different but possibly overlapping camps. One comprises those who say Facebook Libra will not be a “proper” cryptocurrency, while the other is made up of those who suggest Facebook’s business record does not support the idea that it ought to be allowed to produce its own currency.
More on all that in a moment.
The best starting point is to look at how existing cryptocurrencies function and draw the contrasts with the proposed Facebook cryptocurrency. Using a decentralised network of computers, cryptocurrencies such as the best-known, Bitcoin, allow users to “mine” crypto coins by helping maintain a ledger of all transactions in the network, called “blockchain.”
There is a limit to the number of coins that can ever be mined, which, proponents say, makes them inherently anti-inflationary, as, rather like gold itself, once all the coins have been mined, the only way to obtain them would be to purchase them from existing holders. Supporters of Bitcoin and other major cryptocurrencies are adamant that these cannot be faked and are immune from interference by politicians.
However, their value is based entirely on what people are prepared to pay for them. This is true of paper currencies as well, but no major denomination shows the volatility of cryptocurrencies.
For example, on August 20, Bitcoin traded at $10,769. One month earlier, it changed hands at $10,590.70 on July 21, while a year earlier, it was down at $6,475.89 on August 21, 2018, a swing of over $4,000 in a single year.
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Libra coins, by contrast, will be backed by “real-world” assets. Details have yet to emerge, but they are thought to include reserve currencies such as the dollar, the euro and the pound, along with “near cash” such as government securities.
Enthusiasts for Facebook's digital currency point to this underpinning as a welcome corrective to the volatility seen elsewhere in the cryptocurrency world. As users buy Libra currency, the real-world cash they pay for them will be added to this reserve basket of assets which, in turn, ought to provide a platform of stability for the value of Facebook crypto coins.
But this, according to the first school of critics, is precisely the problem. The Libra currency is not really a cryptocurrency at all. It is a proposed payment system, much like Visa or Mastercard. Indeed, these two giants are among the proposed members of the governing Libra Association, along with Facebook itself and names including the car-hailing platform Uber and on-line payment system PayPal.
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All this offends against the libertarian streak in the world of cryptocurrencies, as does the other important way in which Facebook crypto coins will differ from established names. Bitcoin and others allow any of their users to verify transactions, via the decentralised blockchain system. By contrast, transactions in the Libra cryptocurrency will be verified, and the system run, only from computers controlled by association members.
This is necessary, says Libra, to allow for the sort of transaction speeds needed for the genuinely global medium of exchange that the Facebook cryptocurrency aspires to be.
The second group of critics have a slightly different starting point, which is that the Libra Association will eventually wield enormous sway over the world financial system and that Facebook, the prime mover, ought not, on its record, to be granted such power.
They point to the stream of allegations against Facebook in recent years, including that it has allowed the spread of so-called fake news, not least during elections; that it has violated users’ privacy; that it seems uncertain as to how many account-holders it really has; that it has allowed the dissemination of extremist propaganda, and that it has been insufficiently vigilant as to on-line bullying of children and young people.
Even those who accept that Facebook is, to an extent, a victim of its own success are concerned as to the potential for misuse of the currency by criminals, terrorists and others, and some hope central banks will put their foot down. The trouble is that they have largely failed to do so with the existing cryptocurrencies, so it is hard to see what the justification would be with Libra.
Libra will be able to be used via Facebook’s own cryptocurrency wallet, Calibra, of which the company says: “From the beginning, Calibra will let you send Libra to almost anyone with a smartphone, as easily and instantly as you might send a text message and at low to no cost.”
It added: “We’ll also take steps to protect your privacy. Aside from limited cases, Calibra will not share account information or financial data with Facebook or any third party without customer consent. This means Calibra customers’ account information and financial data will not be used to improve ad targeting on the Facebook family of products.”
Libra’s launch, it is fair to say, will attract far more scrutiny than that of any previous cryptocurrency. How well it stands up to this remains to be seen.