Why The Facebook’s Libra Cryptocurrency Is In The Trouble

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                          Why The Facebook’s Libra Cryptocurrency Is In The Trouble

I actually don't know if libra is going to work but I believe that it is important to try new things. When Facebook first announced it was getting into the crypto business with a basicallyunregulated currency called libra the reactionfrom Wall Street and government bankers was aboutas expected. Libra raises a lot of seriousconcerns. I am not a big fan of what they're doing there. I think its a big mistake. It was a neat idea thatll never happen and Ihave nothing else to say about it. Libra is in trouble. The social media giant had lined up a long listof corporate backers for the initiativeincluding major players in the payment space. In early October 2019 PayPal became the first company to back out of the libra coalition.

That led to an exodus of other companies from theproject. MasterCard Stripe Visa and eBay allfollowed PayPal and ditched libra. So why are all these companies ghostingFacebooks digital currency all of a sudden?

First, let us explain how Facebook got into another mess like this.I like the libra concept but you got to drop it. It is clearly doing more harm than good. Facebook first announced libra in June 2019. Introducing Libra a new global currency. It formed the Libra Association in Switzerland torun the cryptocurrency project and lined up 27companies to oversee it Facebook also set up a subsidiary called Calibradesigned to host the financial services and payment software built on top of the libra digital currency. 

Why did Facebook get intocrypto in the first place?

Facebook is big. It has 2.41billion monthly active users. Thats a huge base.Even if a quarter of the users ended up usingLibra for payments. That's 600 million people about twice the population of the United States Facebook though also has a ton of baggage.Think 2016 presidential election and Russianhacking kind of baggage. So when a company that big and that influential plans to introduce a product that could potentially disrupt the global financialcommunity you can see why U.S.lawmakers are paying even closer attention to the social media giant.

This is Facebook's currency chief David Marcustestifying before the House Financial ServicesCommittee back in July 2019.The reason we designed libra in such a way thatFacebook will only be one among 100 differentmembers of the Libra Association and well haveno special privilege means that you will nothave to trust Facebook.Well except Mr.Marcus you know better than that.You know that only Facebook has access to 2 billion people and all to say that that you're just one of many is simply not true after people's data and private messages have been stolen. And this is Facebook CEO MarkZuckerberg testifying before the House FinancialServices Committee about the proposedcryptocurrency in October 2019.

I want to be clear. Facebook will not be a partof launching the libra payment system anywhere inthe world even outside the U.S.until the U.S.regulators approve. Lawmakers are really reallynervous about Facebook getting into digitalcurrencies. Libra could be misused by moneylaunderers and terrorist financiers. Cryptocurrency such as Bitcoin have beenexploited to support billions of dollars ofillicit activity. Facebook designed libra to be a digital globalcurrency. Like other digital currencies librawill be built on top of a blockchain or a digitalledger. Unlike other cryptocurrencies librawould be backed by a basket of real worldcurrencies. That would stabilize its price protecting it from wild swings seen in the bitcoin market.

The libra reserve will hold bankdeposits and short-term government securities forevery libra coin created online.If all goes according to Facebooks plan userswould have a virtual wallet where they could buysell send and receive libra through platformslike Facebook or Instagram or WhatsApp.And those payments would move within seconds forsmall fees. With bitcoin transactions it couldtake several minutes to confirm a transaction.And in some cases cost a few dollars.Bitcoin is known for its volatility and steepprice swings because it isnt backed bygovernment. That means things like inflation andmonetary policy dont influence its value.

 Why The Facebook’s Libra Cryptocurrency Is In The Trouble

Instead, cryptocurrencies move with supply anddemand and basic market forces fear and greed. Bitcoin, for example, has a fixed supply. The total number that will ever be minted ishard-capped at 21 million and experts say that hard cap won't be reached for another 120 years. Facebook says all that volatility wouldnt happenwith Libra because it will be backed by a bunchof currencies effectively maintaining a stableprice even when demand changes.I think Libra is being designed right now to bespent because its a stable coin and its peggedto a basket of currencies and so most peopletoday are going to assume that people will bebuying burgers or coffee.Thats Tom Lee.Hes head of research at FundStrat GlobalAdvisors an independent research firm.He says Facebook entry into cryptocurrencies is ahuge positive.

