Will Libra Succeed ?
Libra Association, formed by Facebook announced a new digital currency which is called Libra. It was presented by Facebook a year ago, but as we see now its already 2020 March and no proper grants are given by the authorities. As I see it, may be the USA government saw it as a risk to the status of the USD. There are plenty of interesting videos on youtube where the Facebook CEO is been grilled over this by the US senate members. Currency war is pretty much the biggest thing in the world and we sure have to give credit to Facebook for even taking the risk of introducing a so called new currency. (Facebook do not use the term “its a new currency”)
Lets see how Libra works and the problems it plans to solve.
Why Libra was created ?
As Facebook say, the world has no common platform to do financial transactions and hold money at the same time with low fees and commission rates. So that’s the problem, Libra is trying to answer. You might think why Paypal does the same? Yes true but it does not have the reach facebook has, no market place like facebook has and most importantly the trust factor is not there. (Will you be comfortable in using paypay to hold your entire savings?)
Given Facebooks reach with 2.5 billion users, every user can have the right to hold a digital wallet for them self. This will solve the low income users hassle, to open a bank account and them being able to participate in digital transactions/online markets. You can get a credit card only if you have a stable income and a bank account. Roughly only 1 billion bank accounts exits in the world. You dont need to produce you salary scripts or any documents to open a Libra account but it still can hold your money like a bank account, you just need a mobile device with an internet connection. Facebook is trying to help other 1.5 billion users also to have an account in a digital form. With this, a higher percentage of physical cash(untapped customers) will be digitized into Libra tokens.
On an external note, if Libra wallet is launched, it has the capacity to be the biggest financial institute with the most number of customer accounts in few weeks. Calibra is the name given to Facebook’s digital wallet for storing Libra coins. It will be a standalone app and will be integrated into WhatsApp and Facebook Messenger. A government ID has to be used for signup.
Crpto vs Libra
If you think Libra is a crpto currency, clear that thought now. Libra is a digital version of the USD,Yen, Euro or the Pound. Libra has all the characteristics of a fiat currency given its currency basket combines of fiat currencies (USD,Yen, Euro or the Pound are all fiat currencies) and most importantly there is a 3rd party/middleman involved. I believe the mediator or the 3rd party is been brought into the picture for Libra to eliminate the trust issues other crypto currencies has.
By fiat means, there is no physical assert bidden to the currency value like gold or silver but the value of the currency is governed by a central bank of the country. Given that Libra is backed by a fiat currency basket its obvious that Libra will inherit all the fiat currency gradients. (you will get to know more on the currency basket later)
BitCoin/Crypto Currency is basically digital gold and it does not have a 3rd party/middleman involved for authorization transactions or to maintain the value of it. Basically saying no central bank is governing bitcoin. Also crypto currencies use block-chain technology. On a very high level, it works P2P and it also takes off the middleman. If I am not mistaken, taking off the middleman was the main purpose of creating a Bitcoin/Crypto Currency.
Libra was introduced as a crypto currency. I believe this is only because its been planned to use the blockchain technology for Libra transactions. Just a technology wrap to gain interest from the bitcoin community I assume. The block chain technology here is different to the block chain technology used for bitcoins. I will be explaining the technicalities in the latter part of the article. (the difference I mean…. )
In my view the Libra creators has analyzed the minus points of fiat currencies, BitCoin and other wallets like paypal and has tried to plaster each when creating Libra with some alternate method. All in all I assume I have done enough to convince that Libra is not exactly a crypto currency… Anyway you will understand most of the terms mentioned above after reading the topic below..
Current Money Problems that Libra is planning to solve
No common infrastructure to move money across the world : You have heard about the companies that do money transfers across boarders and the fees bonded to the transaction. (some companies charge 7% to move money across the boarder .. but u need to wait days to get the money out) With Libra payments can be done instantly between boarders with no fees or commissions. Imagine you need to send money to your aunt in Africa and both of you can open libra wallets and then transfer libra tokens from your wallet to your aunts. Then your aunt can cash the libra tokens from where she stays. With Libra , u can use it as a settlement currency and make money move faster.
Crypto currencies like Bitcoin fickle big : Over the course of the last two years the bit coin went from 900 to 20,000 USD. To overcome this Libra has designed a so called stable coin method. Which means the value of libra is tight to the real word asserts/fiat currencies. This is called the basket of currencies :USD,Yen,Pond and Euro. The value of this basket will decide the value of Libra. But since its a combination of few currencies the fluctuation will be kept at a very low or nothing over a longer period.
Fiat currencies also does fickle : Yes they do. Value of the USD will not stay the same for 1 month. But since the currency basket has 4 major currencies, the rate of change is far less than a since fiat currency.
No inter-operability between current digital wallets and currencies : Paypal does not allow to store bitcoins ? The point is there are plenty of digital currencies and wallets but these are not interconnected. Libra is planning to bridge that gap. May be someday you can buy Libra tokens using bitcoins.. I am just saying :)
Libra can be used as an account to hold your money and worry less about the money losing its value over time. Libra gives a solution to the main issue we have in a fiat currency. Which is inflation. (if you find time to read my article on a topic related to this, pls do :) ) You save 100 Rupees in your account today and you can get X number of Dhal from the market today. But in two weeks can you get the same X number of Dhal for 100 Rupees? Not sure. But Libra, given the currency basket theory they are trying to keep the inflation at a very minimum or nill.
