Facebook, the world’s largest social network, with more than 2.4 billion monthly users, is developing a cryptocurrency that has the potential to reshape the global financial landscape. Called Libra, the cryptocurrency and blockchain system is slated to hit the market in 2020. Facebook wants Libra to become a global currency that could help the world’s roughly 1.7 billion “unbanked” people get access to financial systems.

Unsurprisingly, the announcement has been met with calls for tough scrutiny from regulators and skepticism from technologists and the cryptocurrency community. In an op-ed for the Financial Times, estranged Facebook co-founder Chris Hughes called the prospect of Libra’s success “frightening.” Facebook’s practice of moving fast and breaking things works for a college social network, he said, but is “not appropriate for the global monetary system.”

Wall Street, however, gave a thumbs-up to the endeavor because it has the potential to add a major source of revenue for Facebook beyond advertising. “For Facebook, this is a big opportunity, obviously,” Wharton finance professor Itay Goldstein said on the Knowledge@Wharton radio show on SiriusXM. With more than two billion users, he said, Facebook can profit handsomely from consumers using Libra even if the transaction fees are low.

At the same time, Goldstein sees Libra generating a lot of concern. With privacy issues and outsize market power plaguing Facebook, the company’s plans to get into finance and become a kind of “bank of the world” has set off alarm bells. During a set of July hearings, Congressional lawmakers made it clear that they don’t trust Facebook to launch the cryptocurrency for a slew of reasons, among them its record of mishandling consumer data and its role in spreading disinformation. They also grilled the company over Libra’s potential to upend economic and political systems. Meanwhile, the European Union has begun antitrust probes related to the project, according to Bloomberg, while France and Germany released a joint statement in September opposing it altogether. This is a “tricky time” for tech giants to be expanding their influence, Goldstein added: “There’s generally a crackdown on so-called ‘Big Tech’ and how much power they have.”

These conditions have led to speculation over whether Facebook will be able to launch Libra on time. The company addressed this concern in a recent quarterly report in which it noted legal and regulatory barriers, as well as market acceptance, as hurdles to a launch: “As such, there can be no assurance that Libra or our associated products and services will be made available in a timely manner, or at all.”

What Is Libra?

“It’s actually surprisingly challenging to describe Libra,” says Kevin Werbach, Wharton professor of legal studies and business ethics and a blockchain expert. “Libra is several different things at once. It’s Facebook creating a cryptocurrency. It’s potentially a new decentralized global payments platform. It’s potentially the thing that will bring cryptocurrency truly into the mainstream. It’s potentially Facebook’s strategy to compete against [China’s] WeChat and Alipay by integrating payments with messaging. I think it’s [also] potentially the company’s strategy on reestablishing trust with users and regulators.”

Libra is a cryptocurrency like Bitcoin, but with key differences. To ensure stability, its value will be pegged to a basket of fiat currencies and backed by reserves consisting of bank deposits, government securities, and other “low volatility” assets, according to Libra’s white paper. This should weed out speculators who want to make a fast buck from big price swings.

Stability in a currency also makes it useful for buying and selling; no one wants the price of, say, a cup of coffee to fluctuate wildly from day to day. Initially, Libra will be on a “permissioned” blockchain, access to which is granted to validators—entities that validate transactions. Plans call for the Libra blockchain to eventually become permissionless: Anyone can run a node so long as technical requirements are met.

Libra will be governed by a nonprofit group based in Switzerland and consisting of Facebook’s Calibra unit, Uber, Coinbase, venture capitalists, and others. Each can control a validator node by investing at least $10 million through the purchase of Libra Investment Tokens, which grant rights to a share of future interest earned by the reserves. The Libra blockchain will be open to anyone who wants to build applications on it. Facebook plans to create a WhatsApp digital wallet for Libra, among other endeavors.

By setting up a nonprofit group—Libra Association—Facebook hopes to diffuse the concerns of regulators, competitors, and consumers that it will control Libra. “Facebook understands at this point that it’s the subject of massive skepticism and concern because of its practices,” Werbach says. “So Facebook is smart enough not to think it could create a system that is purely controlled by Facebook—and that the regulators of the world would hand over the keys to the financial system to that entity.” However, the company has faced setbacks with the association in recent weeks, as high-profile members including Visa, Mastercard, and eBay have backed out of the group amid ongoing scrutiny. Initially composed of 28 organizations, the association currently has 21 members.

Technically, Libra isn’t a blockchain in the precise sense, because transactions aren’t aggregated into blocks, Werbach says. However, that’s true of other systems lumped under the blockchain category. “It’s actually not that important,” he notes; what matters is that Facebook took a “technically solid approach.” Ari Juels, a computer science professor at Cornell University, agrees. “They’ve laid very sound theoretical foundations … for the construction of the blockchain itself. The so-called consensus algorithm they’re using is based on well-studied techniques, and they’ve taken pains to improve its security formally.”

