What is the Libra Cryptocurrency?
Libra is a cryptocurrency created by Facebook. This 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. It will not be controlled solely by Facebook. A not-for-profit organization called the Libra Association will monitor this cryptocurrency. The goal of this coin is to be a stable cryptocurrency used to create better and cheaper financial services around the world.
Quick Summary of Points
- 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
- It is backed by a basket of assets which include major currencies and government debt securities which give this cryptocurrency stability
- This cryptocurrency and its associated reserve will be handled by the Libra 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 will receive Libra tokens. This cryptocurrency can be used at any business that supports its use. Facebook is also developing a digital wallet service which can hold and spend these tokens, called Calibra.
Tokens are monitored and kept track of by the not-for-profit organization, the Libra Association. As individuals exchange their local currency for these tokens, the association will ensure that tokens are backed by a basket of major currencies and securities. This basket is what allows the cryptocurrency to have a relatively stable price.
The Libra Association acts 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 will have one vote just like the other members of the association.
This cryptocurrency uses blockchain technology, however it is not a true blockchain since it is not fully decentralized. Only members of the Libra 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. By backing the cryptocurrency with a basket of major global currencies it allows for price stability. This, 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 they want 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 these nations and being robbed can mean losing nearly everything. 1.7 billion adults globally have no access to a traditional bank however 1 billion still own a mobile phone.
Libra’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, Libra wants to give 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 factor 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. This includes companies such as Visa, Mastercard, PayPal, eBay, and many more. This 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 compared to many other cryptocurrencies. For example, Bitcoin the most well-known cryptocurrency tried to fulfill the role of facilitating transactions however 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 these members including Facebook will make in interest income.
Facebook can also indirectly profit from wide usage of the Libra by turning businesses who are willing to support this cryptocurrency, into advertisement buyers on their 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. This open-access has pros and cons. The good thing is that it will ensure low barriers to entry, encouraging competition and driving innovation. The risk, however, is that this can increase the chances of disreputable app makers accessing a user’s digital currency.
This cryptocurrency will also be decentralized. Although the white paper highlights a plan to become decentralized, it will not be considered a true cryptocurrency until this happens. Issues surrounding privacy practices from regulators may hinder Libra from becoming a mainstream currency.
Thank you for reading CFI’s article on the Libra cryptocurrency. If you would like to learn about this cryptocurrency, check out their white paper. To learn about related concepts check out CFI’s other resources: