Facebook's Libra Cryptocurrency: Everything We Know

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Facebook's long-rumored cryptocurrency finally got its big debut, and it's called Libra after all.

Facebook today released a lengthy white paper, along with a post from Mark Zuckerberg and another from VP of blockchain David Marcus, announcing the ambitious crypto initiative and all that comes with it.

The open-source Libra cryptocurrency and blockchain will be governed by the nonprofit Libra Association, while a new Facebook-owned subsidiary called Calibra will release a wallet for Libra tokens and ultimately other banking and finance products—a move that could turn Facebook into a financial services giant in addition to a social and advertising one.

While the public launch of Libra won't happen until the first half of 2020, the developer testnet of the Libra blockchain is live today. There will also be a new programming language called Move for developers to build distributed applications atop the Libra blockchain, though Facebook said neither itself nor the Libra Foundation will be in charge of vetting and approving apps, meaning there could be the potential for fraudulent or scam apps.

We've heard rumblings about a secret blockchain project since last May, when Cheddar's Alex Heath reported that Facebook had been exploring blockchain and the creation of its own cryptocurrency for use within its apps since 2017. Facebook's goal is to launch a virtual token allowing anyone in the world—and particularly billions of unbanked individuals who don't have bank accounts but do have smartphones—the ability to make seamless digital payments and transfers both inside and out of Facebook's apps.

There's a staggering amount of technical detail to how the permissioned Libra blockchain works (read: not completely open like Bitcoin and Ethereum) and how the Libra Association will keep the price stable using a reserve asset pool tied to multiple currencies including the dollar, pound, euro, Swiss franc, and yen.

But for consumers wary of trusting their money and financial data to a company known for privacy problems, there are a few important points Facebook is hammering home with Libra. Not only is it ceding control of the blockchain, but Facebook's social data and Libra's financial data will be kept entirely separate. You don't need a Facebook or WhatsApp account to use Libra or sign up for Calibra.

While users will be vetted for anti-fraud protection when setting up an account, like other blockchains there will be no personal information associated with Libra and all transactions will be encrypted. Facebook can't take the data from your transaction history and use it to target ads or sell you products.

What We Know About Libra

Cheddar reported in December that Facebook was on a hiring spree led by Marcus, the ex-PayPal president who formerly served as VP of Facebook's Messaging products. Marcus, an early Bitcoin investor who serves on the Coinbase board, confirmed he was leaving Messenger to focus on heading "a small group to explore how to best leverage Blockchain across Facebook, starting from scratch."

The team has grown from a dozen members to more than 50 employees, including the former team behind blockchain startup Chainspace, which Facebook acquired in February.

Facebook explored a number of different avenues while figuring out exactly how the financial side of its cryptocurrency will work. After meeting with dozens of financial institutions and tech companeis about backing its token (including Zuckerberg's old friends the Winklevoss twins), Facebook decided to give up absolute control by setting up an independent governance body called the Libra Association, based out of Geneva, Switzerland, to oversee the token.

The 27 founding members of the Libra Assocation paid a minimum of $10 million to operate a node on Facebook's blockchain underlying the token, which will be a stablecoin—meaning Facebook's cryptocurrency will have a stable price during payments and transactions backed by a number of different global currencies beyond just the US dollar. Facebook employees will reportedly have the option of taking the cryptocurrency as part of their salaries.

At launch and for the foreseeable future, Libra will not be a permissionless blockchain other cryptocurrencies, meaning that it's not truly decentralized: not just anyone can set up a node and join the blockchain. Facebook said it couldn't figure out how to make a permissionless blockchain scalable to the number of transactions Libra is expected to see; upwards of 1,000 per second. Libra has a vague plan to transition to a permissionless system "within five years," but for now the association will focus on adding new, vetted members.

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Every company operating a node will be part of the decentralized foundation governing the token. As for who Facebook has courted to invest $10 million for a node and join the "Libra Association," The Wall Street Journal originally reported that Marcus recruited his old friends at PayPal along with Visa, MasterCard, and Uber. Also participating in Facebook's crypto payments network are online payments giant Stripe, Argentinian e-commerce marketplace MercadoLibre, and Booking.com.

The Block obtained a full list of companies involved, now confirmed by Facebook. The Libra Association's membership also counts venture capital firms including Andreessen Horowitz and Union Square Ventures, other popular apps and websites like eBay, Lyft, and Spotify, telecommunications corporations such as Vodafone, nonprofits, and blockchain companies including leading crypto exchange Coinbase. In addition to buying nodes, the companies co-signed the white paper.

