Facebook’s Libra is not really a cryptocurrency – but it could still be world-changing

Facebook could be on to a winner with Libra, its new cryptocurrency, says Dominic Frisby. Here, he explains why.


Facebook's libra has borrowed heavily from other cryptocurrencies

I must say I'm very tempted to buy some shares in Facebook.

I know that makes me evil, bad and wrong, but I can't help thinking it's onto a massive winner with this new Facebook Coin. Or, as it likes to call it, "Libra".

Facebook has 2.4 billion users worldwide, apparently.

If they all start using Facebook money phew! The potential is phenomenal.

Things like the pound and the US dollar will become a sideshow.

The story behind Facebook's new digital currency

In case you didn't hear the news, social media giant Facebook announced its plans yesterday for a new currency. Libra, it will be called.

Quite an interesting choice of name, I thought. Libra means balance or scales, but it is also the Latin word for a pound weight. The pound is, of course, the currency of the UK (and Lebanon), dating back to the time when a pound meant a pound of sterling silver. (Now a pound doesn't even buy you 1/10th of an ounce of sterling silver).

The livre (same meaning) was also the currency of France until the revolution, while the lira was the currency of Italy, and remains the currency of several middle eastern countries today, notably Turkey. The Lebanese often refer to their money as lira too.

There are also overtones of the word "free", as in liberty, or the French or Spanish libre. Those who named it so will be all too aware of the relationship between money and freedom, in particular free markets. It means a great deal to us gold and/or bitcoin bugs.

But the name is just one part of what looks like some very clever marketing.

There is a white paper. This is typical for any new cryptocurrency, except that Libra isn't really a cryptocurrency.

The white paper reads like so many other white papers I have read. It is full of crypto buzz words like "blockchain" and "decentralised" and "permissionless".

Yet as far as I can see, Libra is not really decentralised or permissionless. And a blockchain that is not decentralised and does not carry the rewards of mining is not a blockchain. It is just a database.

So it's just PR, basically.

What does Facebook really want from libra?

The white paper is full of the typical noise about helping the "unbanked" gain access to finance. In this regard Libra could actually succeed. By the early 2020s, almost all of the world's population will have a smartphone, and a smartphone is the way by which many of the world's poorest will gain access to the internet for the first time and be able to make payments beyond their immediate vicinity.

Libra no doubt will make it easy for them to do that.

But read the white paper and you would think that is Facebook's sole aim. Whereas really this is about creating a reserve money and payments system that leverages the enormous user base that Facebook and WhatsApp have. You'll be able to send money via WhatsApp or Facebook Messenger.

It's also very telling that the white paper was released during Asian daytime hours. That shows you where Facebook thinks its market is. WhatsApp is huge in India, for example, where it is believed to have as many as 300 million users. If you can get them sending money as well as messages, the potential is enormous.

Even the idea that Libra is backed by a basket of assets is slightly obfuscatory. It is not pegged to any currency, but backed by "a collection of low-volatility assets, including bank deposits and government securities in currencies from stable and reputable central banks". Effectively, this means a basket of currencies a bit like the International Monetary Fund's SDRs.

One thing bitcoin, for all its success, has failed to do, is to get people thinking in terms of bitcoin. You will always see the US$, £ or € equivalent. People think in terms of US dollars, or euros or pounds. To get buyers and sellers thinking in terms of "libra" will be hard. But that creates a smokescreen for fees and FX charges.

Anyone who knows Mark Zuckerberg's early history, most famously dramatised in the film The Social Network, will know that his strength is not so much as an originator, but as someone who has no qualms about adopting other ideas that are working well, even if they are not necessarily his own, and taking them to a different level.

Libra has borrowed from bitcoin ("a digital currency built on the foundation of blockchain technology") , from the m-pesa (sending money via messages on your phone), from ripple ("the internet of money"), from stablecoins like tether (it is backed by "a reserve of assets"). It has borrowed from all the narratives surrounding the crypto space, as well as the tech itself.

It even says Libra is pseudonymous and allows users to hold one or more addresses not linked to their identity (good luck getting that one passed in the US).

I can pick a million holes in this project. Others can and have and will. No matter.

The bottom line is this: the possibilities of a payments network build on top of Facebook's social network are stratospheric. It will take a long time to get it working both technically and from a regulatory point of view, but this thing could be huge.

Surely it makes sense to get some exposure to it.

I'll have more on this in the next issue of MoneyWeek magazine, out on Friday get your first six issues free here.


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