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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WSJCoin: To Understand Cryptocurrencies, We Created OneIn an original WSJ documentary, markets reporter Steven Russolillo ventures to Japan and Hong Kong to explore the universe of cryptocurrencies. His mission: create WSJCoin, a virtual token for the newspaper industry. Image: Crystal Tai. Video: Clément BürgePayPal 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.
Facebook Says Libra Can Change the World. It Needs to Convince Users.
The key to getting consumers and merchants to use the digital currency will be incentives
Facebook Inc. FB +0.04% has big plans to remake the financial system with its cryptocurrency-based payments network. First, it has to get people to use it.
The social-media giant’s plan for Libra—the digital currency it is launching with a few dozen partners including Visa Inc., Mastercard Inc., PayPal Holdings Inc. and Uber Technologies Inc. —is the most ambitious yet to get consumers comfortable with the technology that underpins bitcoin. Facebook’s ultimate goal is for consumers to use Libra to pay their bills, buy things and send money to family members abroad, among other everyday financial transactions.
Facebook has a built-in advantage because of its massive reach; around one-third of the world’s people visit the site monthly. But persuading them to change their habits and adopt a brand-new technology could be a tough slog. Privacy concerns also could hinder adoption of the new currency, though Facebook has said it won’t mingle Libra users’ social and financial data.
Bitcoin is a case in point. Its pseudonymous creator, Satoshi Nakamoto, pitched the original cryptocurrency to the world a decade ago as a way for people to exchange value directly, without the intervention of banks or other middlemen. Yet it has failed to catch on as a payments platform.
Facebook’s toughest sell will be in the developed countries where established payment options such as cash and credit cards remain king, and in places like China, where mobile-payments networks dominate the market. Consumers in countries with limited access to banking services may be quicker to adopt the new currency.
The key will be incentives. Fiat currencies work for a simple reason: Governments decree that their citizens must use and accept them. Digital currencies such as bitcoin and Libra without ready-made communities have to give consumers a reason to use them.
0:00 / 0:00WSJCoin: To Understand Cryptocurrencies, We Created OneIn an original WSJ documentary, markets reporter Steven Russolillo ventures to Japan and Hong Kong to explore the universe of cryptocurrencies. His mission: create WSJCoin, a virtual token for the newspaper industry. Image: Crystal Tai. Video: Clément BürgeThe founding members of the Libra Association, the Geneva-based not-for-profit that will govern the currency, will be tasked with designing and spreading user and merchant incentives, which could include discounts.
Libra’s appeal, at least in the beginning, likely will depend on how many merchants and service providers sign up to accept it, said Dante Disparte, head of policy and communications for the Libra Association. It also needs to work like the established financial networks that consumers are accustomed to using, he said.
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Libra aims “to make the transfer of currency more efficient than the alternatives,” Mr. Disparte said.
Bitcoin’s development wouldn’t have been possible without incentives. The miners that provide the computing power to maintain and secure the network upon which it exists get a shot at winning a competition for newly created bitcoin.
“That was Satoshi’s brilliance,” said Dan Held, a bitcoin investor and entrepreneur. “It wasn’t even the code. It’s that the code aligned incentives among participants.”
Still, bitcoin has struggled to grow beyond its core base of users and aficionados because of technical limitations.
Libra won’t carry the force of law, and it will have little investment value. It is being designed as what is known as a stablecoin, pegged to the value of a basket of fiat currencies that will shield it from the big swings typical of bitcoin and its descendants.
Thus stability and cost—Libra user fees are expected to be minimal—are likely to be its biggest draws, said Eswar Prasad, an economics professor at Cornell University.
But trust could be a stumbling block, he said. The question of Libra’s stability will be tied to Facebook’s reputation, at least in its early years.
Facebook still has a “reasonable amount of trust among its users,” despite concerns about its privacy practices, Mr. Prasad said. But it is competing with the central banks that issue hard currency, he said, and that could be a difficult fight to win.
“For all of Facebook’s wealth and domination of the social-media space, it is difficult to see its currency becoming a durable and significant store of value,” Mr. Prasad said.
Facebook’s Libra Must Be Stopped
After years of disregarding privacy, exploiting user data, and failing to control its platform, Facebook has now unveiled a cryptocurrency and payment system that could take down the entire global economy. Governments must intervene before a company that “moves fast and breaks things” ends up breaking everything.
NEW YORK – Facebook has just unveiled its latest bid for world domination: Libra, a cryptocurrency designed to function as private money anywhere on the planet. In preparing the venture, Facebook CEO Mark Zuckerberg has been in negotiations with central banks, regulators, and 27 partner companies, each of which will contribute at least $10 million. For fear of raising safety concerns, Facebook has avoided working directly with any commercial banks.Zuckerberg seems to understand that technological innovation alone will not ensure Libra’s success. He also needs a commitment from governments to enforce the web of contractual relations underpinning the currency, and to endorse the use of their own currencies as collateral. Should Libra ever face a run, central banks would be obliged to provide liquidity.
