Facebook's New Digital Currency Plan Gaining Academic Exposure

MENLO PARK, CA — The verdict may still be out on giving a thumbs up to a new crypto currency, but Facebook appears to be doing more than leaning in on its proposed version by creating the "Calibra" financial services division to manage it.

With that, Silicon Valley academic economists have exchanged a few thoughts of their own as they await the release of Facebook's global digital currency called Libra, which is billed as a tool for "empowering billions" of people as easily and cheaply as sending text messages, the Menlo Park-based company insists.

Libra represents the first product the Calibra subsidiary will introduce for a user's digital wallet to be powered by blockchain technology. The wallet will be available in Messenger, WhatsApp and as a standalone app. It's expected to launch in 2020.

"It's pretty early in the grand scheme of things," San Jose State University economics professor Justin Rietz said of granting full approval of the new technological product. "But I think it can be successful if it's done right."

The biggest advantage revolves around it's user base — 2.38 billion as of the first quarter of 2019. It surpassed a billion seven years prior as the first social media outlet to do so, according to Statista. So any product created for all masses has huge potential.

"That brings it legitimacy. Everyone knows about Facebook," the professor said.

Rietz admitted the company still has privacy concerns from a consumer's standpoint, but Facebook has made inroads amid hiccups on maintaining steadfast security on a consistent basis.

"It will be tracked closely from financial regulators — especially since about 1,000 crypto currencies were schemed. Bitcoin has developed its own following as "successful," according to Rietz, with many who track the form of currency turning out as more than what "anybody was expecting."

The social media company has been down a similar road.

"Facebook had its own credit currency, but it didn't take off," he said.

With a simple Internet connection, the crypto currency places all global citizens on a level playing field to save, send and spend money since many people around the world have found basic financial services are out of reach.

The idea of global exposure to a new monetary exchange may seem ominous, especially for a company that's waged a constant fight to fend off data privacy attacks.

Facebook said it plans to combat the looming intrusion with verification and anti-fraud processes that banks and credit cards use. The social media giant also using automated systems that will proactively monitor activity to detect and prevent fraudulent behavior. There's also a dedicated live support outlet to help if a user loses a password. Moreover, if a bad actor fraudulently gains access to a user's account in which Libra is lost as a result, Facebook will issue a refund — much like the practices of financial institutions.

More information on Facebook's Calibra commitments to privacy and consumer protection may be found here.

The reserve is the key mechanism for preserving value to the currency. By fully backing each coin with a set of stable and liquid assets that Silicon Valley social media firm will work out later, users will be able to sell any Libra coin at or close to the value of the reserve at any time. This mechanism gives the coin an intrinsic value and helps protect against the speculative swings of other cryptocurrencies.

Interested parties may learn about signing up for Calibra here.

Stanford Law School Professor Joseph Grundfest, an expert on capital markets, corporate governance, and securities litigation, also chimed in with his analysis.

In an interview with the Stanford News Service, Grundfest described the world's potential approval as the "devil is always in the details, and here, the devil is everywhere."

As Sheryl Sandberg, Facebook’s chief operating officer, admitted the day after Libra’s announcement, the global digital currency is “a long way from launch.” In particular, regulators in the United States and Europe have expressed a broad range of concerns about Libra, the Palo Alto professor pointed out.

These matters can turn into a long regulatory slog. But waiting for perfection may be the ticket to success to avert the risk of another data privacy meltdown. It's one thing to have Facebook posts of pretty pictures, comical quotes and profile affiliations revealed. It's quite another to have a scammer gain access to one's money.

Launching it under the most stringent of security measures may require all hands on deck. Nonetheless, it may help to have a not-for-profit Swiss foundation to run it as proposed in order for Facebook to distance itself from the overall responsibility of monitoring a money exchange.

To Grundfest, Facebook seems to have an idea about functionality but remains unclear on connecting the dots and how the regulators will respond.

"So, Facebook itself doesn’t really know what Libra is or what it will be. As of now, Libra is more a dream than a plan," he told the university news service.

"Yes, there are literally dozens, if not hundreds, of details that have to be ironed out in order for Libra to become a reality, and some of them raise profound intellectual legal and economic issues," Grundfest declared.

One particularly interesting question involves computational design issues: "Will Libra operate on a permission less blockchain or will regulators require that all nodes be operated by regulated entities?" he asked.

Grundfest anticipates that regulators will not allow Libra to operate as a permission less system because then no court or regulator will have the ability to exercise authority over the actual operation of the blockchain.

But as always, crypto-purists will argue that the ability to avoid regulation by governmental authorities is the essence of a blockchain.

"However, the idea that regulators will willingly allow the evolution of a mechanism that is immune to state control and that facilitates the flow of billions of dollars a day, or hour, or minute, seems inconceivable to me, and likely to the regulators as well," he said.

That said, Grundfest insists he hopes to see Libra work, citing billions of people as benefiting from the ability to conduct transactions through a centralized system.

Transactions costs could be reduced for every American, much to the chagrin of MasterCard, Visa and other intermediaries who charge 2 percent or more on every transaction.

Grundfest called the probability of a successful launch ironic since it carries the potential for stimulating the U.S. government and avails itself to everyone on equal terms.

"My bet is that more than one presidential candidate makes that proposal in the not-too-distant future," he said.