Facebook is planning to launch its own cryptocurrency early next year, allowing users to make digital payments around the world.
The digital currency known as Libra will be backed by a reserve of real-world assets, including bank deposits and short-term government securities.
A Libra currency is currently backed by 21 founding companies in the Libra Association.
The association, which will serve as a monetary authority for Libra, is to empower billions of people with 1.7 billion adults without bank accounts set to use the cryptocurrency.
Libra is similar to other cryptocurrencies such as bitcoin. Like bitcoin, Libra will be entirely in digital form.
Libra transactions are recorded on a software ledger known as blockchain that confirms each transfer.
According to Facebook, a Libra project would expand into e-commerce, which will drag cryptocurrencies into the mainstream. In other words, this digital currency would enable Facebook’s users to change dollars and other international currencies into its digital coins.
The coins could then be used to buy things on the internet and in shops and other outlets or to transfer money without needing a bank account. The structure is intended to foster trust and stabilize the price volatility that plagues cryptocurrencies and renders them impractical for commerce and payments.
According to Mark Zuckerberg, the Founder and CEO of Facebook, if approved by the US Treasury Department, the project would engage money transfer firms, including Western Union, to develop cheap, safe ways for people to send and receive money.
Beyond that, it has been reported that Facebook is working on its cryptocurrency to be used even in transferring money on WhatsApp, its encrypted mobile-messaging app. It would be even used for cross-border payments or for settling very small sums.
The big concern today in many countries is how such cryptocurrency would comply with the international monetary system.
A potentially particular concern lies on whether Facebook would be able to guarantee the safety and security of the cryptocurrency transaction. The project has drawn heavy scrutiny from regulators and politicians, particularly in the G7.
And many concerns revolve around likely disruption with the international monetary system.
It’s absolutely unusual for a private company, like Facebook, would issue currency other than the governments. Policy-makers questions its security in comparison with international currencies; if they may not promote drug-dealing and money-laundering, among others.
Apparently, Facebook has unsatisfactorily answered the fundamental questions about how a Libra will work, what consumer protection will be offered and how data will be secured.
Especially from the G7, authorities have centred their potential concerns if a Libra would not destabilize the global financial system, interfering with sovereign monetary policy and harm privacy as well as its potential use.
Aside from the governments’ concerns, there’s a huge test whether people will trust the social networking giant enough to start changing their cash for Libra. To build trust in the system by its users, Facebook has to engage governments, central banks and regulators, to name but a few. In any event, Facebook has a mountainous task ahead.
A couple of reports have raised warning that Libra could stifle competition among other providers. The issue of disrupting the global financial system by the increasing presence of tech giants in areas such as payments was reiterated by Christine Lagarde, former Managing Director of International Monetary Fund (IMF).
She further noted that the rise in financial technology, known as FinTech, has the power to significantly disrupt the global financial system.
Once, the Libra cryptocurrency is launched, it would give a huge task to the central banks to stabilise monetary policy.
Moreover, as the demand for cryptocurrency grows, global regulation on these currencies aren’t backed by any central government, meaning they’re not legally recognised in the majority of countries.
While addressing a FinTech symposium held on the sidelines of the G20 finance leaders’ meeting in Fukuoka, Japan, mid-2019, former IMF Boss Christine Lagarde said “a significant disruption to the financial landscape is likely to come from the big tech firms, who will use their enormous customer bases and deep pockets to offer financial products based on big data and artificial intelligence”.
Basing on the technological reality, innovation from the world’s biggest tech firms could help modernise financial markets, it could give them a concerning monopoly and mean many of the world’s cross-border payment and settlement mechanisms fall under their control.
Among other things, FinTech helps speed up payments and remittances transactions and strengthens the underlying monitoring systems that record such transactions.
If no strict restrictions put in place by the government, things may get out of control.
If Libra is approved, the backers of this currency must protect consumers and investors against fraud and combat tax evasion, money laundering, and the financing of terrorism, ensuring that risks are thoroughly understood and managed.
They must also protect the integrity and stability of the financial system. Though there’s uncertainty about the use of Libra, it’s crucially important to develop a forward-looking regulatory framework to guarantee safe and secure digital payment.
Facebook’s plan to launch Libra must be seen as a precursor to more stringent regulatory controls with respect to the financial services they offer.
The writer is a law expert.
The views expressed in this article are of the author.