Over the weekend, all the major cryptocurrencies rallied to YTD highs. Bitcoin crossed the important psychological level of $10,000. Year-to-date, Bitcoin has rallied by more than 150%, making it the biggest gainers. It has reinforced the fact that Bitcoin should not be ignored. The recent rally is mostly because of the current entry by Facebook into the cryptocurrencies industry. Just last week, the company announced that it was launching its own cryptocurrency in collaboration with 27 other companies like Visa, Mastercard, Uber, and Booking Holdings. The currency will be known as Libra.
What is Libra?
In a statement and in its White Paper released last week, Facebook announced that Libra will be a digital currency that will be available to billions of people from around the world. The currency will be in the form of a stablecoin. A stablecoin differs from other cryptocurrencies like Bitcoin and Ethereum in that it is backed by other fiat currencies like dollar, euro, and pound. As a result, it will be a bit stable compared to the normal cryptocurrencies. Once it starts circulation, one Libra will be worth one dollar, which means that there may be no limit to the amount that can be produced. The funds that will be used to back the currency will be stored in a Swiss bank account and will be overseen by Calibra, an independent non-profit organization. Libra will join other stablecoins already in the market such as Gemini Dollar and Tether.
Challenges for Facebook and Libra
As Facebook prepares to launch the stablecoin, it faces a number of challenges. First, Current, a San Francisco fintech has accused Facebook of copying its logo. As shown below, the two logos, which were designed by the same agency are relatively similar. Therefore, if the company decides to file charges, it could delay the project.
Second, Facebook faces the challenge on justifying whether the currency is indeed a cryptocurrency. This is because its white paper did not show any way in which it is indeed a cryptocurrency. Unlike Bitcoin, it will not be mined. Also, unlike Bitcoin, it is not decentralized because it will have a centralized organization – Calibra – overseeing it. A review by the Financial Times said that:
The fundamental thing to note is that Libra as outlined is not a currency, crypto or otherwise. It is an accounting unit, defined as a weighted basket of real (but so far unspecified) currencies. The new technology Facebook and its partners are promising will just allow people to make payments denominated in units of this basket. The payment and transfer functionality itself is no different from what banks, credit card companies or PayPal do today; and the technology will not have the anonymity or decentralisation that attract some to actual cryptocurrencies such as bitcoin.
Third, the company faces the hectic challenge on how to deal with regulators. Already, many international leaders have talked against the currency. In the United States, lawmakers are concerned about giving too much power to Facebook, a company that is known for its privacy issues. The same sentiment has been repeated by other major international law makers.
Fourth, there are concerns that emerging and developing countries could be hurt by having a single global currency. This is because most people in these countries will prefer having the currency instead of their local ones. As a result, their central banks may not be able to react to the performance of their economies.
Therefore, going forward, investors will continue their focus on the Libra and the interest it garners in the marketplace. Some believe that these headwinds could mean that the currency will actually not see the light of the day.