How does Facebook's crypto currency work

Libra cryptocurrency: Pay once with Facebook, please!

Facebook has 2.4 billion active users. And it is planning its own digital currency called Libra. Politicians in Europe - including Germany's finance minister - fear for their currency power. What exactly is Facebook planning? Why does the world still need a digital means of payment? And what risks would it have if millions of Europeans were to pay with Libra? An overview

What is currently being argued about?

Libra doesn't exist yet. Facebook's new cryptocurrency is announced for 2020. With this, Facebook wants to help shape the global financial markets of the future, not to say: overturn. In mid-June, the company launched a new digital currency called Libra that people around the world can use to shop anywhere - online or in a store. All you need is a smartphone. These plans are not well received in Europe: "We believe that no private company can claim currency power inherent in the sovereignty of nations." With these clear words, Olaf Scholz (SPD) and his counterpart Bruno Le Maire made it clear in an official statement on September 13th: The finance ministers of Germany and France want to oppose Facebook introducing Libra in Europe. And they are not the first to be critical of the plans. There are concerns around the world about data protection, but also the impact that such a digital currency could have on international finance.

Well, the announcement of a new cryptocurrency in 2019 isn't really big news. The hype surrounding digital currencies such as Bitcoin has long since subsided. But the case of Facebook and Libra is different. This is mainly due to the global influence of the social network, which, according to its own information, has around 2.4 billion monthly active users. Thanks to the many people that Facebook reaches, it could establish a new means of payment with Libra practically overnight that works across banks, countries and continents - provided that the supervisory authorities play along. Reason enough to take a closer look at the plans.

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What is libra

Facebook describes Libra as a "global currency and financial infrastructure". As with Bitcoin, it is a so-called cryptocurrency: It only exists digitally and is based on a so-called blockchain. This is a kind of digital cash book: All transfers are stored in the form of individual blocks, they contain no information on the identity of the sender and recipient. Blockchains can differ in their structure. A separate white paper explains in detail what the blockchain on which Libra is built looks like.

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How can people use Libra in everyday life?

Like all cryptocurrencies, someone who wants to shop with Libra needs a digital wallet: a wallet on their computer or smartphone. With Calibra, Facebook has announced its own wallet for Libra, which is to be integrated directly into WhatsApp and Facebook Messenger. Even people who don't use Facebook can theoretically use the cryptocurrency. Because the code is open source, anyone can in principle develop their own Libra wallet or application.

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Users receive Libra by exchanging a so-called fiat currency such as euros or dollars. You can do this either directly via Calibra, via file sharing sites on the Internet or via traditional sales outlets with cash. You can then exchange Libra for other currencies in the same way. If you have Libra in your wallet, you can spend it in the app with just a few clicks: you can, for example, send amounts of money to friends or relatives or make purchases. To avoid fraud and money laundering, users must initially register with Calibra with an ID card.

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When should Libra be available?

The official start is 2020. Until then, only selected people and developers will be able to test the new currency. Initially, it will probably only be available in certain countries that allow crypto currencies. It is still unclear which states this will be and whether Germany will be one of them. But that didn't stop the finance ministers in Germany and France from expressing criticism of Facebook's digital currency plans.

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What can you pay with Libra?

In theory, everything that can be paid for with traditional currency - provided that the relevant retailer accepts digital money, which is of course another question. On the website, Facebook primarily describes Libra as a currency that is supposed to connect people across borders and financial markets. Especially people who send money to relatives in other countries or who have no access to banks - around 1.7 billion people worldwide according to Facebook estimates - should benefit from Libra.

In practical terms, people in western countries will probably first use Libra for small transfers: to pay their buddy for the beer from last evening, the Uber trip or a concert ticket. One day complex financial services, from subscription to salary payments, will also be conceivable through so-called smart contracts.

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What is the advantage over PayPal or Venmo?

Good question. One criticism of blockchain applications is that they would work just as well without blockchain and that there are working alternatives. On the one hand, this is also true in the case of Libra. On the other hand, Facebook argues that the transaction fees for Libra should be significantly lower than for traditional transfers. This could be particularly advantageous for international transactions. A wallet like Calibra does not necessarily require a connected credit card or bank account. Both could be interesting for people in emerging markets.

