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Libra Is More Like PayPal Than Bitcoin

By Stephen Lovely - Jun 27, 2019 at 9:31AM

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Libra may be a currency, but it's not much like Bitcoin.

Facebook (META -0.11%) is a big tech company with big goals. And if you're one of those people who fear that the big tech companies are becoming too powerful, then you may want to avert your eyes for this one: Facebook is getting its own currency.

A cryptocurrency, to be exact. Called "Libra," Facebook's new innovation is being developed in partnership with other major companies, including Visa and PayPal (PYPL 0.44%). The idea is unprecedented but, in some important ways, not quite as earth-shattering as it looks. Thanks to some crucial differences between Facebook's Libra and typical cryptocurrencies like Bitcoin, the former is going to feel a whole lot more like the banking and transaction apps we already have. Though the future may hold some big changes, the Libra of the present looks a whole lot like a new way to solve the same problem that spawned PayPal and Venmo.

Coins fall through a businessman's hands

Image source: Getty Images.

What does Libra have in common with Bitcoin?

First things first: While there are important differences between Libra and Bitcoin, Facebook isn't making things up when it says it has a cryptocurrency.

Like Bitcoin, Libra is a currency. It can be exchanged for dollars and back again. Libra can be used between private parties, not just in transactions involving Facebook or its partners -- meaning that Libra is much more than one of the in-app and in-game currencies that consumers are already used to.

And, like Bitcoin, Libra will use blockchain technology to track what money is where. The secure ledger created back the blockchain keeps cryptocurrencies like Libra and Bitcoin from being easily hacked -- which was the obvious concern that kept "digital money" a fantasy until blockchain emerged as a solution.

Finally, Libra will be exchanged on existing transaction apps -- including PayPal. So when we say that it's like PayPal, what do we mean?

Why Libra is like PayPal

Far and away the most important difference between Libra and Bitcoin is that Libra will be managed in such a way as to keep its value stable relative to the U.S. dollar. When dollars or euros are exchanged for Libra, those dollars or Euros will be held in a bank account -- meaning that there will be a corresponding amount of stable currency backing every bit of Libra in circulation.

By contrast, Bitcoin is not managed by a central bank or organization, nor is its value pegged to that of a more stable currency. That's a huge part of why Bitcoin's value has been such a roller coaster ride for speculators. Facebook and its partners at the top of the currency's governing entity -- the Libra Association -- hope to avoid this and keep Libra stable.

Libra won't make its founders money by skyrocketing in value. Instead the idea is to give Libra users a way to pay for things quickly and without transaction fees. Libra, Facebook says, is safe, stable, and private. Facebook and its partners will use it as a foundation for financial services businesses.

PayPal was once the high-tech future of financial transactions. That's a role Libra wants to take on next. Libra is the PayPal of currencies, if you will.

What's next for Libra and Facebook?

Right now, using Libra looks like another way to complete online transactions quickly and securely. But there are good reasons Facebook opted for a currency instead of a clone of PayPal or Apple's Apple Pay.

Facebook is taking steps to reassure Libra users that they won't be watched (for instance, Libra transactions will be managed by a new company, Calibra, and won't be linked to Facebook accounts). But if Facebook does ever sneak a peek, it would have a new source of information about how people spend their money, much as credit card companies do now. Tech and banking experts have already voiced concerns about privacy. (Not so coincidentally, Facebook's early entry into the cryptocurrency world keeps rivals like Alphabet from getting a head start in crypto and using their position to look at Facebook ad sales and other things Facebook would rather keep hidden.)

And plenty of future complications are possible. The Libra Association wants to keep the currency stable, but it could theoretically attempt to shift the value of the currency later on. Tax implications for Facebook and for Libra users, in general, are dizzying. These issues, too, have experts and regulators protesting ahead of Libra's 2020 launch. And that launch date is best read as tentative, as Libra faces regulatory hurdles and other issues that could slow down its rollout.

Dollars and sense

The idea of a tech-backed cryptocurrency raises plenty of potential issues, but there's no need to contemplate the dystopian in order to see the opportunity that Facebook is chasing here. Libra could offer Facebook and its partners an efficient new platform on which to build financial services like the ones already offered by PayPal and Venmo.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Stephen Lovely owns shares of Apple and Facebook. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Apple, Facebook, PayPal Holdings, and Visa. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$174.66 (-0.11%) $0.19
Alphabet Inc. Stock Quote
Alphabet Inc.
$120.17 (0.52%) $0.62
Apple Inc. Stock Quote
Apple Inc.
$174.15 (-0.23%) $0.40
Visa Inc. Stock Quote
Visa Inc.
$215.25 (0.34%) $0.73
Alphabet Inc. Stock Quote
Alphabet Inc.
$120.86 (0.45%) $0.54
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$99.86 (0.44%) $0.44

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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