Cryptocurrency. First gaining public attention due to the rise of Bitcoin, many innovations our age has adopted the use of cryptocurrency. In contrast to the traditional coins and cash system, cryptocurrency facilitates the exchange of goods and services via digital assets. For instance, consumers could exchange their fiat currencies to cryptocurrencies such as Bitcoins at any digital currency exchange (DCE) and use them to purchase goods and services online. The entire system relies on strong cryptography to ensure the security and integrity of the system. Facebook was driven to introduce their cryptocurrency to address the problem of access to financial institutions in certain demographics. The unbanked can range from the rural poor who are situated too far away from banks, to women in developing countries, to refugees seeking asylum in foreign countries that do not have any valid ID to access financial institutions. Despite the rising technological empowerment across the world, many were still unable to access traditional financial institutions to benefit from the financial system. Thus, Facebook has launched Calibra, a digital wallet for their own cryptocurrency Libra, to provide a unified global currency that could be accessed easily via the consumers’ fingertips. With Libra, Facebook would be able to provide money transfers with no additional fees without any geographical limitations.

So how exactly will Libra work? One of Libra’s priorities was to provide users with a cryptocurrency of stable value. Libra will also be backed by real assets such as bank deposits and government securities to ensure its stable value, unlike certain cryptocurrencies like Bitcoin that are backed by the mere common belief that it has value. Libra’s operations and continued development will be monitored by the Libra Association, which also doubles as validator nodes in the Libra Blockchain. Before the release of Libra, Facebook has established membership of the Libra Association with multiple partners from different industries. The company aims to expand the Libra Association to 100 members in 2020. The membership in the Association then forms the “permissioned blockchain” that regulates and validates all transactions done using Libra. Unlike a full blockchain, which was implemented by Bitcoin, that allows the public to mine for the cryptocurrency, permissioned blockchain effectively restricts the mining rights only to a selected few within the Libra Association, essentially giving the organisation the exclusive rights to control the currency.

Advantages of the Libra Coin

Facebook has an advantage that has offered them a leg up against their competition – brand reputation. Facebook’s name was widely recognised by the online population, with over 30% of the people online associated under its various services such as Facebook, Instagram and Whatsapp. Facebook’s wide reach will be able to provide Libra with the best platform for mass adoption, which allows for easier market penetration. With Facebook’s strong market presence, many users of a higher age group would be more encouraged to use Libra as they were already accustomed by the services of Facebook. The confidence towards Facebook was successfully built over time, and by introducing Libra through Facebook, users not familiar with the concept of cryptocurrency will find it easier to use Libra as an extension of Facebook’s function. Facebook will thus find it easier to expand the cryptocurrency market to people outside of the tech enthusiasts, which will increase the rate of real-world adoption and usher the use of cryptocurrency to the mainstream.

Facebook’s wide reach online also elevates the ease of access to Libra Coin. It’s slated for implementation in Facebook’s flagship brands, including Whatsapp, Instagram and Facebook, three of the most popular online services. Organisations within the Libra Association like PayPal, eBay, Lyft, Spotify will also integrate the Libra Coin into their payment system, allowing users to easily make purchases. This is another significant advantage that the Libra Coin has over other cryptocurrencies. To date, famed cryptocurrencies such as Ethereum and Bitcoin were still only accepted on a very limited scale. By forming alliances with real-life payment services such as Mastercard and Visa, Facebook can elevate the use of Libra outside of the online platform, allowing users to pay for retail services using Libra and thus accelerate the rate of adoption among consumers.

Thirdly, the Libra Coin will be a “stablecoin” linked to the value of other currencies and backed by Facebook’s reserves. Hence, it operates more like a newly introduced currency instead of a cryptocurrency. This ensures stability against fluctuating market expectations, which will encourage consumer confidence, especially during its infancy. Hence, it’s fair to say that the Libra Coin adopts the flexibility of cryptocurrency and the stability of normal currencies.

Disadvantages of the Libra Coin

After the announcement for Libra, many online users have voiced concerns over the overarching power that Facebook seems to be garnering quickly over the years. Facebook was not a corporation free of data harvesting scandals in the past, and by extending its fingers to the pies of financial services, many were worried that Facebook will soon be too powerful to regulate. Even though Facebook has attempted to stamp down worries on centralised control by informing the masses that the corporation only has one vote among the Libra Association, many still worried about Facebook’s ever-expanding presence in their lives. In Libra’s white paper, Facebook has expressed its wish to use Libra to “promote an open identity standard”. Even though Facebook has promised that the company will not utilize any Libra data for ad-targeting, the idea of one company having so much private information on so many individuals was not a pleasant one, to say the least. The problem only stands to aggravate in countries that do not have comprehensive data protection laws to protect the privacy of its citizens.

Facebook, being a powerhouse in the tech circle, while bringing in much-needed brand recognition, has also painted a gigantic bullseye on its operations. Due to its massive reputation, it naturally has garnered the attention of many hackers interested in obtaining private information. With the launch of Libra, Facebook has practically sweetened the reward of a cyber-security break by including financial information in its profile. The problem was only worsened by the fact that Libra’s open developer platform that allows third-party applications to be made to support the adoption of Libra since Facebook has maintained its stance that they will not scrutinise the developer’s products. This is worrying when Facebook’s target audience will consist of less technologically-savvy people, who might not be aware of the app permissions that they agree to when they download these third-party wallets. This might introduce loopholes into Facebook’s privacy systems, where Facebook’s attempt in the separation of social and financial data via the establishment of Calibra might be undermined by privacy-invading third party systems. Many worries that this will eventually lead to another scandal akin to Cambridge Analytica, just infinitely more damaging due to the financial data available for harvesting.

