Friday, Aug 16 2019

How Facebook Could Change the Face of Banking

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How Facebook Could Change the Face of Banking

 

Last month, David Marcus, who is heading up Facebook’s digital currency (Libra) project, sat before Congress to face questions about the tech giant’s currency. Much of the discussion shed very little light onto the matter. However, one question did let people learn something valuable. Facebook can’t properly define the nature of the digital currency until policymakers make certain decisions.

Facebook also asserts that Libra could potentially create a new global financial infrastructure and that it could possibly serve billions of people. This means Facebook could change the face of the financial world with its project, depending on how it actually comes to fruition.

What is Facebook’s Libra and Could It Change the Financial World?

While not everything is clear at this point, Libra has been labeled a “reserve-backed digital currency” by Marcus. Essentially, Libra coins would be digital assets that use a distributed ledger process, not unlike the one used by Bitcoin and a range of cryptocurrencies.

However, unlike Bitcoin, Libra would have a stable value. Instead of having the value swing based on the whims of currency buyers and sellers, Libra would be backed by a serve of fiat currency, including US dollars, euros, British pounds, and Japanese yen.

When asked if Libra was a security, like a stock or bond, Marcus said Facebook doesn’t believe it qualifies as a security. Facebook doesn’t have the legal ability to make that determination – that resides in the hands of the Securities and Exchange Commission (SEC) – the tech giant asserts that Libra is meant to be a “payment tool” instead.

This issue is complex. Facebook isn’t proposing a payment system like PayPal or Venmo, and there is very little formal regulation regarding a project precisely like Libra. But, since Libra involves handling people’s money, the project taps some highly regulated industries. Even though Marcus said that Facebook doesn’t intend to enter the world of “banking,” without guidance from policymakers, it isn’t clear where Libra’s status will fall.

Regardless of the uncertainty, Libra has already found some support. The digital currency wouldn’t belong to a single entity. Instead, the Libra Association – a nonprofit created by Facebook – will lead development. So far, 27 organizations (besides Facebook) have signed on to be participants, including Mastercard, Visa, PayPal, Spotify, and Uber.

With so much planned involvement at this early stage, the project has the potential to destabilize currencies and become a substantial economic power.

Since the project is in an early phase and the government has yet to fully assess what Libra is and how it will function (in a legal sense), it isn’t entirely clear what the end result will look like. However, if a company as large as Facebook creates an integrated payment system with a digital currency and world-reaching potential, the impact on the banking world would likely be substantial.

 

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