Facebook’s Entry into the World’s Payment Systems

Facebook is a company which has been growing at a breakneck speed. Within a decade, the company has already started dominating the advertising industry. However, now, Facebook has decided that it needs to diversify from the advertising industry. Following the example set by Chinese companies, Facebook also believes that communication and payments go hand in hand. This is the reason why Facebook has decided to venture into the global payment system by its currency called the “Libra.”

In this article, we will have a closer look at what Libra is and hence will try to understand it in more detail.

What is the Libra?

The Libra is a currency which has been launched by Facebook. This currency aims to become a prominent mode of payment and store of value. Facebook’s target audience is the poor and unbanked people in the world. It aims to develop Libra as a currency with lower transaction costs in order to make it popular with the masses. For instance, intermediaries charge a hefty 7% in order to remit money overseas. The global remittance market is valued at over $600 billion. Since Facebook has the advantage of lower costs, it believes it will be able to dominate this market within a short period of time.

How will the Libra Work?

Facebook has designed its own international wallet called the Calibra to hold libra coins. However, the use of Calibra will not be mandatory. As per Facebook’s revelations, Libra can be held in any digital wallet! Also, Libra will be able to work on a lower cost model since it will cut down the number of intermediaries. Typically transactions that take place between the buyer and the seller also take place between two banks i.e., the buyer’s bank and the seller’s bank. The Libra will eliminate the need for using the services of the buyer’s bank.

Is Libra a Cryptocurrency?

Libra is not really a Cryptocurrency in the sense that the management of the Libra is not fully deregulated. In case of cryptocurrencies like the Bitcoin, there are no central agencies which control the value of the currency. The value is driven by the market and hence is highly unstable. On the other hand, Libra claims that it's market value will be quite stable. This may be largely because of the fact that the value of Libra will be under the control of the Facebook management i.e., a central agency. At the present moment, Facebook has promised to not change the value of the currency according to its whims and fancies. They have decided that the value of the Libra will be pinned to an underlying basket of currencies such as the euro, yen, and the dollar. In many instances, this arrangement will make the Libra more powerful than the central banks of the nations in which they operate. The only similarity between the Libra and other cryptocurrencies would be that they both use the blockchain technology.

Why some Countries Oppose the Libra?

As soon as Facebook announced its plan to develop the Libra, it came under a lot of criticism from many countries. This is because many people around the world believe that Libra will be a potential danger to smaller economies. It is unlikely that Libra will be able to dislodge the dollar, the euro, or even the Yuan. However, in smaller countries, it would a totally different ball game. In Nigeria or Syria, for instance, the current monetary system isn’t so good. Hence people in these countries are likely to adopt Libra on a large scale. If this happens, the governments of the country will lose control of their monetary systems. If enough people hold their money in the Libra, traditional monetary policy measures such as raising the interest rate become useless! Countries will also not be able to impose measures such as capital controls if they want to! This is the reason why many of them are worried that Libra is an attempt by the multinationals to seize power from the local governments.

Will Facebook’s Power Affect Normal Individuals

Facebook’s foray into payment systems could have disastrous consequences for the entire world. This is because if a significant portion of the world’s population does start using the Libra, Facebook will wield a disproportionate influence on the world economy.

For instance, if there is an outage at Facebook, the entire world economy will be affected! Also, if the share price of Facebook goes down, the value of the Libra would also be affected, thereby affecting the net worth of millions of people worldwide. Lastly, Facebook would have the power to simply lock out people from the financial system. Facebook could flag a user as a criminal or a sex offender, and they could be locked out of the financial system without facing any due process.

The bottom line is that there is a huge debate surrounding the Libra. On the one hand, Facebook believes that it is taking banking services to the most financially deprived people in the world. On the other hand, there are others who believe that Facebook is using politically correct language to trap the people of the world in what would end up becoming a totalitarian system. Facebook has a bad reputation among the general population. Libra’s introduction is likely to worsen this reputation even further.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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