Earlier this summer, Facebook released a white paper outlining its proposal for Libra, a new digital currency and payment platform designed to “deliver on the promise of being ‘the internet of money.’” Before you roll your eyes and think ‘not another cryptocurrency get-rich-quick scheme,’ we should pause to consider how Libra is different than other digital currencies currently in circulation, and how it could impact the payments industry around the world if it progresses from experimental code into a fully functioning system.

To understand the impact, let’s first start with – what is money? The easy reply to this question is to say, “the dollars in my pocket” or “the change in my piggy bank.” These responses are true, but neither answer describes the fundamental properties of money or just how two currencies, such as the U.S. dollar and the Venezuelan bolívar, can have dissimilar values and utility within economies. A more comprehensive definition describes money as an item or record that functions as a medium of exchange, serves as a unit of account and stores value over time.

Money also comes in many shapes and forms that generally fall within two categories: commodity money and fiat money. Commodity money is money made from a precious commodity, such as gold or silver, and derives its value from the value of the metal itself. Fiat money, contrastingly, is money because the government says it is legal tender and serves as a medium to settle debts, such as tax obligations, and it has no intrinsic value. The American dollar, for example, is a fiat currency —its value has nothing to do with its material, which is simply a cotton-paper blend. Instead, its value comes from Americans’ belief in its long-term value and trust in its continuing ability to pay for goods and services. There are also other factors at play, notably the American dollar’s position as the primary global reserve currency.

This review of the classic definition of money is essential to understanding Libra because the proposed digital currency challenges many traditional concepts of money and the role of government and central banks. Foremost among these challenges is digital nature and creation of Libra. Libra will be a fully digital currency issued by a Switzerland-based organization called the Libra Association. The Libra Association is a group of companies and other organizations, such as Facebook, MasterCard, Spotify and Vodafone, that will operate blockchain computing nodes to support transactions, and it alone will “mint” and “burn” all Libra used by participants. In other words, Libra will have no physical form—it will exist entirely on the internet as a blockchain-based application. Therefore, there will never be a physical Libra currency you can hold in your hands or stash under your mattress.

Users will be able to store Libra in digital wallets, and the Libra Association claims its efforts will reduce transaction costs, especially for cross-border payments and remittances, and enable tens of millions of unbanked or under-banked people to access electronic payments with nothing more than a smartphone and a data plan. Yet, unlike all the major currencies in use today, there is no role for a government or central bank.

Traditionally, governments and central banks play a critical part in maintaining monetary systems that provide stable values to support healthy economic activity, and their efforts help to sustain participants’ confidence in the money they use. Since Libra will not have traditional government/central bank authority to establish value and utility, it will instead ensure long-term value with the requirement that for each new Libra, “there must be an equivalent purchase of Libra for fiat and transfer of that fiat to the reserve.”

Essentially, participants must exchange a fiat currency, like an American dollar, for an equal-value in Libra, and that dollar is then placed into a reserve that will be invested in low-risk assets, such as government securities. In theory, the reserve will provide stability that other cryptocurrencies, like Bitcoin, lack because they rely solely on speculation for their value. Association members will encourage utility by facilitating and accepting payment in Libra and by building other applications, like digital wallets, to support the currency. Does that sound complicated? That’s because it is!

Around the world, governments and central bankers continue to express concerns about what could happen if a privately-managed global currency becomes widely adopted. During a recent hearing before the House Financial Services Committee, several lawmakers questioned David Marcus, Facebook’s digital payments leader and co-creator of Libra, on what would happen during an economic crisis and how Libra would address concerns about privacy, anti-money laundering and the overall implications for rivaling traditional monetary and payment systems. There are still more questions than answers, and a group of U.S. lawmakers led by Representative Maxine Waters (D-CA) will soon meet with the Swiss Federal Data Protection and Insurance Commissioner to learn more about the Libra Association’s plans to headquarter in Switzerland, and to seek more information about how the digital currency may impact the U.S. and global economies.

Whether or not Libra moves from an experimental code to a fully functioning global digital currency remains to be seen. In his testimony before the House Financial Services Committee, David Marcus pledged Libra will not launch until the association wins the support of regulators. However, EPCOR members should continue to monitor Libra, as well as other new developments, to be alerted to evolving technologies, regulations, and consumer and business payment trends. What sounds like science fiction today can easily become commonplace in a short time, so we encourage you to stay engaged and informed.

You can look forward to learning about many of these developments at the upcoming EPCOR Payments Conference – Fall 2019 in Overland Park, KS starting on October 21st. For more information, check out our online store, the conference website and stay tuned to News You Can Use!