It brings a lot of credibility tospace but also with its 2 billion users its amassive increase in the addressable market andarguably one of the biggest headwinds for cryptoadoption has been the user interface or the easeof sort of finding on ramps.Libra would use blockchain technology which iswhat all cryptocurrencies run on.The blockchain is a secure digital collection offinancial accounts.So its basically a decentralized bank ledger.Theres no middleman. The currency is exchangedperson to person and recorded on the blockchainso you can see who owns what.Traditionally in crypto anyone could access thatblockchain but not with Libra.This is David Yermack.He chairs the finance department at New YorkUniversitys Stern School of Business and heteaches courses on cryptocurrencies.

 Why The Facebook’s Libra Cryptocurrency Is In The Trouble

Its very different than cryptocurrency likebitcoin or ether which is decentralized has noleadership and relies on a community of peoplewho compete to build the blocks that update thetransactions. Because of the design of somethinglike bitcoin it really can only accommodate asmall amount of traffic but something withcentral management like libra could really growto almost any size that you wished.Libra would be permissioned which meanstransactions can only be added to it by a groupof trusted parties.Thats where the Libra Association comes in.Its the Swiss-based consortium of nonprofits andcompanies like Lyft Uber and Spotify.Each partner of the Libra Association invested aminimum of $10 million into the project.

David Marcus is the Facebook executive leadingthe blockchain initiative who also once servedas the president of PayPal previously testifiedto Congress that libra would work more like atraditional currency than a cryptocurrency.The intent of libra is not to compete with othercryptocurrencies. Its to compete with the realcurrencies issued by the central banks. That raised a red flag among governmentregulators. And thats a big reason why librascorporate backers began fleeing. Zuckerberg took heat from lawmakers looking forclarity. Given the company's size and reach itshould be clear why we have serious concerns about your plans to establish a global digital currency that would challenge the U.S.dollar. For the richest man in the world to comehere and hide behind the poorest people in theworld and say thats who youre really trying tohelp.

 Why The Facebook’s Libra Cryptocurrency Is In The Trouble

Youre trying to help those for whom thedollar is not a good currency.Drug dealers terrorist tax evaders.He acknowledged the risk of digital currency likelibra poses but also argued it could ensure theU.S. position as an innovative financial worldleader. I just think that we cant sit here andassume that because America is today the leaderthat it will always get to be the leader if wedont innovate. And innovation means doing newthings. And that does mean new things have risks.And we need to address the risks and we need tobe careful in doing that.But when pushed to explain why corporate backersexited the libra project Zuckerberg put theblame on risk. Why have they departed?Scores of stable partners have dropped out.Why?

Well, Congresswoman, I think you have to ask them specifically for-Why do you think they dropped out?I think because its its a risky project and there's been a lot of scrutinies.Yes its a risky project.And when asked about potential privacy concernshe told Congress there are millions who trustFacebook. Billions of people come to our servicesbecause they trust that they can share contentmessages photos comments with the people theycare about. And more than 100 billion times aday people do that.They share something with a set of people becausethey know that that content is just going toreach the people that they want it to.So I think that if were able to move forwardwith this project there may be some people whowho dont want to use it because they dont trustus or dont like us.And thats one of the values of having anindependent association where there will be othercompetitor wallets and other approaches too. Zuckerberg spent most of the hearing reassuringlawmakers libra wouldnt launch without approvalfrom U.S. regulators. Facebooks push into digital currency served as abig wakeup call for lawmakers and centralbankers.

