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What does it mean for the average consumer that the first truly global currency could be on the horizon?
To start: lower fees, more accessibility and close-to-instantaneous transfers worldwide. At least that’s Facebook’s goal.
The social media behemoth announced on Tuesday it’s creating a cryptocurrency called Libra to debut in 2020. The currency, built on blockchain, the technology underlying other cryptocurrencies like Bitcoin, was developed in part to ease money transfers across borders and serve un- and underbanked populations around the globe.
The currency is meant to be sent almost instantly, with fewer fees than current money transfer services. Here’s what consumers need to know.
What is the purpose of Libra?
Essentially, Facebook wants to make it as easy to move money around the world as it is to send a text message.
The company released a White Paper to explain the details. It doesn’t see the cryptocurrency as an attempt to replace the current financial system, as is Bitcoin’s aim. Rather, it’s intended to extend a digital payment method to under-served populations that don’t currently have easy access to traditional financial institutions.
Worldwide, almost two billion adults “remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access,” reads the paper. Libra aims to fill the gap.
Even in the U.S., where consumers have access to a wealth of payment options, the FDIC estimates that more than 8 million households are unbanked. But the currency’s potential lies well beyond the U.S. Populations in Africa, Southeast Asia and some Latin American countries are lacking stable, accessible currencies and payment methods, Nicholas Colas, co-founder of DataTrek Research, tells CNBC Make It.
“For large chunks of the world, Libra will be about having a superior form of payment and wealth preservation,” says Colas. Representatives from Libra did not respond to CNBC Make It’s request for comment.
How will Libra work?
Libra will be managed by a Swiss-based nonprofit. It is currently backed by Facebook and more than two dozen Founding Member companies, including Ebay, Uber, Lyft, Spotify, Visa, Mastercard, PayPal, Coinbase and venture capital firm Andreessen Horowitz. Unlike other cryptocurrencies, Libra will be backed by “real” government-backed assets from central banks to give it stability.
Facebook says Libra will be made available to Messenger and WhatsApp users, who can cash in their local currency to buy Libra. The currency will be held in a digital wallet called Calibra (more on that below) and can be spent on products and services at participating merchants, just like any other currency.
To withdraw funds, users will be able to convert their digital currency into legal tender based on an exchange rate. It won’t be so dissimilar to when you exchange U.S. dollars for euros during a European vacation, for example.
Currently, Libra is not “pegged” to a single currency. Its value will depend on the value of its underlying assets, which may fluctuate. Still, this will reportedly help it be less volatile than other cryptos.
For those worried about security, Libra payments will not be connected to a user’s Facebook data and won’t be used for ad targeting.
How to set up a digital wallet
Libra will not be available until the first half of 2020, so you can’t buy the currency today. Once it does become available, there should be several ways consumers can buy the currency, and you won’t necessarily need to go through Facebook.
Facebook is launching a digital wallet called Calibra to hold and transfer the currency to other organizations. (Calibra is also the name of the subsidiary Facebook is operating that will build financial services, including the cryptocurrency.) Colas relates it to a “Starbucks card with a balance on it, but one you can use for more things than just coffee.”
Transaction fees will likely be lower than those currently charged by traditional finance companies, Colas notes, which will primarily benefit merchants, but also people who, for example, routinely send money to family members abroad and are forced to rely on expensive wire transfer services.
Facebook says that it won’t make money on the currency at first. But Colas notes that once the company has set up the first-of-its-kind global payment system, it will be a natural progression to add other services to Calibra, such as loans, that can earn the company returns.
“Everybody understands the global payment system is inefficient in cross-border transactions, and there’s no bigger market than money,” he says. “It’s the biggest market on the planet.”
How is this different from a credit card?
One of the purposes of Libra is to serve people who do not currently have access to traditional banking and financial tools. Currently cryptocurrencies can be used like a credit card to buy goods online. But Libra will theoretically go beyond that. Consumers will be able to purchase the currency and use it at participating merchants.
“You have a balance of, say, $100, you go to a merchant, you scan your smartphone for a $10 purchase, the Libras are taken out of your account and held by the merchant,” says Colas.
Transaction fees will also be lower than they are for traditional forms of payment. Calibra is similar, then, to a payment network like PayPal, but uses the cryptocurrency Libra rather than a fiat currency, like the U.S. dollar for transactions.
The currency won’t launch until next year, but users can sign up for early access here.
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Facebook announced its cryptocurrency, called Libra.
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