By now, you may have heard of Libra, Facebook’s new cryptocurrency. If not, you must have been living under a rock, but that’s okay. This beginner’s guide to Libra should get you up to speed to everything you need to know about this fascinating project.
Now, you may ask yourself why would a social media platform create a cryptocurrency in the first place? This is what this article is all about.
The short answer to this question is to make profits off of your money and data.
If that’s all you care about, feel free to stop reading and share this article. But there are underlying details behind this project that are worth knowing and taking a deeper look at the reality of the situation.
Why does Facebook want to have a cryptocurrency?
For the record, Libra is not Facebook’s first attempt into the worldwide financial services industry. In 2010, the company tried it with Facebook Credits, where users will spend credits for paid applications and in-game items. The new feature was not profitable because of high fees that Facebook was paying to Visa and MasterCard to cover payment processing fees. The company eventually removed Facebook Credits from its platform in 2013.
Facebook took another shot with Messenger Payment, a built-in peer-to-peer transfer feature. It allows us to make payment and send money between Messenger users. As of today, it’s a total failure by Facebook’s standard. Most people don’t even know Messenger has this feature. The few that know about it won’t trust Facebook with their money. In fact, it’s only available in the United States. Messenger Payment never really took off in Europe where Facebook has been in trouble a lot.
Many reports have suggested that Facebook was working on some kind of cryptocurrency with David Marcus in charge, the former head of Facebook Messenger. However, no-one knew what it will look like until Mark Zuckerberg introduced this new project back in June this year. When taking a deeper look at it, it turned out that Libra got nothing to do with other popular cryptocurrencies like Bitcoin. In many ways, Libra is the total opposite of what cryptocurrency was aimed for (more on that later).
You may still remember how most people thought Facebook was a social media company. In fact, it’s a giant advertising and a very data-hungry company that scoops up a huge amount of user data. For the sake of “bringing the world closer together,” Facebook got a massive amount of data that users give away for free. And surprisingly, most people seem to not know about Facebook’s invasive data practice.
“A simple global currency and financial infrastructure that empowers billions of people.” This is Libra’s mission statement. This is a pretty bold and promising statement. However, this has got nothing to do with bringing financial services to the 1.7 billion people around the world who still don’t have access to bank accounts. Let’s take a closer look at the real plan behind Facebook’s Libra.
Over the years Facebook has drawn widespread, scathing criticism for its bad practice over data safety. One of the many scandals that made people hate Facebook so much is its involvement in the 2016 United States presidential elections. In which, a British voter-profiling company, Cambridge Analytica, harvested the personal data of millions of Facebook user profiles without their consent and used it for political advertising purposes. As a result, the hashtag #DeleteFacebook was trending on Twitter, especially in the U.S., where users were deleting their Facebook accounts en masse.
Zuckerberg knew he has lost trust with consumers, therefore nobody would welcome the idea of his company to create a digital currency. That’s why the Libra Association was born. It’s a not-for-profit membership organization based in Geneva, Switzerland, which will control the Libra network. So, Facebook will be just a member and has the same role and get a single vote as any founding member of the Libra Association. Okay, it should be fine if Facebook will not control the Libra Association alone. Not so fast. They know what they’re doing, that’s where Calibra, a subsidiary Facebook company comes into play.
For people to use Libra, they’ll need businesses that accept the currency and digital wallets to store it. The Libra Association’s founding members primarily composed of big names will influence more companies from different industries to join the Association. In terms of digital wallet, Facebook is the ultimate winner here. The social media giant with its subsidiary companies such as Messenger, WhatsApp, Instagram, amass a whopping 2.7 billion monthly users.
When you have that kind of user base that will use your services for free, you know profits will be astronomical. Even if a small portion of Facebook’s user base ends up using Libra, the company is poised to become one of the largest if not the largest financial institution. Just imagine now, Facebook is in charge of your money. That’s a scary thing, you should be worried and we all should be worried.
How does Libra work?
Now, how Facebook will make money from libra? It’s pretty simple.
A one-time investment of $10 million is one of the requirements to become a founding member of the Libra Association. Each founding member will earn dividends off of interests on assets in the reserve, which will be paid out once they cover operating expenses, etc. The more people that use the currency and carry a significant amount of the currency, the more interests the Libra reserve will earn. You should note that Libra users won’t get any interest on their Libras sitting in their Calibra wallets or whatever participating digital wallet they use, the big corporation founding members will.
