Believe it or not, we are entering a new paradigm of financial services which will totally change the way we use currencies.
Evolving from barter system we have entered the age of digital currencies and cashless payments, making payments as easy as sending a text message.
This shift started in 2009 when an anonymous entity (Satoshi Nakamoto) created a trustworthy peer-to-peer money transfer technology called “Bitcoin”. Many other cryptocurrencies were built based on the solution provided in the white paper published by Satoshi, majority of them decentralized but some centralized as well. While decentralized cryptocurrencies are more secure and give more freedom to the owner, centralized currencies are faster and easier to use.
Thus, cometh Libra, Facebook’s latest technology and a partially owned cryptocurrency. Libra provides a combination of both worlds and will let you transact and remit money instantly and with nearly zero fees.
What is Libra Coin and Who Owns it?
In order to prevent the privacy of their Facebook users and to keep their social media data separate from their financial data, Facebook has created a new company Calibra. Calibra will handle the development of Libra and its maintenance upon launch by mid-2020.
The purpose of creating a global currency such as Libra is to promote financial inclusion, encourage lower fees remittances and generate more business online. According to Facebook’s VP of blockchain, David Marcus, “If more commerce happens, then more small businesses will sell more on and off platform, and they’ll want to buy more ads on the platform, so it will be good for our ads business.”
In order to make the currency more decentralized, Facebook/Calibra has formed a Libra Association. Members of the Libra Association will possess 1 or 1% of the voting rights (whichever is higher) in the operational matters of Libra. Each of the founding members will invest a minimum of 10 million dollars to become a validator node (making Libra more decentralized). The aim is to reach 100 founding members in the Libra Association which currently has 28 members.
The current 28 members come from different industries and sectors thus making the association more diversified and decentralized:
– 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 and multilateral organizations, and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
Facebook’s intention to diversify and avoid sole ownership is to escape the scrutiny from regulators who are already investigating Facebook for privacy breach and misusing private data for business purposes.
Who Creates Libra and How Does it Work?
The best part about Libra is that it is pegged to international currencies like the US dollar, Euro, Pound, Swiss Franc and Yen. This keeps the price of Libra stable and easily convertible to major currencies. Since Libra is a stablecoin (digital currency with stable price) it will help the merchants to use it as a mode of payment as they cannot use other currencies because of their high volatility.
Users can purchase Libra coins from Calibra wallet or any other third-party wallets. The money will enter the Libra reserve and will generate the Libra coins equivalent to the amount of wealth stored in the reserve. Once the user converts the Libras back to fiat, an equivalent number of Libra coins will be destroyed/burned from the blockchain. This means, there is always 100% of Libra in circulation.
Libra blockchain can handle 1000 transactions per second, and all these transactions are verified by and updated on the ledger by the nodes (Libra Association members). A consensus of at least two-thirds of the nodes is needed in order to verify and update the ledger.
What’s the Incentive for Associate Members?
Every member in the association will be liable to receive interest (proportionate to their investment) on the money kept in the pool. The founding members can utilize the dividends in infrastructure or they can pass it on to the users to encourage more users to use Libra.
Libra will help to remove the payment barrier the businesses face, especially for the users in underserved markets. Payment access to more people will lead to more business which will eventually lead to more profits for the founding members.
Since Libra is created on a new programming Move (for moving Libra) associate members can also create their own wallets and payment gateways for their users. The flexibility to store Libra coins on multiple wallets will also make transactions easier and convenient for users.
How is Libra Helpful for Users?
The world has already moved to cashless payments, but the hefty fee still remains. Banks and financial institutes charge an average of $50 billion annually as a fee for remittances, which roughly translate to 7% of the amount per transaction.
Libra will remove the transaction barriers and fees. A normal wire transfer that takes 2-3 business days could then be completed in a few seconds anywhere in the world.
Partner companies might also offer benefits and added discount for making a payment using Libra, this will attract more users which is a win-win for both the parties.
“We realize people don’t want their social data and financial data commingled,” says Marcus, who’s now head of Calibra. What this means is, Facebook cannot use the data from Calibra to target customers based on their spending choices. Users will not see ads based on their recent purchases made using Libra.
How to Buy and Transact with Libra?
Buying and transacting using Libra coin is as easy as sending an instant message.
During the sign-up on the wallet, you will have to go through an easy Know Your Customer anti-fraud process. You will be verified within hours of uploading your government-issued photo ID.
The best part about transactions on Libra is that you can make them pseudo-anonymously. Your actual name and information will not be disclosed to the receiver while making transactions, however, your details may be disclosed to law enforcement upon their request.
Once the wallet is set-up you can purchase Libra by directly depositing fiat into the wallet and you can use those Libras to make payments at a local grocery store, or to pay for your Uber, or to remit money to other countries. You can either scan the receivers QR code or just add them to your list to send and receive money from them.
Libra the Currency
The Libra Association is a company registered in Geneva, Switzerland because of the neutral status and support for blockchain technology in Switzerland. The value of 1 Libra coin will be calculated as the global average of the five currencies – USD, Pound, Euro, Yen and Swiss Franc. A basket of multiple currencies is chosen in order to keep the price stable. A sudden/steep change in the value of one currency will not affect the cost of 1 Libra coin as it is pegged with other currencies as well.
If Facebook succeeds in creating a global currency that would enhance financial inclusion and make transactions easier and cheaper, it would benefit everyone in the long run. Easy availability of funds will lead to more revenue for businesses via Facebook, hence the businesses will boost their ad spends. This will lead to more ad revenue generation for Facebook and also help increase the Libra reserve which in turn will produce more dividends for partner companies.
Calibra and Libra will go live in the first half of 2020 when the development and testing phase will be over. Once it goes live, the way we do transactions will change drastically. I am excited about the future of payment systems, are you?