Carrying cash is a crime in most parts of the world. Vulnerability of being robbed is high so a Libra wallet can be used to promote cashless transactions and as a account to hold money in the form of Libra tokens.
How it works ?
- First you download the Libra wallet application to you mobile and create a login. Libra account will be created under your credentials in Libra association. This will have a balance of zero Libra tokens.
- Then you need to link your source account which holds your local currency with your bank as the funding source. (I have assumed that Libra wallet is compatible to link your local bank account )
If you are a Sri Lankan and you have used a Wallet application done by any bank, you will know that your Debit account can be linked to the wallet as the source funding account. If this Debit account is from a different bank, then the account linking will be done via LankaPay CEFT.
3. Now that your source account is linked, you need to buy Libra tokens. Lets say a Libra token is 500Rps, and you are spending 10,000 Rps from your debit account to buy Libra tokens.
4. After the request in point 3, Libra association generates 20 Libra tokens and credits to your Libra account linked to your Libra Wallet.
at the point Libra association created 20 Libra tokens out of thin air. Money is not rippled here since your local currency is held as a liability when issuing Libra tokens. Anyway for the business to run Facebook is planning earn an interest for the local currencies saved in the Libra agency. Facebook has to have plans of reinvesting the fiat currency asset in other means to do so, similar to banks.
5. You goto Facebook market place, search for a merchant, or walk into a merchant who sells Jujubes and also accepts Libra, then buy 10 packs of them. Points to note here is, the merchant also has a Libra account with Libra association and he accepts Libra tokens as currency in exchange for the product he sells.
6. Now you need to withdraw the balance of your Libra accounts. Lets say the Libra token is still priced at 500Rps. So Libra association will convert the remaining token into your local currency and credit your source accounts.
Libra Association
Steps 1–6 is the overall concept of a Libra marketplace. In the meantime, Libra association will earn an interest for the time they hold the local currency in the wallet. I assume they will acquire banking licences and start other investments with this money. Libra association has complete control on how many Libra tokens are in circulation. Its like a central bank which can create and destroy Libra currency any time. Also most importantly, Libra association will have the authority to decide the buying and selling value of Libra.
Libra association has to have a reserve of money to payback who ever wants local currency in exchange to Libra coins. Similar to banks, they will have to self impose a reserve percentage.
Governing Body of Libra the Libra Association, it’s based in Switzerland with a group including 20–30 members. Libra association decides the price of a Libra token and also they are responsible for the Libra reserve.
What is the Libra reserve ? each time you cash in a dollar or any other currency it goes to a reserve called the Libra reserve. Libra reserve uses 4 currencies, USD,Jap Yen, Euro and Pound which is been branded as the Currency Basket. Lets say you buy a Libra tokens using Sri Lanka rupees. But the Libra reserve will not keep Sri Lankan rupees in the reserve. They will convert the Rupees into any of the four currencies in the basket and add to the reserve. With this method, even if one of the currencies goes up or down the value of the Libra will be stable.
how Libra transactions will process ? I mean technically
A Blockchain method is used here with some alterations. Blockchain is an infrastructure where digital transactions take place. Its a digital unchangeable record where transactions are recorded and verified by a set of set of nodes which are independent and de-centralized. In other words there is no central governing body or a central bank. This will enhance security because there is no single entity to be hacked. Also on another note governments or central banks cannot block transactions based on any conditions. Well that’s the normal blockchain, with Libra there is a slight difference tho, unlike bitcoin the libra nodes cannot be run by anyone. It has to be one from the Libra association. So end of the day the association has the power to validate if they want to and act as a middleman.
All the financial data will be kept in Calibra (co) and not Facebook. This is done to minimize the data privacy concerns.
note : Bitcoin can handle only 7 tps, Libra can handle 1000 tps and the centralized VISA can handle 24,000 TPS.
Issues and way ahead …
What ever is been said on the internet, Facebook and the Libra Association has put a solid plan in introducing Libra. As per some of the experts Facebook made an mistake by marketing the Libra currency, instead Facebook should have spoken about the wallet and the platform, its benefits more. Privacy concerns which the US senate worries about more are due to the past experiences with Facebook failing to keep its promises. Most interestingly the youngest senator Alexandria Ocasio-Cortez (whom I am a huge fan of :) ) also does not believe in Facebook’s credibility let alone the seniors. This I believe is a telling factor in the future of Libra.
Libra uses a fiat currency basket as its reserve. These fiat currencies are printed , or created out of thin air by the respective central banks. Does these currencies has any backing of a reserve like gold or silver ? No. Simple answer is fiat currencies does not need to have any backing of a physical assert. So to use fiat currencies as the reserve for Libra.. well its a bit confusing to me.
If Libra association go bankrupt in any case how will the public hold the association responsible is another concern. Its not like the government of any country is backing the Libra currency. The governing body of Libra is a set of self appointed company heads and not a central bank.
Lets wait and see how things will fold out in the next few months.. Fair to say, Libra will be huge and it will open doors for endless opportunities .. Please share your thoughts on this.. thank you!.
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