To put that into perspective, let’s say you want to buy $100 worth of Libra. The Libra Reserve will take your $100 and gives you an equivalent value of Libra, in that case, ≋100, which you can use to send remittances to your loved ones back home. The Libra Association will then invest that money into a variety of low-risk, short-term investments like U.S. Treasury bills. When hundreds of millions of people are buying and using Libra, the return on investment (ROI) will be massive for the Association.
That’s not all. Here’s where things got even more interesting.
The Libra project is open source, which means any consumer, developer, or business can use the Libra network to build their products on top of it. You can expect in the future to find Libra features in the Uber, eBay or PayPal app. Since Facebook is the mind behind all of this, they are ahead of everybody in the game. The company already created its own digital wallet. Keep in mind, once the Libra Association makes a Libra payment, they got nothing to do with what you do and how you decide to spend those Libras.
That’s where Mark Zuckerberg will be waiting for you, and it’s how Facebook intends to make money off Libra if everything goes according to plan. The best way to explain Calibra would be a bank run by Facebook, the Bank of Facebook or whatever you want to call it—but you get the idea. The Libra Association will play the role of the Federal Reserve System, which will create the currency, promote its stability and safety.
Calibra promised to make its users’ data safe and “never share account information or financial data with Facebook or third parties without customer consent, nor will they use data to improve on ad targeting”. If Facebook cannot make money off of Libra users’ data, how will it make money then? For instance, the largest social media platform has many ways to make money with Libra. They will charge small fees for merchant payments or sending money internationally, which by far will be the lowest compared to the current market rate, according to Facebook.
So this is it? Just by collecting fees from transactions. That’s not all. Even if it was just to collect small fees from transactions, those could add up to big bucks. Facebook would have still make a massive amount of money off Libra.
What’s in it for Facebook?
Once Libra becomes a success, Facebook may offer “other financial services such as credit”, according to Kevin Weil, vice president of product at Calibra. Of course credit, even Apple has jumped on the bandwagon of credit cards with its freshly released Apple Card. Weil also pointed out, that people will be able to use Libra within Facebook’s apps through services like Facebook Marketplace and Instagram Checkout. This is brilliant. Again, Facebook will “not know who you are and what you buy”, according to Calibra’s Customer Commitment.
Another way Facebook could make money off Libra with advertising, although the company won’t have access to Libra users’ data, is through small businesses that primarily use cash. Many of them would love to reach out to customers through Facebook advertising, thanks to Libra they will now have a way to pay for that. This primarily will target small businesses in third-world countries, which is Libra’s mission to “reach out to the unbanked”.
While Libra will bring value to the unbanked, there are certain security and privacy risks that come with using this service. Facebook has “no plan to put in place a vetting system for anyone who wants to use the Libra Network, according to Marcus”. This will create an open pipeline for shady developers to scam people, steal their Libras and even use their purchases history to launder money. You can imagine many things that could happen in a situation like this, and it’s something Libra users definitely don’t want.
However, Facebook will have a vetting process for anybody that wants to open a Calibra account. You need a government-issued ID to to sign up for an account. That way Facebook can be compliant with laws and regulators. Libra will be centralized with hundreds of founding members controlling the currency. On the other hand, Bitcoin is decentralized, which means you’re solely in control of your money, no one knows who owns what and who spends what. The only thing Libra has in common with cryptocurrencies is the blockchain technology.
The Libra project will be run by a group of powerful corporations that have been already controlling and ruling many aspects of our lives. If Libra succeeds, traditional financial institutions will take a huge hit. This explains why companies like Visa, MasterCard, PayPal, which have different business models than Libra’s, have joined the project. They’d rather be part of the project’s success than to be left out.
And by the way, this is actually well planned for Facebook by keeping the project open to everybody even its direct competitors, although we doubt Google, Apple, Amazon will join the party. Having your competitor revenues tied to your company’s success is sheer genius.
Because of Facebook failures over the years to make it into finance doesn’t mean the Libra project will fail too. There are also no clear indications that it will be a success either. But we think it’s safe to say, Facebook this time took a totally different approach by joining a bunch of big corporations together to profit off consumers. Only time will tell what lies ahead, but the future hasn’t ever been so scary.
Let us know your thoughts on a situation where Facebook being your bank and taking over the world finance services.
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