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Libra Cryptocurrency

Facebook's cryptocurrency intended to be used as a simple, low-fee medium of exchange worldwide

What is the Libra Cryptocurrency?

Libra is a cryptocurrency created by Facebook. The Libra cryptocurrency is intended to be used as a simple, low-fee global currency. It will essentially be digital money on your phone, which can be used to pay for any purchase where the cryptocurrency is supported. Libra is backed by a basket of assets, including major currencies and government debt instruments.

In December 2020, Libra was renamed Diem. Libra Association – responsible for overseeing the project, currency, and transactions – was rebranded as Diem Association.

 

Libra Cryptocurrency versus Bitcoin

 

Summary

  • Libra is a cryptocurrency created by Facebook, intended to be used as a simple, low-fee medium of exchange to be used around the world. The digital currency is now called Diem. 
  • It is backed by a basket of assets, which include major currencies and government debt securities, which give the cryptocurrency stability.
  • The cryptocurrency and its associated reserve will be handled by the Diem Association, an independent not-for-profit association made up of the coin’s founding partners.

 

How Does Libra Work?

Libra will be able to be purchased, held, and used by cryptocurrency wallet applications. By cashing in dollars, you can receive Libra tokens. The cryptocurrency can be used at any business that supports its use. Facebook is also developing a digital wallet service that can hold and spend these tokens, called Calibra.

Tokens are monitored and kept track of by the not-for-profit organization Libra Association (now called Diem Association). As individuals exchange their local currency for tokens, the association will ensure that the tokens are backed by a basket of major currencies and securities. The basket allows the cryptocurrency to have a relatively stable price.

Diem Association will act as a regulatory body for the cryptocurrency, and it will not be run solely by Facebook. Instead, the association is made up of 28 founding partners, which include Mastercard, Visa, eBay, and a number of other companies. Facebook is entitled to one vote, just like the other members of the association.

The Libra cryptocurrency uses blockchain technology. However, it is not a true blockchain currency since it is not fully decentralized. Only members of the Diem Association will be able to access the ledger of transactions.

 

What is the Purpose of Libra?

Libra is intended to be used as a simple medium of exchange around the world. Backing the cryptocurrency with a basket of major global currencies is intended to provide price stability. That, in turn, promotes the efficacy of the coin as a simple currency that can be used for daily transactions.

In Libra’s white paper, one of the main problems it seeks to address is how much it costs for individuals in developing countries to move money. In these developing countries, money sending services charge steep fees and take upwards of $50 billion away from families annually.

Storing money is not always easy in such countries, and being robbed can mean losing nearly everything. Some 1.7 billion adults globally are unable to access a traditional bank; however, one billion own a mobile phone.

The cryptocurrency’s goal is to become a mainstream digital currency that can be used by anyone. By charging much cheaper fees than other money sending services, utilizing blockchain technology, and holding the value of the currency stable, the Libra initiative wants to provide better, cheaper, and more open access to financial services for all.

 

How is Libra Different from other Cryptocurrencies?

As mentioned before, one of Libra’s differentiating factors is that it is backed by real assets. Many cryptocurrencies do not do this, which is why they lack the stability and guaranteed intrinsic value that Libra offers. There are other cryptocurrencies that are backed by real assets. However, most are pegged to a single currency. Libra, instead, uses a basket of major currencies and government debt instruments.

Another interesting factor is that this cryptocurrency is backed by many strong businesses that make up the Libra Association. The Association includes companies such as Visa, Mastercard, PayPal, and eBay. The Association manages the Libra Reserve and is the only one that can create or destroy tokens.

Libra’s low fees and real asset-backed reserve resulting in low volatility make it a more realistic mainstream medium of exchange as compared to many other cryptocurrencies. For example, Bitcoin, the most well-known cryptocurrency nowadays, tried to fulfill the role of facilitating transactions. However, it became more of an asset to be held as a store of value.

 

How will Facebook Profit from Libra?

Facebook, as well as the members of the Libra Association, can make money and cover their costs based on the interest earned on assets being held. The more mainstream the currency becomes and the more assets being held in the reserve, the more the members, including Facebook, will make in interest income.

Facebook can also indirectly profit from the wide usage of the Libra by turning businesses that are willing to support the cryptocurrency into advertisement buyers on its website.

 

Issues Faced by Libra

The Libra blockchain will be open to everyone, meaning anyone can build products and create apps on top of it. The open-access setup comes with benefits and drawbacks. The good thing is that it will ensure low barriers to entry, encouraging competition and driving innovation. The risk, however, is that it can increase the chances of disreputable app makers accessing a user’s digital currency.

The cryptocurrency will also be decentralized. Although the white paper highlights a plan to become decentralized, it will not be considered a true cryptocurrency until such a thing happens. Issues surrounding privacy practices from regulators may hinder Libra from becoming a mainstream currency.

 

Additional Resources

Thank you for reading CFI’s article on the Libra cryptocurrency. If you would like to learn about this cryptocurrency, check out CFI’s free Cryptocurrency course. You may also like these resources:

  • Cryptocurrency
  • White Paper
  • Blockchain
  • Special Drawing Rights
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