Cryptocurrency has taken the financial world by storm in recent years. With the introduction of Bitcoin and the staggering gains and losses experienced by the virtual currency, numerous other players have entered the picture. Today, dozens of cryptocurrencies are available to investors, each with their own strengths and weaknesses. In June, 2019, social media giant Facebook announced that it was entering the cryptocurrency field, releasing plans for the company to launch a new currency called Libra. Immediately, financial experts and privacy advocates were skeptical of the plan.
Libra – A New Cryptocurrency Model?
In an effort to create a new global payment system for goods and services, Facebook announced ambitious plans centered on Libra, its new cryptocurrency model. Facebook will bring together 27 like-minded organizations, including tech companies, payment processing providers, and others, under a non-profit collaborative venture called the Libra Association, which will be based in Geneva, Switzerland. Libra, the organization’s cryptocurrency, is scheduled to be launched in the first half of 2020.
Existing cryptocurrencies, such as Bitcoin, Litecoin, Monero, Ethereum, Zcash, and nearly 4000 others, face significant market swings that influence valuations. The typical model is decentralized, and most cryptocurrencies are extremely volatile. Facebook’s Libra, on the other hand, is designed to be tied to government-backed funds, which in theory will create a more stable environment for investors. Facebook has indicated that it won’t directly manage the currency itself, but rather will create a third-party digital wallet management division called Calibra.
Financial and Privacy Concerns
Facebook has been plagued by numerous privacy breaches that have affected millions of the social media platform’s daily users. The company has been slow to respond to these breaches, and many industry analysts are therefore hesitant when it comes to the Libra cryptocurrency initiative. Financial transactions, especially those that occur in the digital environment, must be private and must employ end-to-end security encryption in order to succeed. It is unclear if Facebook is up to the task of providing a secure environment for these transactions; its track record of information security is spotty, at best.
Resolution of claims regarding processing or accounting errors is another area that has financial industry analysts holding their breath. There is a patchwork of regulatory provisions regarding cryptocurrency, and most users of these currency models do not enjoy the consumer protections available in more traditional financial payment/processing models. If something were to go wrong with Libra, consumers may not have adequate legal remedies. Investments in Libra are not protected by deposit insurance. This alone may make Libra and other cryptocurrency choices remain on the fringe of the financial world for years to come unless consumer rights reforms are passed. For now, Libra sounds good on paper, but the reality suggests that Facebook’s cryptocurrency will join thousands of others as having limited practical uses for the foreseeable future.