If you didn’t know, in 2019 Facebook announced it was getting into the cryptocurrency business with an unregulated currency called Libra, of which government regulators, bankers and many others in the finance sector did not take kindly to it.
Long story short, Libra is in trouble. Facebook had lined up a long list of corporate backers for the cryptocurrency initiative including major players in the payment sector like PayPal, VISA, Mastercard, etc.
These big shots became members of what was called the Libra association. With each member contributing at least $10 million to the project.
What is the Libra association?
The Libra association is the Swiss-based consortium of nonprofits and companies like eBay, Uber, Lyft, Spotify, VISA, Master Card, etc. formed to control the Libra cryptocurrency.
However, in early October 2019 PayPal became the first company to back out of the Libra association. That led to the exodus of other companies from the project.
VISA, Mastercard, Stripe, and eBay followed PayPal and ditched Libra.
So why were all these companies ghosting Facebook’s digital currency all of a sudden?
First of all, Facebook has a ton of baggage. Think back to the 2016 US presidential elections, Russian hacking, and the data incident with Cambridge Analytica.
So, when a company that big and controversial tries to introduce a product that could potentially disrupt the global financial community, you can see why the US lawmakers, other governments and financial institutions paid more attention.
Why did Facebook try to get into the cryptocurrency business in the first place?
Well, Facebook is BIG! It has 2.4 billion monthly active users. It’s a huge base for such a business idea especially as cryptocurrencies are now popping up. Even if only half of the 2.4 billion people use Libra for payments, that’s still more than 600 million people, that’s about twice the population of the United States.
Facebook designed Libra to be a digital global currency. Like other currencies, Libra will be built on top of a blockchain but unlike other cryptocurrencies such as Bitcoin, it will be backed by a basket of real-world currencies.
This would stabilize its price and protect it from outrageous fluctuations often seen in the bitcoin market.
The Libra reserve will hold bank reserves and short-term government securities for every Libra coin created online.
If all went according to plan, Libra users would have a virtual wallet called Calibra where they could buy, sell, send and receive Libra through platforms like Facebook, Instagram or Whatsapp, and those payments will move within seconds for small fees.
In contrast, Bitcoin transactions take several minutes to confirm a transaction and sometimes cost a few dollars. Moreover, Bitcoin is known for its volatility and steep price swings. That’s because it isn’t backed by governments meaning things like inflation and monetary policy don’t influence its value.
Instead, the value of cryptocurrencies depends on supply and demand as well as basic market forces like fear and greed.
For example, Bitcoin has a fixed supply. The total number that will ever be minted is capped at 21 million. Some experts say the cap won’t be reached for another 120 years.
Facebook says all that volatility wouldn’t happen with Libra because it would be backed by several currencies. Thus, maintaining a stable price even when demand changes.
Facebook’s manifesto stipulated that Libra will be a Permissioned based system which means transactions can only be added to it by the members of the Libra association.
So where did it go wrong for Libra?
David Marcus the Facebook executive leading the blockchain initiative who also once served as the president of PayPal testified to the US Congress that
“Libra will work more like a traditional currency than a cryptocurrency”
This meant Libra intends to compete with real-world currencies like the USD, Pound Sterling, Euro, etc.
That raised a HUGE RED FLAG among government regulators and raised eyebrows of people in international monetary institutions.
The huge backlash made the members of the Libra association to start fleeing
In a sit-down with the US Congress, Zuckerberg was grilled by lawmakers seeking clarity.
In September 2019, France and Germany agreed to block Libra.
The government said “No private entity can claim monetary policy, which is inherent to the sovereignty of nations”
A few weeks later that’s when Libra’s corporate backers began to jump ship, PayPal was the first to leave in October 2019. eBay, VISA, Master Card, and Stripe followed suit.
The opposition came from countries with established financial payment systems where the majority of the population already have bank accounts. Facebook was going after the unbanked population which has huge potential.
In truth, Libra was trying to replicate what has already occurred in China. Companies like Tencent and Alibaba have launched payment services that are fast and are pushing aside regular banks as sources of payment.
In a way, Libra’s demise before it even began was Facebook’s own doing. The company has a poor reputation when it comes to user’s data and competing against established currencies would spell the end for said currencies.
Right or wrong, let us know in the comments if it was a marketing mistake by Facebook to market Libra as a “stable” coin comparable to real world currencies.