Why Are Facebook Entering The Blockchain Space?
A high level summary of Facebook’s cryptocurrency project, Libra – along with an explanation as to why they did it.
I’m quite sure you’ve heard of Facebook’s Libra project. A cryptocurrency created, developed and launched by the world’s largest Social Media company. On a quiet Tuesday morning, 18 June 2019, tech journos were diligently going about their business when suddenly all hell broke loose. News emails started filling up with press releases and freelance queries about a major Facebook announcement: They had published the White Paper to their latest project: Libra. “A global currency and financial infrastructure that would empower billions of people.” (To quote the paper).
Journos couldn’t keep track, as they scrambled to make sense of what Facebook were doing, how they did it, and most importantly, why they did it. Now that the dust is only just beginning to settle, allow me to provide you with a summary of what every news outlet in the world touched on in recent months.
Why Facebook Did This
Mark Zuckerberg has said on numerous occasions that the purpose of Facebook is to “make the world more open and connected.” You may cynically believe that’s just a façade for simply wanting to be incredibly rich and powerful. But if you’ve read “The Accidental Billionaires” by Ben Mezrich, you might get a different picture. I most certainly did: I sincerely believe Zuckerberg saw how “The Facebook” could dramatically impact the world, and bring online human interaction into the next phase of the internet. And he was (and is) willing to do whatever it takes to achieve such a connected world.
Sure, the lines are going to get blurred when your vision is global and you need funding to achieve such a vision. But, while I remain an advocate for user privacy, I believe Zuckerberg’s intentions aren’t malicious.
I believe Zuckerberg and his team saw the technological breakthrough of blockchain, and began to envision a financial system that aligned with their “open & connected world” vision. Facebook wants the world to communicate through their platform. That’s why they bought Whatsapp and Instagram, and tried to buy Snapchat: These companies were growing so rapidly, it made sense to include them into Facebook’s ecosystem.
Now consider: commerce is one of the most fundamental forms of communication. After all, what better way to “make the world more open” than by allowing them to trade more freely?
So in short: An intra-networked cryptocurrency fits right in with Facebook’s mission of a more open and connected world.
And again, there could very well be more financial incentives at play here, but the amount of regulatory hurdles the company will have to go through in order to get this form of currency passed as legal is far too great for it to be simply a financial goal. A company and its founders would only pursue such a grand task unless it fit into their ideals. Which I believe Libra does.
The company has already been dragged before a US Congress House of Financial Services Committee, with further government pressure being imposed in the foreseeable future. This is a fight very few (if any) companies would be willing to take on. A fight I believe only worth considering if ideals are its motivation.
So what exactly is “Libra”?
It is an entirely digital currency (no cash notes) able to be traded between digital wallets and within the Facebook digital ecosystem (Whatsapp, Instagram, and Facebook itself). We call this a “cryptocurrency”, because it is secured by cryptography.
In their white paper, Facebook believe this cryptocurrency will promote financial inclusion for the “unbanked” because it will create an entirely digital economy not bound by borders and geo-political jurisdiction. Unfortunately however, it seems as though this vision could be a few years before its time. As we can see by the strong-handed regulatory push back, world governments aren’t ready for a truly global economy. They’re ok with globalization being thrown around at their forums and conferences, but when the rubber hits the road, it would seem the road is a little more rocky than companies like Facebook expected.
In terms of title definition, “Libra” seems to have two sources of inspiration. Facebook says that the name is based on the Roman unit of weight measurement (the “Libra”), but it is also inspired by the French stem “Lib” which of course is where we get the word “Liberty” – and according to the Social Media giant, they’re promoting financial freedom. The currency symbol represents what looks to be three baskets, or perhaps they’re waves? You decide: ≋
How are they going to do this?
Before blockchain came along, a global economy that was entirely digital was impossible. It required all kinds of third parties and intermediaries such as PayPal and Venmo, all of whom were heavily regulated within each geo-political jurisdiction. The reason for such bureaucracy was because the internet economy was still dealing in people’s Dollars and Pounds, but without the use of traditional sovereign currencies, no such jurisdictional regulation would be required (technically).
Blockchain technology allows for Libra’s ledger to be perfectly recorded and adhered to, on a live, up to date basis. It also closes the door on hackers gaining access to user funds.
Another example of digital economies is in-game currency for computer games like Fortnite or even FIFA Soccer. Almost every game online these days has its own in-game currency, but hacking the system isn’t that difficult in order to illegally gain the currency. It’s just not widely done because owning the currency only allows you to get further in the game. But with a real economy of goods and services, the incentive for security breaches is much higher. Blockchain technology provides an infrastructure that requires enormous amounts of computing power to even try and attempt a breach.
