Facebook (FB) has announced it will move forward with a new cryptocurrency it has named Libra. Although it will be based on blockchain technology, as is cryptocurrency leader Bitcoin, Libra will differ from Bitcoin in that it will be a “stablecoin”, meaning its value will be pegged to other currencies and thus will be much more stable in value than Bitcoin. Why is it important that Libra’s value remains relatively stable? Because Facebook envisions that its users will use Libra to pay for real things. If Libra’s value remains stable, people will be more likely to use it as intended. There are stories out there of early Bitcoin owners paying for coffee with Bitcoin when Bitcoin was valued at $50 or less, prior to its explosion in value to $20,000 (1 Bitcoin is now worth about $9,000). Imagine how foolish the people who bought coffee for Bitcoin feel, now that Bitcoin’s value is where it is! If people think that Libra’s value could follow the same path, they would be much less likely to use it. Facebook wants people to actually use Libra rather than to buy Libra and hold on to it, and so that’s why they created Libra as a stablecoin.
Upend the Payments Market
One thing I enjoy about the financial media, in particular, is its wild speculation about new products and how they will take over the world. For Tesla, for instance, the speculation was that people would soon be buying electric cars en masse and the internal combustion engine and fossil fuels would become obsolete. Now, electric cars have made good progress, but they are a long way from supplanting traditional cars and trucks. Now we have the introduction of Libra, and the press is speculating that Libra could take the place of traditional payment methods such as credit cards (cash being already too-20th Century to be cool). Maybe this is Facebook’s “in its dreams” goal, but I’m guessing Facebook is really thinking, “Let’s introduce this, see how it works, maybe make some tweaks, and go from there.” No world domination just yet, but it is a thought out there.
Secrecy
One of the appeals of Bitcoin and other cryptocurrencies is that transactions would be secret, and not traceable. Now we have Facebook, a company that has been ripped in the media for lax controls on secrecy and data and identity confidentiality, to say nothing about fake accounts, getting involved with a product that is appealing because of its secretive nature. Put me down as a skeptic that Facebook can pull off this secrecy aspect of Libra. To that end, Facebook has put together a governing board of other companies to try to establish that Facebook alone won’t control your data. We will see how well this goes.
IMO
I believe it is a smart move by Facebook to create Libra as a stablecoin if Facebook wants people to use Libra to buy stuff. Facebook will have to work on making sure the purchasing process goes smoothly, because, with Bitcoin, the purchasing process is not smooth. If all goes well, Libra could be successful, but I believe it will take much more than Facebook and its crony partners to truly upend the payments system in the United States. A good chunk of the established system of finance stands to lose if Libra is successful, meaning that these established banks and the like will have to jump on board or adapt themselves. Then there are all of the regulatory bodies of the US Government; let’s see how that plays out. If you want, go ahead and buy some FB, especially if you can afford to lose some money. After all, FB isn’t a pure play on cryptocurrency – they also have a social network, as you might recall.
I relied heavily on this article in the Washington Post and this article from the Wall Street Journal to write this blog post.