Facebook’s Libra & The Potential Affects on Banking

Facebook’s Libra & Potential Affects on Banking

Facebook recently unveiled what is considered as an ambitious plan where it launched its currency, Libra, like Bitcoin. The social media giant has already partnered with other heavyweights in the industry, such as Master Card, Visa, Spotify, PayPal, and Uber. There are a lot of privacy questions that have been raised, which adds to the regulatory concerns over Facebook. As we speak, Facebook already rules over communication for more than 2 billion people all over the world.

Now it has its own currency. Most consumers will most probably use Libra as an alternative to money banking. This could make the new currency proliferate, especially if it is viewed as an attractive option. For example, if every American held a one-tenth of the total amount in their bank balances to the new currency, the new outstanding worth of Libra would be at more than $2 trillion. Should Banks be worried?

At first glance, Libra looks sort of a banking system. The Libra reserve is designed in such a way that it can hold adequate liquid safe assets that can back any issues arising in Libra. A small section of a staunched group of economists has been referring to this sort of plan as a dubbed narrow banking that is meant to replace the already in existence fractional reserve version, which stipulates that mortgages or any other illiquid loan will back all deposits at the banks.

On the surface, they argue, the only significant difference between Libra and narrow banks will be that the latter will be capable of holding assets dominated by a variety of currencies (still to be specified)

In creating its globe-spinning money, Facebook is likely to receive more interest from regulators since the new currency could conceivably privacy users, national currencies, and the banks. It will only attract more scrutiny from the regulators, which makes one wonder whether this was the smartest course of action. This is according to a section of the New York Times.

Libra will be available in the form of a cryptocurrency or digital cash, which will be using encryption mechanism as a security feature. Cryptocurrencies are not available in the form of physical bills but rather in the way of a digitally designed computer code. All the records and transactions that take place through cryptocurrencies are recorded in ledgers referred to as Blockchain.

What Will Be The Benefits Of Facebook’s Libra?

Fostering More Sales

Facebook now has a chance to encourage more people to use its new currency to make purchases from the ads posted through its social media platforms. This way, it will be able to make more sales and get more ads from the advertisers, and similarly, to make the ads more attractive to the potential customers.

Backing from familiar corporations will also see Libra become the first cryptocurrency with an impressive mass appeal. Other cryptocurrencies have repeatedly failed despite having some devoted followings from curious innovators and investors.

Bitcoin alone remains one of the cryptocurrencies that are deeply shrouded in numerous fraud concerns and suspicious secrecy, in addition to the wild fluctuations in value from time to time. This is an issue that has made it unappealing to the typical user.

Facebook does not intend on running Libra directly. Instead, the company and its partners have formed an organization named The Libra Association, whose headquarters will be based in Geneva, where they will be overseeing the use of the new currency. Facebook claims that the whole association will be under Swiss Financial Authorities.

Introducing A New Digital Wallet

In line with the launch of Libra, Facebook also came up with a new subsidiary, Calibra, which oversees designing a modern digital wallet that will allow Libra users to send and by using the currency.

Calibra, on its part, has sworn not to share transactional information and data collected from Libra users, unless in cases where it is compelled to especially in criminal cases.

Right from the start, Calibra will let users send Libra to almost anybody using a smartphone. The process will be secure and instant, just like when a person is sending a text message.

How will Libra affect the Banking Industry?

Facebook’s Libra promises a world where payment providers, including banks, are partially disintermediated, which will bring about an almost free, instant international money transfers.

If Facebook’s 2.4billion users embrace the currency, it could affect the role of the central bank. Although the ink is not completely dry on Facebook’s proposal, industry experts and investors all claim to be evaluating the impact that Libra will have on the banking system but suggests that there will be a lot of hurdles along the path for Libra, but should it overcome those hurdles, it could be a major disruptor for the industry.

Conclusion

Facebook is already taking on initiatives that are aimed at building Libra, and it seems that all of its more than a dozen partners are very ready to contribute to the development of the underlying technology of the currency; which may result in a reduction in operational banking risk, but time will ultimately tell. Facebook is looking at raising over $1 billion from both its existing and future partners.

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