Data privacy is hardly Facebook’s forte, yet the fate of its digital currency could hinge on users’ willingness to trust the social network with transactions.
On June 18 Facebook announced Libra, its future digital currency, which users will be able to send and receive in its Messenger app, WhatsApp, and eventually a standalone app. Promising a faster, cheaper and more inclusive way to pay, Facebook emphasised how Libra would “empower billions of people”, giving those in less developed parts of the world access to the financial system, unleashing innovation, and speeding up the flow of commerce.
Given that Facebook has 2.4 billion users worldwide, there is potential for widespread adoption. That could make Libra one of the world’s most circulated currencies. The impacts on Facebook’s power, and on the global financial system, are staggering to contemplate.
Of course, the concept is not new; nor is this the global financial system’s first would-be revolution. Libra invites comparison both to incumbent payment services, and to Facebook’s own existing services. Users in the U.S. can already make payments through Messenger, and WhatsApp is testing this in India. The difference is that these cannot be used across borders. They also require bank accounts, thus excluding the unbanked. Other payment services such as TransferWise and Western Union can be used internationally, but their transaction fees can be prohibitive.
Comparisons to cryptocurrencies like Bitcoin are inevitable. Like Libra, they allow international transactions, do not require bank accounts, and have much lower fees. The difference, according to Facebook, is that Libra will be faster, handling 1,000 transactions a second. Libra will also be managed differently. The difference, according to critics, is that Libra would not truly be decentralized, as Facebook claims. Sceptics also doubt the projected speed claims.
The challenges facing Libra run the gamut – from the technical complexities to the regulatory quagmire and political opposition, which is already being voiced. Anticipating the latter issues, Facebook co-founded a consortium called the Libra Association to govern Libra. Its 28 members include financial firms such as Visa and Stripe, as well as online services Spotify and Uber, cryptocurrency wallets, venture capitalists and NGOs. Facebook has also created a subsidiary, Calibra, to run Libra’s digital wallet and “ensure separation between social and financial data”.
If it works, Libra could be lucrative for Facebook, though not directly. As The Economist explains, the low transaction fees would not generate much revenue. The real money would be in advertising. Facebook would be able to charge its advertisers more, since the adverts would allow customers worldwide to quickly and easily make purchases directly on the platform. This activity would in turn feed a whole new trove of data to be harvested for more targeted advertising.
Then the thorny matter of data privacy rears its head. There are reasons why CEO Mark Zuckerberg’s announcement of a new “privacy-focused social platform” at its annual developer conference in April elicited laughter. For Libra to be adopted widely enough to matter, users must be willing to trust Facebook with financial transactions. The Libra Association is meant to impose third-party check and balances, but undeniably this is still a Facebook business. If users don’t take the leap of faith, then merchants have little incentive to pay for more expensive ads, and Libra’s commercial viability makes its descent.