One sector that didn't jump at the opportunity is Wall Street; firms including Goldman Sachs and JPMorgan reportedly passed, and there no big banks signed on at launch. At least three companies chose not to partner with Facebook due to data usage concerns, CoinDesk reported.

How Will This Work?

The short answer is that it's very, very complicated. The tokens be transferrable at "low to no cost," according to Zuckerberg, between Messenger, Instagram, WhatsApp, and other Facebook-owned apps and services. So for users who need to send money to friends within the Facebook ecosystem, the coin could serve as a way for Facebook to undercut services like Venmo and Apple Pay Cash. Acquiring Chainspace helps Facebook on the transactional side; the startup was working on decentralized smart contracts to facilitate faster blockchain-based payments.

The cryptocurrency is also key to Facebook's grand e-commerce designs. Facebook is building out a network of businesses and merchants to accept Libra as payment, and Facebook plans to make its cryptocurrency available to exchange from traditional currency through physical ATM machines as well. Small businesses and merchants who accept Libra will also be able to offer discounts and promotions for signing up new users, as well as cut down on transaction fees compared to traditional credit card processors.

The most ambitious aspect of the stablecoin may be its potential to tie the global financial system together through a single crypto asset. Laura McCracken, Facebook's head of financial services and payment partnerships for Northern Europe, first told a German business magazine that Libra won't be tied to any single fiat currency, but will be linked to multiple currencies to prevent volatility.

For a TL;DR of how the crypto-finances work: the number of Libra tokens will always correspond exactly to the pool of physical currency backing it. When a user transfers money for Libra, new tokens are created. When they cash out, the token is destroyed. The tokens are pegged to a pool of reserve currencies, which the Libra Association can adjust based on world markets to ensure there aren't volatile swings in Libra's value.

What members like Visa, Mastercard, Uber, and Spotify get out of the arrangement are dividends on the interest generated by Libra's pool of reserve currency, as well as the ability to offer discounts and incentives for customers to pay in Libra.

The Calibra wallet will be built into Messenger and WhatsApp, but will also be available as a standalone app for Android and iOS. Facebook sees Calibra as just one of many third-party wallets that consumers can choose from to hold their Libra tokens. There aren't too many blockchain companies in the association at launch, but Coinbase's participation is a signal to other wallet apps that may think about supporting Libra.

Calibra will launch with the same verification and anti-fraud processes used by banks and credit cards, and Facebook will have automated monitoring to detect fraud and potentially offer refunds.

What Libra Mean for the Crypto Market

Facebook's token is poised to achieve two very important firsts for cryptocurrency: the first crypto asset launched by a major tech company with a wide global rollout across both the financial world and consumer web services, and the launch of the most high-profile stablecoin ever created.

Stablecoins are enticing but risky endeavors, and in some cases fraught with controversy. The idea behind a stablecoin is to reduce the volatility and uncertainty of crypto prices to ensure that conversions, remittances, and other transactions remain, well, stable for consumers.

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There are a few ways to do this. One is to peg a cryptocurrency either as a fiat currency (or in Facebook's case, a basket of currencies) such as in the case of Tether, the most high-profile stablecoin until now, which is in theory pegged 1:1 to the US dollar. This turned out not to be entirely true, and Tether has dealt with a myriad of issues, from allegations of price manipulation to a loss of trust and investigations into in whether the coin was fully backed and was used to cover popular exchange Bitfinex's losses.

Stablecoins can also be peggged to a reserve resource like gold or silver, or in some cases it can be a coin where the supply, demand, and exchange rates are monitored and controlled to keep prices consistent. Stablecoins have gained popularity in countries like Venezuela where citizens need an alternative to the hyperinflated bolivar, but they can come in many different forms. JPMorgan's JPM Coin is a stablecoin in a fashion (albeit only for use within the bank's own private blockchain network), and IBM has partnered with blockchain payment network Stellar to let international banks launch their own stablecoins on the Stellar public blockchain.

The way Facebook has structured Libra gives the cryptocurrency instant global legitimacy, both it the high-profile members behind the effort and in tying the tokens to a number of government-backed fiat currencies. Particularly through apps like WhatsApp, Libra could also realize the promise of frictionless remittances and cross-border payments in the developing world that gives unbanked users simple, low-fee ways to send and receive money.

Libra is a huge market validation for crypto's long-held promise of digital payments, but the trade-off is that the permissioned, more centralized blockchain creates the transaction scalability needed while somewhat compromising the truly decentralized and distributed nature of the technology.