The question is whether governments understand the risks to financial stability that such a system would entail. The idea of a private, frictionless payment system with 2.6 billion active users may sound attractive. But as every banker and monetary policymaker knows, payment systems require a level of liquidity backstopping that no private entity can provide.
Unlike states, private parties must operate within their means, and cannot unilaterally impose financial obligations on others as needed. That means they cannot rescue themselves; they must be bailed out by states, or be permitted to fail. Moreover, even when it comes to states, currency pegs offer only an illusion of safety. Plenty of countries have had to break such pegs, always while insisting that “this time is different.”
What sets Facebook apart from other issuers of “private money” is its size, global reach, and willingness to “move fast and break things.” It is easy to imagine a scenario in which rescuing Libra could require more liquidity than any one state could provide. Recall Ireland after the 2008 financial crisis. When the government announced that it would assume the private banking sector’s liabilities, the country plunged into a sovereign debt crisis. Next to a behemoth like Facebook, many nation-states could end up looking a lot like Ireland.
Facebook is barreling ahead as if Libra was just another private enterprise. But like many other financial intermediaries before it, the company is promising something that it cannot possibly deliver on its own: the protection of the currency’s value. Libra, we are told, will be pegged to a basket of currencies (fiat money issued by governments), and convertible on demand and at any cost. But this guarantee rests on an illusion, because neither Facebook nor any other private party involved will have access to unlimited stores of the pegged currencies.
To understand what happens when regulators sit on their hands while financial innovators create put options, consider the debacle with money market funds in September 2008. Investors in MMFs were promised that they could treat their holdings like a bank account, meaning they could withdraw as much money as they put in whenever they wanted. But when Lehman Brothers collapsed, MMF investors all tried to cash out at the same time, whereupon it became clear that many funds could not deliver. To forestall a widespread run on all MMFs and the banks that backed them, the US Federal Reserve stepped in to offer liquidity support. A run on Libra would require support on a much larger scale, as well as close coordination among all central banks affected by it.
Given these massive risks, governments must step in and stop Libra before it launches next year. Otherwise, as Maxine Waters, the Chairwoman of the US House Committee on Financial Services, has warned, governments may as well start drafting their own living wills. In the parlance of finance and banking, a “living will” is a written plan that banks provide to regulators describing how they will unwind themselves in the event of insolvency. In the case of a government, a living will would have to explain how the relevant authorities would respond to Libra breaking its peg and triggering a global run.
Obviously, this raises a number of pertinent questions. Would governments vow, like former Fed chairman Ben Bernanke in September 2008, followed by European Central Bank President Mario Draghi in July 2012, to do “whatever it takes” to ensure the currency’s survival? Would they even have the capacity to do so, let alone coordinate their actions – and share losses – with all the other countries involved? Would governments be able to seize control of the system if it proves incapable of sustaining itself?
Silence in response to Facebook’s announcement this week is tantamount to endorsing its dangerous new venture. Governments must not allow private, profit-seeking parties to put the entire global financial system at risk. If banks are “too big to fail,” then states definitely are. If governments fail to protect us from Facebook’s latest act of hubris, we will all pay the price for it.
Facebook’s New Cryptocurrency, Libra, Gets Big Backers
Facebook Inc. FB +1.75% has signed up more than a dozen companies including Visa Inc.,Mastercard Inc., MA +0.17% PayPal Holdings Inc. PYPL +0.15% and Uber Technologies Inc.UBER -2.19% to back a new cryptocurrency it plans to unveil next week and launch next year.
The financial and e-commerce companies, venture capitalists and telecommunications firms will invest around $10 million each in a consortium that will govern the digital coin, called Libra, according to people familiar with the matter. The money would be used to fund the creation of the coin, which will be pegged to a basket of government-issued currencies to avoid the wild swings that have dogged other cryptocurrencies, they said.
The Wall Street Journal reported last month that Facebook was recruiting backers to help start the crypto-based payments system and was seeking to raise as much as around $1 billion for the effort.
In the works for more than a year, the secretive project revolves around a digital coin that its users could send to each other and use to make purchases both on Facebook and across the internet.
Talks with some of the partners are ongoing, and the group’s eventual membership may change, the people added.
A Facebook spokeswoman declined to comment.
It has been a decade since bitcoin was born, yet consumers hardly use it—or the hundreds of other cryptocurrencies—to pay for things. Facebook is betting it can change that with a crypto-based payments system built around its giant social network and its billions of users.
It isn’t known, even to some members of the consortium, how the coin will work or what their roles will be, people familiar with the project said. Regulatory hurdles in the U.S. and elsewhere are high. Some members have expressed concerns that the token could be used to launder money and finance terrorist organizations, some of the people said, a persistent problem with bitcoin and other cryptocurrencies.
Facebook won’t directly control the coin, nor will the individual members of the consortium—known as the Libra Association. Some of the members could serve as “nodes” along the system that verify transactions and maintain records of them, creating a brand-new payments network, according to people familiar with the setup.