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Facebook hasn't told us: why launch a cryptocurrency?

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·Senior City Correspondent, Yahoo Finance UK
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A visual representation of digital currency. Facebook unveiled its subsidiary Calibra, a digital wallet to store and send Libra, a new cryptocurrency to launch in 2020. Photo: Chesnot/Getty Images
A visual representation of digital currency. Facebook unveiled its subsidiary Calibra, a digital wallet to store and send Libra, a new cryptocurrency to launch in 2020. Photo: Chesnot/Getty

Facebook officially launched its much-hyped new cryptocurrency project on Tuesday.

Libra, a new cryptocurrency run by an independent non-profit, will launch in 2020. Facebook also announced a new subsidiary, Calibra, that will build products for Libra. It will initially build payments into WhatsApp and Instagram, before a stand-alone app.

The launch confirmed details of the project but didn’t answer a fundamental question: why launch a cryptocurrency?

“Nobody still has any idea why the FacebookCoin is a crypto,” David Gerard, the author of ‘Attack of the 50-foot blockchain’, said in a newsletter earlier this week. “Journalists at the press conference apparently asked directly why FacebookCoin is a crypto, and couldn't get a sensible answer.”

It’s not fully decentralised

The main advantages of cryptocurrencies are decentralisation and lack of censorship. Bitcoin, for example, is run by an ever evolving online network that is difficult to disrupt or take down. It is not run by any one organisation, meaning it’s unlikely to be co-opted by political wills, and if one organisation departs, others pick up the slack.

The Libra Association, the Swiss non-profit that will run the currency, is comprised of 28 founding members and looking for more. It is open sourcing its code and has released a white paper for consultation. The announcement stresses that the association is “independent” of Facebook and the company would likely argue that it’s decentralised.

But critics say it is not. Poramin Insom, the founder of privacy-focused cryptocurrency Zcoin, said the project is “still a centralised platform and is still subject to censorship, monitoring and control.”

The Libra Association is backed by top corporates, including Visa, MasterCard, Stripe, PayPal, and Uber. Each of them have committed to a minimum future investment of $10m (£8m) to access the network and help to validate transactions on it.

“Adding a consortium of global companies as validators does nothing to decentralise the system,” George McDonaugh, the CEO of London-listed blockchain investment company KR1, said in a statement.

“All the validators are known and as such can be fully 'leaned on' to adhere to the pressures that exist from the global financial systems.”

There are already non-crypto rivals

A sign advertising Indian electronic and cellpohne-based payment system PAYTM hangs at a roadside vegetable stall in Mumbai on February 25, 2017.  / AFP / PUNIT PARANJPE        (Photo credit should read PUNIT PARANJPE/AFP/Getty Images)
Tech companies such as India's PayTM already provide mobile-based financial services. Photo: Punit Paranjpe/AFP/Getty Images

Another advantage to cryptocurrencies is scale. Facebook cited the fact that blockchains can be “globally accessible” as one of the advantages of the technology.

Facebook is pitching Libra as a solution for the world’s global “unbanked” — the estimated 1.7 billion around the world who don’t have access to a bank account. Calibra products will let them “send Libra to almost anyone with a smartphone, as easily and instantly as you might send a text message and at low to no cost.” Those who can’t access a bank account will be able to save, pay bills, and more.

But companies already do this without blockchain.

In China and India, services like WeChat and PayTM provide mobile wallets that let people pay and save on their phones.

In Africa, services like MPesa in Kenya and Tigo Pesa in Tanzania allow people to pay bills and access financing and insurance through even dumb smartphones.

And fintech companies such as TransferWise, Remitly, and WorldRemit have all made mobile cross-border payments much easier and cheaper in recent years.

Why does Facebook need blockchain?

Messenger payments already exists

PARIS, FRANCE - APRIL 06:  In this photo illustration, the home page of the instant messenger 'Messenger' is seen on the screen of an iPhone on April 06, 2018 in Paris. Messenger, the messaging application launched by Facebook, is in the center of attention. Indeed, Facebook allows itself to analyze the links and images that users send to Messenger and even to read the messages exchanged if they are posted, in order to make sure that the contents comply with the conditions of use. This increased monitoring of Facebook within its messaging application was confirmed by Mark Zuckerberg a few days ago.  (Photo Illustration by Chesnot/Getty Images)
Facebook Messenger. Photo: Chesnot/Getty Images

In fact, Facebook has already dabbled in smartphone financial services without blockchain.

Facebook launched payments through its Messenger app in the US in 2015 and expanded it to Europe in November 2017. The service failed to capture users’ imaginations and last month it was discontinued in Europe.

“You’re essentially taking a business proposition that you’ve already failed at and adding cryptocurrency,” Christian Lanng, the CEO and cofounder of supply chain finance platform TradeShift, told Yahoo Finance UK earlier this year. “You’re just adding complexity and something users don’t understand. I don’t exactly see that as a recipe for success.”

Facebook may argue that this differs from Messenger payments as it is targeting the developing world, not the developed.

But beyond the technical, why does Facebook need a new currency?

Libra will be pegged to, and backed by, a basket of global currencies. Its value will be “a blend of multiple currencies.”

Who would want that? People pay for things in their local currency and creating a new one simply adds a layer of complexity. You’ll now have to calculate how much you need to pay in Libra rather than just sending what you owe or need to pay in local currency.

Even if there is some intrinsic benefit to blockchain that Facebook wants to tap into, why not build these new services using the host of cryptocurrencies that already exist?

So why?

Cynics argue that this is all about making more money.

Financial services also offers a new market for tech giants who have seen growth in their traditional businesses stall. That’s why we see everyone from Apple to Amazon trying to move into things like credit cards and loans.

“It will be spun as banking the unbanked, revolutionising payments and connecting the world, but don't be fooled, this move into the murky world of cryptocurrency is about tapping new wells of data, the modern day oil,” McDonaugh said.

Facebook insists that Calibra won’t share data with Facebook Inc., for ad targeting and will only share it to “keep people safe, comply with the law, and provide basic functionality.” Calibra will reportedly operate as an entirely independent subsidiary of Facebook and Facebook will be just a member of the Libra Association.

Still, recent years have shown Facebook doesn’t exactly have the best track record when it comes to user data.

A new cryptocurrency could also allow Facebook to keep an even greater slice of the pie when it comes to ad spending.

If any advertisers pay Facebook with credit or debit cards, then the card issuers will get a cut of those payments in merchant fees. By creating a new network it controls it could cut out these costs. It may also explain why transaction-heavy companies like Spotify, Uber, and Farfetch — a luxury clothing retailer — have backed an expensive and ambitious project ostensibly about financial inclusion in the developed world.

A new money-making avenue, an altruistic financial inclusion venture, or something in between. It’s early days for Libra but many questions remain.


Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.

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