But one concern is that like Bitcoin, Libra “leaks a lot of information about users’ transactions,” Juels said on the radio show. Another worry, he added, is its usability: “The Achilles’ heel of almost any cryptocurrency system is key management. It’s very hard for users to manage their private keys. These are keys that they use to authorize transactions and participate in the system in general. Something like four million Bitcoins, representing many billions of dollars in value, have been lost simply because keys have evaporated”—that is, were lost by their users or stolen.

That means Facebook has to figure out how to make it easy for consumers to manage their keys. “The only way to do this [easily] is to have users’ keys managed for them by some corporate entity, presumably,” Juels added. “And then the decentralization story begins to break down.” If the system is used to manage user identities, and the keys are stolen, “then there’s risk of things like identity theft.”

More Than Mobile Payments

With all the complexities that come with cryptocurrencies, why doesn’t Facebook just offer mobile payments of fiat currency, like WeChat Pay in China, M-Pesa in Africa, and Paytm in India? “Facebook wants [Libra] to be ubiquitous,” Werbach explains. “There is no existing fiat currency that extends beyond the territory of an issuing country.” For a payment system to be truly global, it has to be based on a cryptocurrency, he adds.

But the trouble with most cryptocurrencies today is that they lack price stability, are prone to be used for illegal activities, and seek to circumvent central authorities, among other obstacles that impede mass adoption. Libra was created to avoid many of these challenges, and its blockchain system also could become “a framework that will support many platforms,” Werbach says. “Facebook has Calibra that will build on Libra. Amazon might come and build its own set of applications on top of Libra.”

A key selling point for Libra is its purported stability, since it will be pegged to a basket of currencies and other assets. However, “There are huge questions as to whether they can actually do it—whether this can actually be resilient in times of stress,” Goldstein said. “If everyone wants to convert Libra into dollars or other currencies at the same time, this is effectively what we think of as a run.” Adds Werbach: “If there is a run on Libra, who is going to backstop it? That’s a relevant financial stability concern for central bankers.”

Other cryptocurrencies generally don’t pose a systemic threat to the financial system because they’re not fungible or widely used. Typically, cryptos have “ingress and egress points” where hard currencies are exchanged for them and vice versa, Juels says: “If you want to buy something in the real world, it’s hard to do it with cryptocurrency.” Libra will be different.

Libra, at its heart, also bucks the libertarian ideals that have characterized cryptos. That means cryptos meant to “empower individuals [are] being co-opted by corporate concerns,” Goldstein said. While being governed by a handful of entities doesn’t have to be a bad thing, he notes, by the time Libra becomes permissionless, corporate entities will be so entrenched in the system that users will be dependent on them.

A big social goal for Libra is to reach the unbanked. Providing an easy payment mechanism that’s integrated into Facebook has the potential to make a difference in the lives of those with little or no financial access, Werbach says. But there is room for doubt. “The global financial inclusion is a harder problem [to solve] than it seems,” he notes, adding that people are “quite skeptical” that Facebook is truly motivated by social altruism. All of this could just be a cover for an expansion of its market power.

Thumbs Up or Down?

Werbach says that all the details for Libra haven’t yet been worked out, so much of the commentary about it should come with caveats. But on the whole, Libra gets a thumbs-up from him: “This is a brilliant idea for Facebook, because if they can pull it off, it can simultaneously address a whole series of challenges that they face,” such as being able to expand into payments and the rebuilding of trust in the company.

Werbach doesn’t see Libra supplanting financial institutions or central banks; rather, these could be validators on Libra’s system. “If Libra is successfully launched, I would expect many of the world’s major banks to be involved,” he says. “Banks have expertise in building services and applications on top of money. The fact that there is a new kind of asset and a new kind of entity doesn’t mean that banks have no value.” Besides, Facebook is under such pressure from antitrust regulators that any hint of it crowding out players in another industry would be viewed negatively, he says.

A silver lining is that Facebook’s entry into cryptocurrencies would hasten their regulation—and thus give them more legitimacy over time. “I have felt for a long time that there needs to be more regulatory engagement with cryptocurrencies,” Werbach says. “Not to shut them down, but to actually transition them to become more trusted and widely used.” Scams, fraud, and theft are all problems that hinder wider adoption.

“Libra, by getting the attention of all of the world’s regulators … will hasten the coming of the regulatory resolution of cryptocurrencies,” Werbach says. These rules won’t benefit all cryptocurrencies, just the major ones like Bitcoin. Still, he adds, “In the long run, it will be good for the cryptocurrency world.”


Published as “Facebook’s Currency Gamble” in the Fall/Winter 2019 issue of  Wharton Magazine.