A Lightning Rod for Regulation

The moral is, Facebook's coin will work quite differently from Bitcoin, Ethereum, or any of the mainstream cryptocurrencies built on public blockchains. Libra won't be transacted over a public blockchain like Bitcoin where it would be difficult for Facebook to ensure the coin wasn't being used for illegal activities; the private, permissioned network set up through the Libra Association (where only verified companies control nodes) creates a network that's still decentralized to a degree, but governed and monitored by a foundation that Facebook and its partners control.

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Bloomberg reports that Facebook will test its stablecoin first in India for WhatsApp transfers, with the goal of realizing one of cryptocurrency's ultimate goals: seamless cross-border payments and remittances anywhere in the world.

Facebucks will shine a bright light on the cryptocurrency market as a whole, and it'll also come with increased regulatory scrutiny from US agencies, including the SEC and CTFC, as well as countries worldwide. Rolling out a global stablecoin of this kind that's pegged to multiple currencies and backed by giants of the tech and financial worlds will force the kind of accelerated regulatory action that the cryptocurrency market has been waiting for.

It'll also mean a lot more financial lobbying for Facebook, which is already dealing with multiple inquiries and regular calls for the social giant to be broken up. In May, members of the Senate Banking Committee sent an open letter to Zuckerberg inquiring into how Facebook's cryptocurrency and payments system will work. Libra may ultimately be a net positive for cryptocurrency's legitimacy in financial markets and its fully realized potential for cross-border payments, but its most immediate impact may be the fallout of whatever regulations are enacted to police it.

The Ripple Effects of Facebook's Big Pivot

Mark Zuckerberg's messaging has changed significantly in the wake of Facebook's tumultous stretch of privacy scandals, security breaches, and regulatory actions since the 2016 election.

After 15 years of making billions from online advertising as its core revenue stream, Zuck wants to change the core bargain at the heart of Facebook (and free online services writ large). Since the dawn of social networks, the trade-off has always been: we give you a free service, and you give us your personal data to target advertising at you. Most users didn't realize the implications and ramifications of this bargain until the Cambridge Analytica scandal and subsequent privacy revelations woke us up, but that transaction is at the heart of how the modern internet works.

In March, Zuckerberg outlined plans to re-engineer Facebook and its entire app family from the ground up as a "privacy-focused platform." In April, at Facebook's F8 developer conference, Zuck expanded on that foundational pivot by announcing that the company is overhauling the infrastructure behind Facebook, Messenger, Instagram, and WhatsApp to make end-to-end encryption the default standard and promote private conversations where Facebook collects less personal data.

On the one hand, this broader unification fits with Zuckerberg's vision to enmesh all of Facebook's apps and make them more interoperable. The founders of Instagram and WhatsApp have all left the company one after another, reportedly amid increasing pressure from Facebook to integrate their apps more deeply with the mothership. On the other is this shift toward unified privacy.

Two big dominoes fell in March when Chris Cox, Facebook's Chief Product Officer and the de facto No. 3 exec behind Sheryl Sandberg, left the company. Along with him went Chris Daniels, the recently installed head of WhatsApp. According to The New York Times, the Zuckerberg-led transition toward connecting the apps was the primary driver behind the departures.

Facebook's revenue will always be built on targeted advertising, but it's telling that at the same time Zuckerberg announced the new, privacy-focused Facebook, he also touted a slew of new features around e-commerce and shopping. At F8, Facebook announced that it's redesigning the Marketplace with shipping support for sellers, that Instagram users will be able to buy products directly from influencers, and that businesses will be able to upload product catalogs to WhatsApp. Facebook already lets Messenger users interact and shop directly with brands.

Wouldn't it be easier for users if they could complete all these transactions with Facebook's built-in money?

The true value of a crypto coin for Facebook is in convenience and engagement. Beyond any kind of altruistic notion of advancing an economic vision of digital money, Facebook is connecting all its apps and giving users a universal currency to use within them. Billion of users who already use these apps daily or monthly will have a built-in mechanism to spend their money there, too. The implications of this shift could turn Facebook from an online ad behemoth into a financial services and shopping giant to rival Amazon and big banks, especially because Libra and Calibra will be available to everyone beyond just the billions who use Facebook-owned apps.

If Zuckerberg does see his vision of a private Facebook become a reality, the new connected continuum of Facebook apps will have a self-sustaining e-commerce and shopping ecosystem built in to keep its billions of users sated within the walled garden, and give billions more a new reason that Facebook's technology is now indispensable in their daily lives.

Editor's Note: This story was updated at noon ET with details about Libra.

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