Even with Facebook’s established reputation, many criticisms regarding the violation of blockchain’s core principles have been voiced since the announcement of the Libra Coin. After all, many would argue that the core value of a blockchain was its decentralised nature, hence the adoption of the blockchain system of distributed governance. However, the Libra Association seems to be the antithesis of the decentralised blockchain, as the power of governance seems to lie on the members within the Libra Association. When the currency is centralised, many have said that the introduction of Libra has gone against the purpose of cryptocurrency as a whole. With this issue, further problems have extended to issues of censorship and privacy.

Many users of cryptocurrencies were drawn to its product due to its truly anonymous and censor-free nature. When transactions cannot be traced back to real-life identities, it meant a truly unregulated and free marketplace. However, Facebook’s step into the cryptocurrency world via Libra would require users to register their profile with a photo despite its pseudonymous nature. With the ability to collect certain information such as merchant identification and item of purchase, many critics have voiced the concern of Facebook potentially censoring the usage of Libra on transactions that the corporation do not deem appropriate. Even though it might be advantageous to curb illegal activities, many worry that the censorship will lead to an abuse of power and silencing of dissenting opinions in the future. Facebook will also have the power to block transactions to specific countries, such as North Korea and Iran. Thus, it is entirely natural to worry that Libra might be turned into a political weapon in the future. All of these factors led to a problematic conclusion that Libra cannot be neutral to all of its users, which goes against the very nature of why cryptocurrencies were deemed attractive in the first place.

Facebook has branded Libra as a tool to provide financial empowerment to the masses. However, its stability was a subject worthy of scrutiny. Since Facebook will not be subjected to the capital and liquidity requirements like other banks, there is a definite risk that Facebook might not be able to recover consumers’ assets in times of financial crisis. The Eurodollar crisis 2008 offers a similar context to such a financial crisis, and many financial institutions were only able to avoid collapse only due to support from federal banks. However, federal banks were willing to intervene in the 2008 crisis only because the threat was enough to danger entire economies. This, unfortunately, does not apply to Facebook’s Libra. Users of Libra would mostly use the cryptocurrency for small, day-to-day transactions and currency transfers. If it collapses, the subsequent fallout will not be dire enough to incentivise federal banks to step in and provide assistance. Thus, Libra users must be aware that Libra’s value-protection measures are not entirely fool-proof.

Despite Libra’s claim to provide financial access to the unbanked population, many question its feasibility due to Libra’s inherent reliance on fiat currencies. According to the white paper, users can purchase Libra by exchanging with fiat currencies. The question is, how could the unbanked undergo the exchange without access to banks? If access to banks is required, it meant that the users would still need to be subject to documentation checks, such as the Know Your Customer standards and the Anti-Money Laundering regulations. With such a wide influence, Facebook is legally required to conform to legal requirements, which will require the company to store KYC and AML information within Libra wallets to ensure that information is available for counter-terrorism (CFT) and sanctions purposes.

Current Challenges: Regulatory Concerns

Many governments were wary of Facebook’s venture into cryptocurrency. Libra’s many functions might threaten local currencies, which has many governments implementing barriers of adoption to protect their sovereign currencies. Due to Facebook’s wide reach, Libra will immediately pose systemic problems to the global financial system after it is officially launched. Thus, many countries including Singapore, Italy, France, Switzerland, the United States and the United Kingdom were not hesitant in voicing their concerns.

The US Senate has delivered 7 questions to Facebook regarding its precise intentions and privacy measures done concerning Libra in May 2019. Then, on July 2019, the US Congress has requested Facebook to halt all implementation of Libra until proper scrutiny can be done by involved regulators. The moratorium on Libra’s development was recommended to last until hearings on Libra’s details were complete. These doubts have risen due to the vague nature of Facebook’s explanation of Libra’s operations, and without clear regulations, many were worried that it will provide leeway for exploitation. The above concerns were loudly echoed by many US consumer groups, who had followed up with a non-exhaustive list of questions addressed to Facebook. A joint statement from multiple international signatories also expressed similar concerns and further urged Facebook to step up and answer the many questions regarding the implementation of Libra. In response to the Senate’s letter, Facebook has expressed its willingness to hold conversations and collect feedback from various regulatory institutions.

Meanwhile, France was also very outspoken with its opposition towards Libra. Right after Facebook’s announcement of Libra, France has led the effort among the G7 (Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States) to form a task force aimed to oversee the development of Libra. In September, France has once again stressed that it will not allow Facebook to develop its cryptocurrency in Europe as the innovation poses a serious threat to sovereign currencies. One of the major concerns voiced was how Libra provides a channel for people to abandon their respective fiat currencies during the crisis, which would render the governments’ macroeconomic controls ineffective. Many governments were also reluctant to consider the prospect of Facebook, a private company, possessing the power to issue currencies like a sovereign state.

Conclusion

Facebook’s Libra has yet again proven to us that the relationship between technology and finance is inevitable. The announcement of Libra signifies the induction of cryptocurrency into the mainstream. Despite its convenience, we need to be wary of the many shortcomings of Libra and not dive blindness into the innovation based on Facebook’s branding alone. In the upcoming months leading to the scheduled launch in 2020, we should stay vigilant and pay close attention to Facebook’s response to the various enquiries on data and privacy protection. Despite the intense scrutiny, how much would you trust Facebook and buy into the idea of Libra? What would your boundaries be, and to what extent are you willing to stay and believe in Facebook’s claims? These are several thoughts that we should all consider shortly.


Researcher: Teh Jia Qi

Reviewer: Vikky Beh

Editor: Bryan Wong