Last year, Facebook (NASDAQ:FB) 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 (NASDAQ:PYPL) -- 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.
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.
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.