Crypto 101

Could Facebook’s cryptocurrency render Bitcoin obsolete?




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Facebook Libra

Bitcoin (BTC) has been rising in value over the last couple of weeks, floundering above $12,500 on 8th July and falling back to $10,500 this week. The bearish price action is catalyzed by several factors. Today, many financial experts believe that the emergence of Facebook’s cryptocurrency dubbed “Libra” or Globalcoin is a contributing factor to the price fluctuations. The venture from the social media giant is likely to validate the idea of digital currencies. That might just work in favor of BTC and its rival cryptocurrencies like Ethereum.

Facebook’s Crypto Libra

The crypto community has been on its toes for almost a year now following Facebook’s involvement in this space. The social media powerhouse has been working to build a cryptocurrency-based payment system. Former Instagram and PayPal executives and a renowned technologist David Marcus are part of the team driving the project. 

Not until recently, the crypto community was not privy to the developments. However, it is now clear that the Silicon Valley darling is working around the clock to launch their own cryptocurrency. The approach is to build a stablecoin and back it up with a “basket” of fiat currencies. Libra or Globalcoin is expected to be a digital medium of exchange for the extensive Facebook ecosystem. The coin will be availed through physical automated tellers, exchanges, and through a purported reward system. 

Countries Gearing Up for Libra

The popularity of Libra has pushed major countries like the US, UK, and Japan to take some action. Following president Trumps concerns that cryptos like Bitcoin and Libra could be used to fuel illegal activities, the US Treasury Secretary now stresses on compliance. In a recent press statement, Mnuchin insists that all cryptocurrencies, including Facebook’s Libra, must adhere to the Anti-Money Laundering and Counter-terrorism policies.

Moreover, the United States Senate Banking Committee has revealed the opening statements of Facebook’s head of Calibra wallet, David Marcus. The statements are being heard today, July 16, in the US Senate where Marcus is set to testify. In general, the testimony will clarify the upcoming Libra cryptocurrency and its associated Calibra digital wallet. More importantly, Marcus will have to convince the Senate on the regulatory frameworks that will guide the use of the new stable coin. The UK Finance Minister Phillip Hammond takes a different stand that the financial regulators should decide the fate of Libra, not lawmakers.

How Libra will work

The social-media giant has an impressive user base of more than 1.5 billion people. The Globalcoin will help users to transfer coins to each other across the platform. Facebook is already partnering with a number of financial firms and online merchants in preparation for the launch. Of course, this will be preceded with an ICO that aims to raise $1 billion in investment. 

According to The Journal, the social network has courted Mastercard, Visa, and the payment processor First Data. It has also approached e-commerce firms and apps about accepting Globalcoin and investing in the project. The incentive is based on the zero card-processing fees for these merchants.

More importantly, Facebook plans to back its cryptocurrency with dollar reserves in a bid to stabilize its value. Volatility has been the greatest undoing of Bitcoin and other cryptocurrencies, and Facebook looks to address that through fiat backup. Introducing a stablecoin could also be a response to rising concerns about the privacy and safety of users. Of course, other cryptocurrencies promise user anonymity and security.

The company also plans to introduce a virtual checkout that coin holders could use to make purchases on other sites. It’s the same way you can use your Facebook credentials to log into other websites. Moreover, users will gain fractions of the coin by watching ads, engaging with other content, or shopping on the platform.

Funding Options for Globalcoin

Since the Globalcoin is typically a stablecoin, its value is pegged on a traditional fiat currency. So, it can be traded easily across various exchanges. Facebook actually seeks to peg the value of its coin to a host of different foreign currencies other than USD. However, this brings issues when it comes to attracting investments. Cryptocurrency investors are often enticed by the wildly fluctuating value of cryptos. So, Facebook’s proposition may not attract as many investors as many would imagine. However, it could prove potentially interesting for mainstream financial institutions and consumers. Facebook users would be glad to have a coin that they can use to make purchases over the internet without worrying about erratic price movements.

What does Facebook’s new cryptocurrency mean to Bitcoin?

Facebook’s cryptocurrency will undoubtedly be a powerful force in developing countries, which is where the social media giant intends to market the product. The reason is that central banks in developing countries lack the integrity to maintain the value of their fiat currencies. More often, these currencies rapidly lose purchasing power, which is not a good thing for investors. Venezuela, for example, is experiencing hyperinflation worse than what Germany suffered after World War I. 

By providing a reliable store of value for citizens in these developing countries, Facebook’s cryptocurrency will indirectly impart fiscal and monetary discipline on those nations. By extension, it will improve the lives of many people across the globe. However, many crypto experts believe that the Globalcoin will turn out to be Trojan horse that powers Bitcoin to mainstream adoption.

How will Bitcoin benefit?

While some schools of thought have taken a cynic approach, claiming that Facebook could detract from Bitcoin’s value proposition, some believe that it could actually favor Bitcoin. Caitlin Long, Morgan Stanley’s former executive and blockchain proponent thinks that Globalcoin could bolster Bitcoin’s mainstream adoption. 

In an extensive interview on the possible effects of Facebook’s cryptocurrency on Bitcoin, Long explained that the new coin could help accelerate the adoption of Bitcoin. Facebook will tacitly educate its users about crypto assets. Through Globalcoin, users could interact expensively in the digital economy. But, when users get acclimated with the coin, they could turn back to Bitcoin for one simple reason: BTC is scarce and Globalcoin is not.

Backing her claim, Long pointed to the education efforts about Venezuela’s Petro cryptocurrency. The oil-backed digital asset aimed to save the nation’s hyperinflating economy, but the results seemingly spiked the adoption of Bitcoin in Venezuela. The same trend could easily recur with Facebook’s cryptocurrency.

Luke Martin, a reputable analyst and industry commentator, also agrees with Long’s prediction. Martin recently reiterated that Bitcoin, being the industry pioneer, acts as an on-ramp to any cryptocurrency that crops up. So, Facebook’s foray into the cryptocurrency ecosystem will eventually benefit Bitcoin

Final Thoughts

Although Globalcoin is likely to enjoy widespread adoption owing to Facebook’s enormous user base, it is not a venture immune to challenges. In the long run, it will drive the long-term value of Bitcoin and accelerates the adoption and acceptance of digital assets across the globe. Furthermore, the presumably centralized cryptocurrency could be a “honeypot” for Facebook and governments.