Facebook along with 27 organizations has planned to create a new global currency called Libra, a move that could potentially shake up the world’s banking system. Can Libra fix the inherent defects in cryptocurrency?
Cryptocurrency is a digital currency built with cryptographic protocols that make transactions secure. The most important feature of a cryptocurrency is that it is not controlled by any central authority: the decentralized nature of blockchain makes cryptocurrency theoretically immune to the old ways of government control and interference.
Cryptocurrency largely relies on a distributed ledger technology known as blockchain to provide both a transparent and secure means for tracking transactions and ownership of the cryptocurrency. The data on a blockchain is meant to be shared while also adhering to the primary premises of cryptocurrency being decentralized, secure and anonymous. Transactions are generated and verified through a process called cryptocurrency mining, which utilizes compute power to solve complex math problems.
Facebook has revealed its long-awaited cryptocurrency, “Project Libra,” that is designed for the billions of people using its apps and social network. Libra is an open-source digital currency that people will be able to use to transfer money to peers or merchants over the internet.
According to the Facebook’s CEO, Mark Zuckerberg “Libra’s mission is to create a simple global financial infrastructure that empowers billions of people around the world. It's powered by blockchain technology and the plan is to launch it in 2020. Right now, there are around a billion people who don't have a bank account but do have a mobile phone.”
Facebook is not only responsible for fully controlling Libra, but Facebook has also got a single vote in Libra’s governance like other founding members of Association including Uber, Andreessen Horowitz and Visa. Other Companies involved include Mastercard, PayPal, the crypto exchange Coinbase, and eBay,Lyft and non-profit financial organisations Women’s World Banking, micro-loan platform Kiva, and humanitarian aid group Mercy Corps. Each of these organizations has invested at least $10 million into the project’s organizations. The Libra Association will market the open-source Libra Blockchain and Developer Platform with their own Move programming language.
In order to achieve the decentralization, a new organization called Libra Association has been established whose members will have separate tokens which will provide them with on-chain voting rights to govern decisions about Libra.
Unlike bitcoin and other cryptocurrencies, Libra is tied to a mix of global assets to prevent the level of volatility common in the digital currency space. A Libra is a unit of the Libra cryptocurrency that’s represented by a three wavy horizontal line unicode character ≋like the dollar is represented by $. The Libra Association is still hammering out the exact start value for Libra.
Facebook is also introducing a digital wallet, Calibra, for users to store and exchange the currency. Calibra will be made available on Whatsapp and Messenger. It will be regulated like other payment service providers. Any information you share with Calibra will be kept separate from information shared on Facebook. The company has stated that “We'll provide fraud protection so if you lose your Libra coins, we'll offer refunds”. Libra will also use the same verification and anti-fraud processes that banks and credit cards use and will implement automated systems to detect fraud, Facebook said in its launch.
Project Libra’s roll-out comes as Facebook faces unprecedented scrutiny from regulators, and is battling to regain users’ trust after a series of privacy scandals. The congresswoman and chair of the House Financial Services Committee, Maxine Waters, called on the company to put a stop to the project until Congress and regulators could review it. She also called on company executives to testify before the committee. “Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data,” Waters said in a statement. “With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users.”
Our assessment is that Facebook is using one of the least-regulated areas of finance for its foray into digital sector. We realize that investors have lost hundreds of millions of dollars through steep price drops and crypto-exchange hacks. The market has also faced money-laundering and terrorist-financing allegations.
We feel that this move can reshape the payment industry and also end the decentralized era of cryptocurrency. It can be noted that the currency runs on a permissioned blockchain, which means that only companies in the Libra Association can mine it. It also makes the Libra Association a de facto central bank, actively managing the currency for stability backed by a reserve of bonds and liquid currency.
In India, the RBI had already announced that any form of cryptocurrency won’t be considered as legal tender in India. Recently, a new draft bill named 'Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019,' announced by a panel headed by Economic Affairs secretary, Subhash Chandra Garg has reportedly proposed a 10-year-long prison term for those who "mine, generate, hold, sell, transfer, dispose, issue or deal in cryptocurrencies."