Facebook plans to disrupt the crypto market

• Facebook announced its own digital currency Libra
• Roadblock in Facebook’s ambitious plan

After a rough 2018, Facebook hogged the headlines in the mid-June of 2019 and unveiled a plan to launch its new digital currency Libra in 2020.

Cryptos are an emerging concept in the financial ecosystem and with rising internet and smartphone users, it already has brought a wave of disruption. Blockchain and digital currencies have the power to disrupt nearly every industry and Facebook is planning to make a significant impact in this space via Libra.

What appeals for Libra?

Facebook’s Libra could be a game-changer in the digital currency market. The social media giant already has a huge user base and is one of the largest social media companies in the world. It can leverage this humongous user base of ~2.4 billion monthly active users to adopt Libra and push it into the mainstream without much of a struggle to enter a somewhat crowded digital currency market as equated to other companies, which require starting from the scratch. Facebook’s user base becomes very important here when we see that worldwide only 2.5 million people own Bitcoin, the number one digital currency up till now.

According to a Business Insider report; ~2 billion people do not have bank accounts worldwide, wherein if we talk about unbanked population, India tops the list with ~190 million people yet to have a bank account. South-East Asia alone has ~438 million unbanked individuals, which represents 73% of the entire population in this region. As per McKinsey, the economic contribution in this region could increase from $17 billion to $52 billion by 2030 via reaching out to this unbanked population. Moreover, from Facebook’s perspective, it has the largest user base in India, with over ~270 million users, this is followed by ~210 million from the US. So, countries like India and other South Asian nations could be a preferred target for Facebook as it plans to empower the unbanked population globally, who could use the currency on its platform. Though this is a separate discussion about how successful it is going to be in these countries, where acceptance of alternate currency would be altogether a different challenge. As per Facebook’s Mark Zuckerberg, sending money online should be as simple as sending photos and Libra is designed to make it a reality by transferring money online more easily and cheaply. And this would also payback to Facebook by attracting new users to its social media platform.

What is Libra?

Facebook is setting its hopes by positioning Libra as a Stablecoin (know more about Stablecoin visit our blog ‘Stablecoins, are these a solution for volatile cryptocurrencies?’) rather than a Bitcoin-like cryptocurrency and backed by a reserve of real assets and governed by an independent body called the Libra Association. Currently, the proposed Libra Association has got the consent from 28 members, including some of the big-names i.e. Visa, Mastercard, PayPal, Vodafone Group, Uber, Facebook, Women’s World Banking and expects to have 100 members by the time it launches commercially in 2020. In Facebook’s white paper, it has been stated that Libra will be built on Libra Blockchain that would be neutral and open-sourced, protected by Merkle tree structure that enables the detection of a change in the existing data. Unlike other blockchains, where blockchain see a collection of blocks on transactions, Libra blockchain is a single data structure that records the history of transactions and states over time. This simplifies access to the blockchain by allowing it to read any data from any point of time and check and verify the authenticity of the data using a unified framework.

The roadblock

Facebook has created a subsidiary called Calibra, which will run a wallet, this will ensure separation between social and financial data, and operate services on the top of the Libra network. However, what would be interesting to see is how Facebook ensures the separation between its social and the upcoming financial data in the long-run. The company was staggered in 2018 by the data-sharing scandal known as the Cambridge Analytica scandal and is still reeling under its effects. It was one of the worst data privacy breaches in history, where over 50 million Facebooks users’ private data was compromised and was used to build a psychological profile to influence elections globally. The governments around the world intervened to get answers from Facebook on how it uses its users’ data and its work with third-parties. This controversy costed heavily to Facebook and its shares dropped by more than 20% and there was an erosion of $120 billion in its value in a single day. Its $5 billion FTC (Federal Trade Commission) settlement still needs final approval from the U.S. Department of Justice. Furthermore, regulators around the world have criticised Facebook over its practices and have also raised concerns on risks related to consumer privacy and potentially illegal use.

Additionally, Facebook’s plan has also been criticised on the possible use of users’ account information and financial data to improve ad targeting on its family of products. However, Facebook has emphasised that Calibra will hold only a single address on the blockchain so transactions between Calibra users would not interact with the blockchain itself. In addition, Calibra will formalise its wallet in line with local laws to handle the money of customers.  But still, there is much clarity that is required on how it will protect user data and deal with money and other things within the legal framework.

On a broader level when we talk about the crypto market, it is not just about Libra; the whole cryptocurrency space still lacks a clear regulatory framework. The U.S. lawmakers are calling for increased and clarified regulations for the crypto market and even the U.S. President Donald Trump has also made his opposition known by commenting that all unregulated crypto-assets can facilitate unlawful activities. As a result, the price of Bitcoin and other cryptocurrencies fell more than 10% following the Senate Banking Committee hearing on Libra in July 2019. Presently, regulators are more worried about how Libra would be used as billions of Facebook users could derange crypto market activities, where Bitcoin also failed to gain acceptance in the financial ecosystem globally. Positively, Libra is Facebook’s ambitious plan to offer an alternative financial system, but the biggest roadblock to this is its reputation (post the Cambridge Analytica scandal) and the legality and regulation on the crypto market as a whole. How successful would Facebook be on its ambitious goal? This only time will tell.