And then there is the spread: Facebook has almost 2.4 billion active users, WhatsApp another 1.5 billion. PayPal only comes in at around 280 million. In the end, availability and ease of use could be the biggest advantage: Who still needs PayPal when you can pay with Libra on Amazon and at the kiosk on the corner?

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What is the difference to Bitcoin?

Both crypto currencies pursue the approach of establishing a global, digital currency based on a blockchain. But that's where the similarities stop. The most important difference to Bitcoin or Ether is that Libra is a so-called stablecoin. The value of the cryptocurrency is linked to the value of one or more fiat currencies, such as US dollars or euros. In other words, a Libra will always be worth about a dollar. This prevents extreme price fluctuations and owners can be sure that their Libra will always have a similar value.

Therefore Libra is not suitable as an object of speculation and cannot be mined by third parties using immense computing power and energy (see also next question). In contrast to Bitcoin, the number of Libra is not limited, but depends on the demand: the more people convert fiat money into Libra, the more Libra will be spent. If demand falls, excess coins are destroyed.

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Who decides the value and award of Libra?

Libra should become what is called a stablecoin in cryptocurrency jargon. This means: The value is linked to a currency basket that weights several stable currencies together. As a result, the fluctuations are in the cent range, so it is not possible that a Libra is worth one US dollar today and five tomorrow. Every Libra that is issued must be covered by reserves of the same value. In other words, if there are $ 100 million worth of Libra in circulation, there must be $ 100 million in reserves. There are two institutions to control this: the Libra Reserve and the Libra Association.

  • The Libra Reserve contains the reserves in the form of various assets. These can be bank deposits or short-term government bonds. As it says on the website, these should not be risk bonds, but stable investments. Put simply, the reserve could be described as a money store in the background, which is always opened when someone exchanges Libra for fiat money and vice versa. This money store is not only filled by the users' money exchange, but also through investments made by the founding members of the Libra Association, who had to raise at least ten million US dollars for their admission.
  • The Libra Association is a newly founded non-governmental organization based in Switzerland. Apart from Facebook, the 28 founding members include companies such as Mastercard and Visa, Vodafone, Spotify, Uber, venture capitalists and NGOs such as Kiva. They have two main tasks: First, they decide on the composition of the Libra Reserve, i.e. they manage the money storage and decide how and to whom the return, for example through interest, is distributed. Second, they provide the hardware for the so-called validator nodes: In the early days of Libra, the transactions on the blockchain were compared and thus secured using these nodes located around the world. The Association has an administrative, a technical and a regulatory role in the development and dissemination of Libra. It should grow to 100 members by the start of 2020.

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How much power does Facebook keep in Libra?

Facebook is the developer of the Libra blockchain and founder of the association. However, shortly after the official launch of the currency, the social network wants to transfer its leadership role completely to the association. Like all members, Facebook would then have the same rights and obligations. So in the future, Facebook cannot alone decide in which direction Libra will develop. The social network is likely to have a major impact.

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How does Facebook make money from it?

Like all members of the Association, the company hopes for the currency's long-term success. Because the more people use Libra, the higher the investments in the reserve and the higher the return through interest. For the same reason, companies such as Mastercard and PayPal are believed to have been there from the start - companies whose business model is actually threatened by Libra, but who can hope for additional income through their participation.

Facebook also has a head start: With Calibra, it has developed the first independent Libra wallet that is to be integrated into WhatsApp and Facebook Messenger. For many people, this may initially be the fastest and easiest way to get in touch with Libra. Calibra could even be the first really widespread crypto wallet. Kevin Weil, vice president of Calibra, told the other The Verge, they want to keep the transaction fees low. It is more important to promote the spread of Calibra in such a way that "a lively economy of financial services" arises. The more people use Calibra, the longer they are in the Facebook ecosystem and the more attractive it becomes for retailers and advertisers to place ads in this system - which in turn makes Facebook profit.

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