By Judy Loy
RICP®, ChFC® and CEO of Nestlerode & Loy, Inc.
The biggest cryptocurrency, or digital currency, Bitcoin, has been around since 2009. While innovative, Bitcoin has been incredibly volatile. At its high, one Bitcoin was worth $20,089 U.S. dollars. It currently sits at about $10,269.13. It also has limited purchasing power. Companies that accept Bitcoin are few and far between, with the most popular companies being Expedia (EXPE), Overstock (OSTK) and Microsoft (MSFT). Overall, Bitcoin was great for speculation, but not so much for paying your electricity bill.
Facebook (FB) announced plans to unveil a new “global currency” in 2020 called Libra. Libra is built on the same groundbreaking technology as Bitcoin called blockchain. In the simplest terms, blockchain is an online database that allows information to be distributed, but not copied. Blockchain is what permitted cryptocurrencies to exist. In most other ways, Libra is extremely different from its predecessors. In fact, Libra has a centralized governing body, Libra Association, that will oversee transactions and verify them.
To start, Facebook created Calibra, a Facebook subsidiary. With privacy concerns at Facebook, putting a digital currency at arm’s length made sense to add trust. Calibra will be a digital wallet for Libra, the cryptocurrency. Calibra is considered a financial services firm and will develop products and services for Libra. The subsidiary will protect customer data by not sharing account information or data with Facebook or a third party “without customer consent.” Let’s hope they don’t put that option in small print.
Bitcoin, Ethereum and Zcash are open-source currencies with no stored value. Calibra looks to change that and basically created its own central bank. The U.S. dollar is stabilized by our Federal Reserve, the U.S. central bank. A stabilized currency helps to bolster transactions because the buyer and seller are assured of how much they are spending or receiving. When a user purchases Libra, the money is invested into government bills and safe assets. It is like an ETF that has assets backing it. With safe and stable assets backing the new cryptocurrency, the plan is for it to be a stable store of value. Unlike a central bank, neither Calibra nor Facebook will manage the amount of supply. The supply of Libra will depend upon demand from consumers. A Libra can always be converted back into underlying assets.
To add even more backing, Facebook is partnering with major players to create a partnership to facilitate Libra commerce, back the currency and promote its use. More than two dozen corporations are on board. These include Visa (V), MasterCard (MA), PayPal (PYPL), Spotify (SPOT), eBay (EBAY), Vodafone (VOD), among others. This means big players bringing big bucks. Facebook wants to raise $1 billion for its currency by getting 100 members to pony up $10 million to join the Libra Association. According to recent reports, the agreements are non-binding.
Regulators are the biggest hurdle to Facebook’s new currency.The Senate Banking Committee and the House Financial Services Committee will hold hearings next month on Facebook’s Libra currency. Given that Libra’s planned launch would be on Facebook’s platforms, WhatsApp and Messenger, privacy concerns and regulation might yet change the picture.
Facebook is not aiming low with its currency and said it hopes it will “transform the global economy.” It could be a game changer if it moves forward.
Disclaimer: Nothing contained in this article should be interpreted as a promise or guarantee of earnings or investment results nor a recommendation for the purchase or sale of any security or sector.