Please ensure Javascript is enabled for purposes of website accessibility

Facebook Still Wants a Piece of the Cryptocurrency Market

By Leo Sun – Apr 20, 2020 at 12:30PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The social networking giant isn’t abandoning its fintech dreams.

Last year, Facebook (META -0.54%) assembled a consortium of companies to create an open-source cryptocurrency called Libra. Facebook planned to offer Libra as a payment option in a digital wallet called Calibra, then integrate those payments into Messenger and WhatsApp.

But shortly afterwards, leading members of the consortium -- including Visa, Mastercard, and PayPal (PYPL -2.96%) -- abandoned Libra after government regulators expressed concerns about money laundering, tax evasion, and other illegal transactions. Critics also argued that Facebook's spotty track record with privacy and security issues made it an unsafe platform for financial transactions.

A woman uses a payment app on a smartphone.

Image source: Getty Images.

For a while, it seemed like Facebook would abandon Libra. However, the Libra consortium recently revised its plans to address some of the biggest concerns. Let's see if those changes will help Facebook finally launch its digital currency.

A less disruptive approach: Libra 2.0

Unlike bitcoin, which isn't pinned to any fiat currencies, Facebook planned to pin Libra's value to a broad mixture of currencies and government debt. That approach prevented Libra's value from being pinned to a single currency and stabilized its price.

Physical bitcoin tokens on top of a smartphone.

Image source: Getty Images.

It would also turn Libra into an independent digital currency that could freely move across national borders -- and that freedom made governments and banks uneasy. Facebook serves 2.5 billion monthly active users, more than the population of any single country on Earth, and a unified currency for all those users could undermine national currencies.

In response, the Libra Association recently decided to issue different versions of Libra directly pinned to individual currencies. It would also issue a "composite" version of Libra, which is pegged to several stable currencies, to facilitate cross-border transactions and serve countries that lack a currency-pegged version of Libra.

For example, Libra would be pegged to the U.S. dollar in the United States, and it must be converted to the composite version for overseas transfers. Boxing in Libra prevents it from overwhelming national currencies and upending the banking system.

Meanwhile, Libra can still accomplish Facebook's previous goals: to serve the 1.7 billion adults worldwide who lack bank accounts, to enhance Messenger and WhatsApp with new payment features, and to boost the stickiness of its ecosystem.

The consortium also scrapped its plans to turn Libra into a completely open platform, which would have prevented a single authority from controlling the currency. Lastly, the consortium pledged to vet any digital wallet app that wanted to provide Libra payments, instead of leaving those approvals to local regulators.

Those changes indicate the consortium would bear more responsibility governing Libra, and would proactively address its privacy and security issues.

But did Facebook turn Libra into another PayPal?

The Libra Association clearly hopes to gain regulatory approvals with its concessions, but they also narrow its moat against widely used platforms like PayPal. PayPal is already available in over 200 countries and regions worldwide, with support for 25 currencies.

However, PayPal requires users to link a bank account or credit card before they can send or receive money. The Libra Association will allow users to directly buy coins, presumably via methods which don't require bank or credit card accounts, then use them for purchases and peer-to-peer payments.

That's an interesting idea, but many individuals are currently "unbanked" because they lack enough cash to meet the minimum requirements for opening a new account. Many of those lower-income individuals might not buy Libra coins instead of using cash -- even if there's an overlap between unbanked individuals and Facebook users.

Meanwhile, users who have bank accounts and credit cards will likely stick with established payment platforms like PayPal, which isn't tightly tethered to a data-mining tech giant like Facebook.

Don't expect much near-term progress

The Libra Association originally planned to launch its digital currency by the end of June, but it's now targeting a launch by the end of the year. Regulators in certain countries, including France and Germany, are still trying to block its launch, while countries like India are tightening their restrictions for digital currencies.

In short, Libra still faces a long uphill battle before it can be integrated into Facebook's apps and other digital wallets. This struggle won't move the needle for Facebook anytime soon, but it could set the foundations for a digital payment ecosystem that could eventually expand its social platform into the fintech and e-commerce markets.

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. Leo Sun owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook, Mastercard, PayPal Holdings, and Visa. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$135.68 (-0.54%) $0.73
PayPal Holdings, Inc. Stock Quote
PayPal Holdings, Inc.
$86.07 (-2.96%) $-2.63

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.