While Facebook had big plans to launch its flagship cryptocurrency, Facebook Libra, in June 2020, the $525 billion tech giant has faced yet more resistance from regulators for its controversial approach to digital finance.
Zuckerberg’s grand vision to “reinvent money and transform the global economy so people everywhere can live better lives” has raised eyebrows across the world as financial institutions cast doubt over the social, political and economic implications of a privately-owned global currency.
As The Libra Association continues to battle its way through the regulatory minefield, we wanted to take a closer look at how Facebook is progressing with its vision and whether the world of accounting should be concerned about the rise of digital cryptocurrencies.
Facebook hopes to leverage its growing empire of over 2.6 billion monthly active users to create a fast, stable and secure digital currency that will improve financial access across the globe.
Libra uses blockchain technology to connect a permissioned network of secure servers to manage the issuance and transfer of digital tokens. While the original plan was to peg the value of the Libra against a ‘basket’ of international currencies and government debt, fears of destabilising the value of established currencies and money laundering have forced Zuckerberg to find a plan B.
The Libra Association now claims the cutting-edge digital currency will use a “college” of regulators, central banks, and enforcement agencies from over twenty countries in a bid to scale-back its approach and receive regulatory approval from the Swiss Financial Markets Supervisory Authority (FINMA).
Facebook hopes its cooperation with major financial institutions will help them work around regulatory concerns and build a reputable digital currency with global exposure. While Zuckerberg appears to be doing all the right things, his unwavering battle against the regulators calls the sincerity of his vision into question.
One of the biggest differences between cryptocurrencies and traditional currencies is the fact that they don’t comply with our classical understanding of monetary theory.
We usually attach value to a currency based on one of two factors:
- The weight of precious metals is used as a benchmark to denote value.
- If the state will accept the currency as a form of tax, we attach value to it.
The inability to attach physical value to a digital entity, combined with the lack of regulation around most cryptocurrencies means that the likes of Bitcoin, Ethereuem and Facebook Libra don’t meet either of the above criteria. This critical distinction between traditional currencies and cryptocurrencies triggers concerns over the volatility of Libra if it were to get the green light from regulators.
The Libra Association has responded by announcing the proposed launch of “stablecoins” that will be valued against an undecided assortment of currencies such as the US Dollar, the Euro and the Pound.
Head Economist at Calibra, Facebook’s digital wallet branch of its crypto venture, explains how they plan to “retain the construct of a multi-currency Libra, but it’s fundamentally changed, streamlined and simplified relative to the original one”.
He also claims they are taking measures to protect Libra against “extreme market distress” by holding collateral in the form of low-risk liquid assets with short-term maturity. While the details of these precautionary measures remain unclear, they should help to improve the stability of Libra once it’s off the ground.
Calls for tightened government regulation of Facebook is largely due to concerns over monetary sovereignty and the stability of official state currencies.
While the proposition of pegging Libra against a ‘basket’ of international currencies and state debt will go a long way to moderate its value, many governments fear Facebook’s seemingly infinite access to customer data could give the tech giant an unfair advantage that could warp the value of state-owned currencies.
Crucially, economists are worried about a fundamental shift whereby the value of the basket of state currencies becomes reliant on the value of Libra, not the other way around.
This fascinating video by TDLR News on the future of cryptocurrency and China’s latest DCEP currency explains how Facebook’s ability to control the weighting of currencies in their ‘basket’ could manipulate the value of other currencies and distort entire economies.
Smaller nations with weak domestic currencies are particularly fearful of the impact of Libra and other stablecoins on their economy. With this in mind, Zuckerberg has his work cut out if he wants to realise his grand vision of creating affordable and accessible finance to developing nations across the world.
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While Facebook has a long way to go before Libra will find its way into our everyday lives, keeping a watchful eye on the evolution of digital currencies and understanding their regulatory implications is vital to help accountancy firms tailor their skillset to the future of finance.
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