Facebook’s Libra Cryptocurrency: How It Stacks Up to Bitcoin and PayPal

The social-media giant’s new payment system is a lot closer to traditional web-commerce systems than you might think

Facebook Inc. last week unveiled plans to launch Libra, a payment system it describes as a new “global currency.” It’s based on blockchain, the same technology that powers bitcoin, and is backed by real assets and pegged to stable government securities. Over two dozen corporate partners are on board, including financial companies MasterCard Inc., Visa Inc.,PayPal Holdings Inc. and Coinbase. Partners contribute a membership fee of $10 million each. Facebook’s goal is to line up a total of 100 corporate partners and $1 billion in assets.

In many ways, Libra appears to operate more like existing web-payment systems, such as PayPal, than bitcoin. Here’s how Facebook’s new system compares:

LIBRA

Facebook’s base of 2.4 billion active users gives Libra immense global reach. But the social-media company will need to assure its users that Libra’s convenience doesn’t come with the cost of compromising privacy.

Libra’s blockchain will be fundamentally different from bitcoin’s. With bitcoin, the process of validating transactions is decentralized among all the participants of the system. Libra, on the other hand, will have a centralized governing body, the Libra Association, overseeing transactions and verifying them. Libra’s transaction history will be stored in one place, and some members within the association will be responsible for maintaining and verifying the digital ledger.

The association then distributes Libras through authorized sellers.

The Libra Association—an independent organization created by Facebook —mints the currency.

The authorized seller exchanges the currency with the Libra Association, which then burns, or destroys, the currency.

A consumer downloads a digital wallet from a new Facebook subsidiary called Calibra, then purchases Libras from an authorized seller’s site.

Spotify then exchanges the Libras that it received for dollars via a reseller.

The user uses Libras to make an online purchase, such as a subscription to Spotify, one of the corporate partners of the currency.

BITCOIN

Bitcoin can be used as a payment system, but mostly appeals to a niche group of investors. For various reasons, the original cryptocurrency never took off as a payments network; only about 1% of bitcoin transactions are for payments, according to research firm Chainalysis. As currently constructed, bitcoin is most commonly used for trading. To traders, bitcoin is not about cash, it’s about profit. It’s a volatile but at times very profitable asset to own, along the lines of a hot tech stock or a parcel of Vegas real estate.

While a bitcoin miner might sell a portion of earnings to recoup expenses on the shipping container full on overheating hard drives, most users are inclined to sit on their cache. In late 2017, the cryptocurrency spiked close to $20,000, only to fall a year later to the mid-$3,000 range. Such volatility makes bitcoin owners unwilling to use the cryptocurrency for impulsive purchases.

The first miner to solve a complex math problem wins the competition, and is rewarded with new bitcoins.

Miners compete with each other to process transactions and earn a reward of new bitcoins.

Miners sell or trade bitcoin. Holders store the keys to their bitcoin in digital wallets.

The exchange charges a small fee to convert the bitcoin into fiat. The bitcoin continue to reciruculate in the system.

Bitcoin holders can trade through various exchanges or on peer-to-peer platforms. Trading represents the majority of bitcoin activity.

A bitcoin holder can use the currency to make online purchases, though there are a limited number of merchants that accept it.

PAYPAL

PayPal is one of the founding members of Facebook’s Libra launch. On paper, there’s a lot of overlap between the two digital-payment systems, with one big difference: Libra uses a cryptocurrency, PayPal doesn’t. The financial-technology company functions similarly to an online bank, albeit one that appeals to people of all financial levels. One can set up a PayPal account without a credit card or bank account.

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PayPal provides added security by centralizing a user’s financial information. Instead of saving credit-card or bank-account numbers on various sites—any one of which can be compromised—users link their financial information through PayPal. In addition, receiving money requires only giving out an email address, not a bank-account number.

Unlike bitcoin, PayPal isn’t anonymous. The company is a licensed money transmitter and therefore it requires personally identifiable information, such as your name and phone number, when creating an account.

While a wide base of merchants accepts PayPal, it isn’t accepted everywhere. Amazon, which has its competing Amazon Pay app, doesn’t accept PayPal.