Not Fully In Control
Facebook won’t hold all the control of Libra. They recognise that if their vision of a global economy is realised, having so much power would be fundamentally dangerous and grotesquely totalitarian. And so they have enlisted the partnership of some of the world’s leading tech providers and financial know-it-alls: VISA, Mastercad, PayPal, Naspers, eBay, Spotify, Uber, Lyft, Xapo, Coinbase, Andreessen Horowitz and a dozen other companies have each invested over $10 million, are each providing blockchain network support (by running nodes), and each form part of the “Libra Association” registered in Geneva, Switzerland.
At this stage, it seems as though any company or institution can apply to become partners in The Libra Association, but a number of minimum thresholds are required, along with limitations on the types of companies (Ie. only one third of founding members can be crypto-related businesses). Investors and partners are entitled to a share in dividends earned on interest from user deposits, paid in a secondary token called the “Libra Investment Token”.
Calibra Wallet & Libra “Stablecoin”
Facebook plan to launch a subsidiary company called “Calibra”, which will hold user’s cryptocurrency, as well as ensuring Facebook user data does not get intertwined with Libra payments. IE. Publicly visible transactions on the blockchain will never be able to reveal user’s identities. Interestingly, Libra is far more decentralized and anonymous than many tech journalists gave it credit for.
Facebook hope to integrate the Calibra Wallet into Whatsapp initially, allowing for transactions to take place as simply as typing and sending a text message. And as Libra’s white paper states; it provides workers abroad a fast & affordable way to send money back home, or a tenant to pay their rent as easily as they pay for coffee. The plan is then that users will be able to cash out their Libra currency and even spend it at local exchange depots such as convenience stores and retail outlets worldwide. It would seem as though Facebook envision an economy in the future where users may not even need to cash out their Libra, because they can live entirely using the cryptocurrency. Granted, this is certainly idealistic, but a future that Facebook hope to see realized.
The Libra currency is pegged to a host of securities managed by the Swiss-based Libra Association. These securities are a basket of traditional currencies (including the US Dollar, GB Pound and the Euro), bank deposits, as well as short-term government securities. All of which are carefully monitored and traded to ensure the currency holds a stable value, allowing for users to confidently accept payment in Libra knowing with surety that the value of their payment will be worth what it was the day before. But as TheNextWeb reports, it won’t be a classical “stablecoin” by definition – as its value may still be affected by various foreign exchange market conditions.
Also interesting to note is that the actual Libra tokens in circulation will be controlled by “The Libra Reserve”, with new tokens being minted or burned as supply and demand fluctuates. This is a very similar economic method used by Central Banks to ensure stability of an economy, but flies in the face of the more traditional cryptocurrencies like Bitcoin and others who believe that a fixed supply of tokens, “minted” or “mined” as time progresses, promotes economic stability as opposed to uncertainty caused by inflation. This is a complex economic argument that has never been conclusively resolved – although many “gold bugs” will tell you that world monetary policy stepped onto a slippery slope when it abandoned the “gold standard” in 1973.
Facebook have invested a lot of time, effort and money into this project. It seems as though they are far too deep to back out now, despite the immense regulatory push back they have received in recent weeks. The company’s blockchain team is reportedly now over 60 people, and with over 300 people in their regulatory department, the project already has some serious steam. Not to mention the executives and directors like Sheryl Sandberg and Mark Zuckerberg themselves negotiating with Blue Chip company executives in bringing them on board as partners.
Although not yet trusted by the world’s leading governments, most notably its home government in the USA, Facebook’s Libra has only been in the public domain for a few weeks now. It has already caused more chatter in the tech industry than Elon Musk this year. Well… almost. But with overwhelming staff, financial and external partner support, a user base that would make it the world’s largest country (2.9 billion people), and a vision big enough to compete with Elon Musk’s Mars missions; I just don’t see this one going away.
In the same way that websites and companies worldwide are integrating Facebook into their registration process, I believe we will see Libra integrated into all kinds of ecommerce platforms. From Amazon to Shopify. Farmer’s markets to brick & mortar retailers. There is ample room for this project to take flight.
Will it, though?
Put it this way: I wouldn’t bet against it.
This looks to be Blockchain technology’s biggest disruption case yet. I’m eagerly anticipating how the story pans out.
Today’s comments question:
Do you think Facebook were too early in launching Libra? Is this a case of the right thing at the wrong time, or will Facebook’s prowess give it the ability to create a truly global alternate economy?
James is an accomplished tech writer and speaker, and is Managing Editor at SA Crypto, South Africa’s first news website for the blockchain industry. He has covered innovative tech and how it can make our world a better place since 2006, and has since won five SA Blog Awards. His work has been featured on East Coast Radio, BBC Africa, and BizNews.com among others. His work in socio-economic philosophy caused him to stumble across the Bitcoin project in early 2013, where he began researching how true digital money and its underlying blockchain technology could impact society. His talks are highly engaging, informative, and deeply inspiring. You can contact him on email@example.com – or on his LinkedIn profile here: https://www.linkedin.com/in/jamesprestonza/