CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure. CFDs are a leveraged product and can result in losses that exceed deposits. Please ensure you fully understand how CFDs work and what their risks are, and take care to manage your exposure.

Facebook’s cryptocurrency: what you need to know about Libra

Facebook is to announce plans to launch a new cryptocurrency payments platform with a string of big name partners. Is it the news that crypto enthusiasts have been waiting for?

Trusting Facebook with your data is one thing, but would you trust it with your money? The social media giant is expected to announce plans to launch a new cryptocurrency on June 18, in what could prove to be the biggest catalyst for the market yet.

What do we know about Facebook’s cryptocurrency?

Facebook’s Head of Financial Services & Payment Partnerships for Northern Europe Laura McCracken told German magazine WirtschaftsWoche that Facebook would publish a whitepaper detailing its plans to launch a cryptocurrency payments platform on June 18. Reports suggest Facebook is hoping to have rolled-out the platform to a dozen countries by the first quarter of 2020.

The name of the cryptocurrency is not yet known. Reports have suggested it is referred to as ‘Global Coin’ inside Facebook, but others suggest it will be named Libra, after the consortium of companies that are working on the project. Facebook is thought to have signed up major partners spanning telecoms, tech and e-commerce to the Libra Association, which is based in Switzerland. This is reported to include payments giants Visa, Mastercard and PayPal, as well as ride-hailing firm Uber. The Wall Street Journal reports Facebook has asked each partner to contribute $10 million to operate a node that can validate transactions on the platform, and that it could be looking to raise an additional $1 billion in venture capital for development and to hold as collateral.

Reports suggest Facebook has held talks with US regulators about how a new cryptocurrency would work, and founder Mark Zuckerberg also met the governor of the Bank of England (BoE) Mark Carney in April to discuss the future of finance and what role Facebook could play. The company has recruited several individuals that are thought to bolster its attempts to win over regulators and governments at a time when it is under intense scrutiny over how data is used and yet trying to expand into more data-sensitive areas, like financial services. This includes former leader of the Liberal Democrat party Nick Clegg (who served alongside Conservative leader David Cameron under the coalition) and Ed Bowles, the former head of corporate and public affairs at Standard Chartered.

It is not the first time that Facebook has ventured into digital currencies. Facebook credits, which were purchased online and used within the platform or with other signed up retailers, was abandoned less than a year after the beta stage ended in early 2011.

How might it work?

Facebook is expected to roll-out the new cryptocurrency across its core platform as well as Messenger, WhatsApp and Instagram. It is anticipated that users will be able to change their fiat currencies (the dollar or pound etc.) for the new cryptocurrency online and transfer sums to their friends and family without charge.

Users will also be able to use it to pay for things in the wider internet. Facebook is likely to sign up merchants to the platform by promising lower transaction fees, which will broaden the appeal of the coin. It is reported Facebook is in talks with Western Union, the international payments firm, about how a new cryptocurrency could help people that don’t have access to traditional banking services.

McCracken has also confirmed that the cryptocurrency will be pegged to a fiat currency or a basket of them. This means it will be a type of stablecoin which, because it derives its value from less-volatile currencies, offers greater price stability compared to other cryptocurrencies that regularly experience sharp fluctuations in price.

Read more: What is a stablecoin and how will it affect cryptocurrency?

Why is Facebook moving into cryptocurrencies?

As growth in advertising revenue begins to wane, Facebook has been under pressure to find new areas of growth and monetise other parts of the business, like WhatsApp and Instagram. The push into cryptocurrencies could open up a number of opportunities for the social media giant and is only the first step toward a bigger push into financial services.

Many big-name firms from a variety of sectors – from tech firms to banks – have tentatively entered the world of cryptocurrencies over recent years but none have boasted the advantages of Facebook. It has superior reach with 2.4 billion people to target. It already has the platform on which to build on, and a marketplace where businesses and individuals already trade goods and services.

But make no mistake, the number one prize that Facebook has its eyes on is the data it can collect from operating a cryptocurrency payments platform, not the money to be made facilitating payments. Understanding how people spend their money will only bolster Facebook’s wheeling and dealing in data: advertisers, for example, will be more than happy to tap into any insight Facebook gains into our spending habits and how they can utilise that for their own gain. It will also offer the revenue streams that the likes of WhatsApp needs: popular messaging sites in other countries, like KakaoTalk in South Korea, have already moved into payments.

If the payments platform gains traction and starts to be widely used, then Facebook will become a supplier of key infrastructure rather than a social media platform that many people can live without. However, engagement with its social media platform will directly translate to use of its cryptocurrency.

What are the challenges?

The potential rewards on offer are huge but so are the challenges. There is still no international approach to regulating cryptocurrencies and that poses a problem for a company working on a worldwide scale. While it seems likely that Facebook will be selective about where it will initially launch the service it will hit different problems in different countries.

Talks with regulators in the US and the UK show that Facebook is aware it has to tread carefully. The European Commission’s director general for financial stability, Olivier Guersent, recently said he wasn’t aware of any talks about a potential Facebook cryptocurrency with the EU. That would prove yet another shun to Europe following Zuckerberg’s refusal to attend public meetings with the EU parliament about how it protects people’s data following the Cambridge Analytica scandal.

Read more: Cambridge Analytica, a threat to Facebook’s reputation?

Although trust seems to have been relatively unaffected after a brief backlash (active users were up 8% year-on-year in the first quarter of 2019), the Cambridge Analytica scandal has stained Facebook’s reputation and gives reason to give Facebook less, rather than more, of our sensitive data. The fact it has suffered cyber attacks raises questions about Facebook’s security if it wants to manage our money, particularly when so many cryptocurrency exchanges have been pilfered by hackers. It will also have to prove it can overcome problems that others have so far been unable, or unwilling, to solve, such as effectively identifying users and money flows to avoid money laundering. While anonymity sits at the heart of most cryptocurrencies, this may be less of a concern for Facebook, which seems more interested in speeding up and lowering the cost of business.

The string of major partners that are thought to have signed up to the consortium is not just about bringing together the financial backing and expertise needed to launch a successful cryptocurrency but as a way of mitigating risk. Reports suggest Facebook will be the central operator, but the cryptocurrency and the wider project will be owned directly by the consortium. This shares out the financial burden and spreads the risk.

Facebook’s cryptocurrency: the catalyst bitcoin and cryptos need?

Facebook could be one of only a few companies that has the social platform needed to push cryptocurrencies into the mainstream, but it has taken a sensible approach by partnering with the biggest names in business to make sure it has as much support as possible. That should work in its favour when it comes to dealing with regulators and governments around the world that think Facebook is unfit to handle the data it has already, let alone everyone’s financial information.

The devil will be in the detail. Most of what is known so far is speculative and little has been confirmed. For example, Facebook may be the operator of the platform but it is unclear who will be responsible for minting the cryptocurrency. Facebook can quite happily collect the data it wants without being the issuer.

Either way, the announcement looks likely to be a boon for other cryptocurrencies such as bitcoin and litecoin. Although a cryptocurrency launched by Facebook and its partners represent a powerful rival to existing cryptocurrencies, it could be the one to bring cryptos to the masses, which could help broaden the appeal of bitcoin and others.

This information has been prepared by IG, a trading name of IG Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients.
CFDs are a leveraged products. CFD trading may not be suitable for everyone and can result in losses that exceed your initial deposit, so please ensure that you fully understand the risks involved.

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