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Explained: Facebook’s global digital currency ‘Libra’

TWO SIDES: “Libra may have a few things working in its favour. But going by the opposition to the idea, it is not going to be smooth sailing.” Representations of virtual currency in front of the Libra logo

TWO SIDES: “Libra may have a few things working in its favour. But going by the opposition to the idea, it is not going to be smooth sailing.” Representations of virtual currency in front of the Libra logo   | Photo Credit: DADO RUVIC

What is Facebook’s plan to empower billions? What is Libra’s technology? Is this cause for worry?

The story so far: On June 18, Facebook announced that it is going to launch a global digital currency by the first half of 2020. The currency has been named Libra. It will be run by the Libra Association, a Geneva-based entity that has over two dozen founding partners, including Facebook, Mastercard, Visa, Uber and the Vodafone group. Almost immediately, concerns were raised by some lawmakers, commentators and even the co-founder of Facebook, Chris Hughes, who is now one of the foremost critics of the social media network he helped create.

Why does the world need Libra?

A white paper released by the Libra Association says its mission “is to enable a simple global currency and financial infrastructure that empowers billions of people”. The point it makes is this: in a world with cheap data and smartphones, about 1.7 billion adults are still outside the organised financial system in the world. This, despite a billion of them having mobile phones and nearly half a billion having Internet access.

The reasons for this are high fees, lack of access, and absence of documentation. Libra is being pitched as a solution to this. The promise is of financial inclusion on a global scale.

The white paper says: “Moving money around globally should be as easy and cost-effective as — and even more safe and secure than — sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn.”

It is apparently being built on the block chain technology. How similar is it to Bitcoin?

It is true that Bitcoin and Libra are both based on block chain technology, which refers to a form of distributed ledger — not centralised — of transactions. These are created by complicated math functions that make them almost incorruptible. But beyond this, there is very little in common between Bitcoin and Libra.

Libra is an initiative of 28 influential corporate entities. Bitcoin, which the world first came to know of in 2008, is seen as a product of libertarian values. Its founder, whose identity remains a mystery to this day, is referred to as Satoshi Nakamoto.

In Bitcoin: The Future of Money?, Dominic Frisby imagines what would happen if Bitcoin becomes somehow globally preferred: “In a flash, the ability for a government to fund itself through the manipulation of money disappears. You can’t obfuscate bitcoin supply — inflation is transparent. You can’t ‘quantitatively ease’ bitcoins... Central banks and private banks can’t create bitcoins when it suits them, and government can’t print bitcoins. It all means you don’t have to pay the price for the mistakes of governments and banks.”

Libra is going to be nothing like Bitcoin. The association white paper says, “We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure and trusted framework underpins this new system.”

Those are just some of the differences.

Though Bitcoin has come a long way, it has remained a niche currency. Why should Libra’s fate be any different?

Bitcoin, though built on a sound technological base, has had to encounter challenges relating to regulation across the world. Governments of the world, including India, have been wary of it functioning outside the ambit of organised finance. With huge swings in value, it remains one of the most volatile currencies.

Libra immediately has a few things working in its favour. A currency, to be a success, needs to have acceptability amongst many people. Facebook, with its over 2 billion users, and its partners could tick this box. Also, the Libra Association is promising to play by the regulatory rule book.

Plus, to make it a relative stable currency, not prone to wild fluctuations, the creators of Libra are backing this up with a reserve of real assets. Still, going by the opposition to the idea, it isn’t going to be a smooth sail for Libra.

Why is Libra being opposed?

Bloomberg has reported that the French Finance Minister, Bruno Le Maire, has called on the Group of Seven central bank governors to “prepare a report on Facebook’s project for their July meeting. His concerns include privacy, money laundering and terrorism finance”.

Markus Ferber, a German member of the European Parliament, has also been reported as saying that Facebook could become a “shadow bank” and that regulators should be on high alert.

Facebook’s co-founder Hughes, terming the digital currency “frightening”, has said it is a shift of power from central banks towards multinational corporations.

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Printable version | May 22, 2020 8:55:46 AM |

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