 Why The Facebook’s Libra Cryptocurrency Is In The Trouble

Its pitting Facebook against the U.S.and other governments.And Facebook is losing so far.In September 2019 France and Germany both agreedto block libra. The government said "no privateentity can claim monetary policy which isinherent to the sovereignty of nations."A few weeks later libra began to lose itscorporate backers. PayPal was the first companyto leave in early October 2019.Days later two senators on the Senate BankingCommittee sent letters to the CEOs of VisaMasterCard and Stripe to express concerns overtheir involvement in the Libra Association.Senator Sherrod Brown of Ohio and Brian Schatz ofHawaii told companies "to proceed with caution"until Facebook provides more details on the risksposed by libra like financing terrorism anddisrupting the global financial system.

A few days after the senator sent the letterseBay MasterCard Visa and Stripe announced theywould leave the Libra Project.The U.S. Treasury Department had also beenprivately pressuring libras corporate backersaccording to the Wall Street Journal.The opposition to libra is coming from countrieswith established financial and payment systemswhere a majority of the population already hasbank accounts. Thats not really the kind of userFacebook has in mind with libra.Its going after the worlds unbanked population.You know that unbanked world is a lot largerthan we all appreciate because anyone living inthe U.S. you know has pretty simple access andlow-cost access to banks.Facebook points to statistics that show 31percent of adults in the world dont have a bankaccount.

 Why The Facebook’s Libra Cryptocurrency Is In The Trouble

Thats about 1.7billion people globally.And those numbers are worse in developingcountries and even worse for women.Turns out the unbanked community of 1.7billion people can be leveraged through reliableinternet infrastructure and mobile phones.Those two things alone have given rise to a newgeneration of financial services withoutrequiring fancy tech.1.1 billion of those 1.7unbanked people have a mobile phone.For example in sub-Saharan Africa simpletext-based phones have popularized mobile moneyaccounts. So Facebook has a lot to gain fromwinning over the unbanked with a global paymentservice based on its own digital currency.Its not just Facebook making waves in thedigital currency market.Chinas government also wants a piece of theaction. Chinas central bank has made some verypublic announcements that theyre going tocompete with the private digital currencies intheir economy by having a crypto version of therenminbi their own currency.And there have been a lot of central banks aroundthe world researching this over the last five orsix years. The Peoples Bank of China announcedin August 2019 that its close to launching itsown digital currency saying the rationale behindthe move is to protect its foreign exchangesovereignty. 

Some say the move would encouragethe worldwide use of the yuan the Chinesecurrency and the deputy director of the PeoplesBank of Chinas Payments Department said thiscurrency will have similarities to libra andwould be as safe as the central bank-issued papernotes Libra is really trying to mimic what hasalready occurred in China where two social mediacompanies Tencent and AliBaba have launchedpayment services.Theyve run very very quickly and have begun topush aside the regular banks as sources ofpayments for people.And if you look at how quickly the Chinese socialmedia companies have grown and the fact thattheyre now going abroad into other countriesthere seems to be an opportunity for companieslike Facebook Google Amazon to create a verysimilar service.Chinas central bank plans to launch this digital token through a two-tier system where both the Peoples Bank of China and commercial banks would be legitimate issuers.All this means that Facebook doesnt just have tocontend with the opposition with regulators andpoliticians. It means the social media giant isalso in a race against time with governments thatwant to build their own digital currencies. While libra still may be in deep trouble despiteZuckerbergs performance on Capitol Hill thepromise of digital currency should live onaccording to Tom Lee. I mean I think the future is really bright fordigital assets.one because I think it is reducing a lot of of friction in traditional financial architecture. The average person spends almost a month of everyyear paying for the right to use banks.So I think that thats a level of value capturethats high and so digital assets are going tohelp sort of create productivity around that.No one knows when the federal government willenact regulation that would impact how the libracoin operates or what that regulation would looklike. 

 Why The Facebook’s Libra Cryptocurrency Is In The Trouble

All they do know is its coming at somepoint. Some even speculate Facebook wont be thefirst public tech company in the U.S.to issue a currency.I dont think other majors Silicon Valleytechnology companies are far behind so I thinkFacebook is the first but I think well see manyother versions.

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