Demelza Hays on Facebook's New Cryptocurrency

Tue, Jun 25, 2019 - 9:34am

On June 18, Facebook announced its plans to develop a new cryptocurrency, called Libra. It won’t go live until 2020, but the announcement alone has created substantial impact around the world. Demelza Hays, a cryptocurrency researcher, professor and author, joined FS Insider to discuss the announcement and implications of Libra.

What Is Libra?

Much like Bitcoin, Libra is going to be a cryptocurrency, though it will have significant differences from Bitcoin. Facebook is developing the new coin, and it released the open source code for the project online so developers can begin inspecting it. Libra plans to include an entire ecosystem of instruments, including a dedicated Calibra wallet, which is to be integrated into the Facebook Messenger app and in WhatsApp.

Libra will work differently than other cryptocurrencies. It consists of two coins: the Libra coin and the Libra investment coin. The first is slated to be a stable coin designed to maintain its value at a set rate. This is intended to reduce or eliminate speculative interest in trading Libra, Hays noted. The Libra investment coin will only be distributed to partner companies who invest $10 million into developing the currency. How the two coins will interact is not yet clear.

Interestingly, Libra will not be pegged to the U.S. dollar. Instead, it will be backed by a basket of reserves including stable assets such as short-term Treasuries and liquid deposits, Hays said. There’s no reason why the mix of assets in the basket backing Libra couldn’t shift in the future. If the coin is fully backed, Hays questioned how new coins will enter circulation. Many want to know how Libra’s stability will be maintained, and what exactly will back it.

“The white paper itself does have a sentence that says, ‘We believe the world needs a global digitally native currency that brings together the attributes of the world's best currencies: stability, low inflation, wide global acceptance and fungibility,’ Hays said.

$10 Million Partners

Markets seem to have liked the announcement, with a rise in Facebook’s stock after the announcement. Facebook isn’t developing Libra by itself and while it started the project it won’t be in sole control of the cryptocurrency.

To develop Libra, Facebook partnered directly with Vodafone, the developer of M-Pesa, which is used in many developing countries to send payments with phone credits, in a bid to provide financial services to the “unbanked,” or people who do not have access to traditional financial institutions.

Libra will be tied to Facebook’s Messenger app, which by itself has 1.7 billion users, providing a potential built-in user base the moment the new cryptocurrency drops. The company has also enlisted numerous partners, including Visa, Paypal, Ebay and Mastercard, among others, as investors in the project.

These investors agree to invest $10 million into an account in the project and are given a Libra investment token. The companies will validate transactions, determine what the rules of the network are and how the network will develop in the future.

“Right now, there are 28 partners,” Hays said. “Facebook says the goal is to have 100 partners by the launch date in 2020. So that means that Facebook is going to bring in about $1 billion from this Libra coin.”

Potential Disruption

This announcement raises many regulatory questions, Hays pointed out. We have already seen some backlash from regulators, with Representative Maxine Waters from California saying that Facebook will need to pause development until Congress can hold hearings. Also, a Russian official has already stated that Libra will not be allowed.

If Libra succeeds, it could have profound impacts on micro transactions, global finance, remittance companies and other cryptocurrencies. It appears Facebook is trying to profit from the creation of money and the operation of financial markets, Hays stated.

The fact that Libra will not be pegged to the dollar also has tremendous implications, she added, and U.S. regulators are rightfully worried. Because Libra will be backed directly by Treasuries and liquid bank deposits, it looks a lot like an unregistered exchange-traded fund, Hays noted. Also, these assets will be held in Geneva, Switzerland.

If Facebook had launched this project a decade ago, prior to the release of Bitcoin, it would have been shut down instantly, Hays stated. Now, regulators have more incentive to back the project, because if they don’t, it will only push people further toward decentralized cryptocurrencies such as Bitcoin.

“This is a very disruptive announcement,” Hays said. “It's a checkmate really. I'm not sure how the regulators are going to handle this. … (Libra) is a huge threat. If Facebook quotes reserves in the model that they are suggesting, it's going to be a global, privately held central bank. It's halfway between our current fiat money and halfway to completely decentralized cryptocurrencies. I think that it's going to be very interesting to see how the market and regulators respond.”

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