All you wanted to know about...Libra

The highly secretive crypto currency project that Facebook had been working on, over the last few years, has finally been unveiled. It will be called ‘Libra’, probably due to the libertarian values that it espouses, and will go live in 2020.

Libra is attempting to replace Bitcoin and other crypto-currencies that have had a checkered history replete with mind-boggling rallies, resounding crashes and numerous run-ins with various regulators.

The designers of Libra have tried to retain the strong points of the existing crypto-currencies while addressing the shortcomings. Libra too can be created through computer algorithms and is based on open source block-chain technology. But the similarity with existing crypto-currencies ends there. The main problem with Bitcoin and others was lack of intrinsic value. This is being addressed by backing every Libra unit with reserves of real assets made of bank deposits and short-term government securities. The value of Libra will be linked to the value of the assets held in the reserve and thus the currency is expected to be more stable.

The second issue with Bitcoin and other cryptos — lack of accountability — is addressed by bringing on board many founding members, including Mastercard, PayPal, Visa, eBay, Uber, Spotify, Vodafone, Coin-base and Anchorage, who will be investing in the company and will also promote the usage of the Libra units. The founding members will be given Libras in lieu of their initial investment.

Founding members will also be paid dividend out of the returns earned by the reserves, after meeting all the operating expenses. There will be certain authorised re-sellers who will be the conduit between the actual users of the currency and the Libra reserve.

There is definitely a need for a digital currency that can help in cross-border transaction, with minimum regulatory intervention and cost. Bitcoin and other crypto-currencies held promise in this regard. But they have failed to deliver.

With the confidence that each of the Libra units can be exchanged for fiat money, users need not worry about its actual worth. Also, with large payment, technology, communication and venture capital companies backing the initiative, the usage of these units is likely to grow manifold in the coming years.

The only problem could be integrating of this currency with the existing financial system where global central banks control the strings. With currency in circulation having a major bearing on inflation and monetary policies, these banks are unlikely to allow digital currencies to disrupt the balance.

Already dissenting voices are being raised from global central banks that are forming committees to look in to Libra. Also, there are concerns about the involvement of Facebook in the venture. Facebook has been known to trade user information in the past and there are concerns about letting it launch a currency that can disrupt the entire global payment system.

If you are a computer geek, you can look forward to the launch of Libra next year. Indians can however buy or sell these units only if the RBI gives permission to banks to facilitate transactions involving Libra. If the permission is given, you can exchange Libras for rupees and buy and sell on global e-commerce sites. Also, remitting money globally will be easier, without central bank intervention, if done with Libra. There could be derivatives and even exchange-traded funds based on Libras, if the usage increases.

Will Libra gain currency? The jury is still out.

A weekly column that puts the fun into learning

COMMENT NOW