When the super-ambitious tech giant Facebook announced to the world on June 18 its plan to introduce a new cryptocurrency, Libra, financial experts and officials across the world started fearing the emergence of a rival to the global financial system, privately controlled by a company that is known to have already breached the trust of millions of its users by putting their data at stake. Owing to the earlier breaches, experts now fear the worst — a breach in the financial data, a risk to the global financial system and risks arising out of ease of using cryptocurrency for money laundering, among the other dangers that Libra could bring along.
What is Libra
Libra is a cryptocurrency being aggressively pushed by Facebook to make its ads more valuable by enabling smoother transactions and payments online, particularly among those without credit cards or bank accounts.
Libra will use the same security and record-keeping principles as Bitcoin, the most popular digital currency today. But unlike Bitcoin, Libra is backed by several traditional financial companies, including PayPal, Visa and Mastercard, and will base its value on multiple real-world currencies such as the US dollar and the Euro.
According to experts, users will first have to sign up for Libra in what is called ‘Calibra’, a digital wallet specially designed for the purpose. The user, who signs up for Calibra may link it to her/his bank account in order to make transactions. Libras can also be sent to other users via mobile phones. It is said that people can switch back to official currencies whenever they want to. The money held by Calibra will be backed by major currencies, government bonds and deposits.
As with other cryptocurrencies, users will be able to buy and sell Libras on exchanges for traditional currencies. It is not clear at this moment as to what fees, if any, consumers will have to pay for such transfers, although Facebook says they should be low. Reports on Libra’s official website also state that the Facebook currency will be linked to the official financial system in two ways — the banks and the currencies issued by sovereign governments.
Challenges for Libra
As the social networking company hopes to offer an alternative to money issued by governments across the world, the biggest challenge that Libra faces comes from Facebook’s own poor track record of innumerable security and privacy breaches.
Fluctuations in money demand may also pose a major challenge to Libra, as the supply in money will depend solely on how much hard currency the 27 partner companies, including Visa, Mastercard, eBay, PayPal, Stripe, Spotify, Uber, Lyft, and Coinbase invest in the ambitious project. Hence, money supply will not be endogenous as is the case with Bitcoin, where miners have incentives to add to money supply when Bitcoin prices rise as a result of strong demand.
According to Columbia Law School professor Katharina Pistor, “The idea of a private, frictionless payment system with 2.6 billion active users may sound attractive. But as every banker and monetary policymaker knows, payment systems require a level of liquidity backstopping that no private entity can provide. Unlike states, private parties must operate within their means and cannot unilaterally impose financial obligations on others as needed. That means they cannot rescue themselves. They must be bailed out by states, or be permitted to fail.”
What is Cryptocurrency
The much talked-about cryptocurrency is a form of digital cash, which has its records kept on ledgers known as blockchain. It also uses encryption technology to make it secure as the cryptocurrencies exist not as physical bills or coins but rather as lines of digitally signed computer code. People can store their cryptocurrency stashes in virtual wallets that resemble online bank accounts.
Although it is possible to trace some cryptocurrencies as they are spent, owners of accounts behind the transactions aren’t necessarily known making such currencies a favourite among certain cybercriminals. But it is sometimes possible to tie cryptocurrency transactions to a real person who has cashed out digital coinage into a traditional currency.
For the benefit of people and for reasons of security, national monetary authorities have to wake up to the fact that the cryptocurrency challenge is here to stay. The big question before them at this juncture is “how to embrace the new technology?”
A deeper look into the concept of digital money will show that even a cryptocurrency issued by a central bank will have a profound influence on the financial system, as patrons will have a direct access to money in the central bank and may not need banks for settlements.
Think of cryptocurrency and the first thing that comes to mind is ‘Bitcoin’. Bitcoin has been a successful trendsetter and has enabled a wave of cryptocurrencies across the world. So much so that it’s become the standard for cryptocurrencies, inspiring an ever-growing list of followers.
Following in the footsteps of the popular Bitcoin, several other cryptocurrencies have cropped up over the years calling themselves altcoins and have tried to present themselves as modified or improved versions of bitcoin.
Cryptocurrency in India
Going by the looks of it, cryptocurrencies making it big in India anytime soon seems farfetched. The Narendra Modi government after returning to power has come down heavily on cryptocurrencies. The government’s stance on cryptocurrency will be more clear when the inter-ministerial panel under Finance Secretary Subhash Chandra Garg, tasked with drafting regulations for the sector, submits its report to the Finance Ministry.
The Reserve Bank of India has always maintained a tough stance against cryptocurrencies and clarified time and again that cryptocurrencies can’t be recognised under the existing legal regime. The RBI has also many a time stated that virtual currencies are “neither currency nor money; they can’t even be considered as a valid payment system”.
Citing all the above factors, “Will there be a ban on it?” is the biggest question that is haunting the Indian crypto-investors at the moment. Several reports in the media have suggested that anybody in India dealing in cryptocurrencies could be sent to jail for 10 years, dashing hopes of those who “mine, generate, hold, sell, transfer, dispose, issue or deal in cryptocurrencies directly or indirectly.”
The move is sure to tighten the noose for those who try to transact in cryptocurrencies. This also comes as a setback for various cryptocurrency trading platforms in India that have been eagerly awaiting a positive step in favour of cryptocurrencies from the government.
Koinex, a Mumbai-based cryptocurrency exchange start-up became the latest company to join the long list to shut shop after it closed all operations on June 27, citing uncertainty around the future of cryptocurrencies in India. While the RBI’s ban is being challenged in the Supreme Court, a lack of clear direction from the government has meant that the case as well as cryptocurrencies are in limbo in India.
A few cryptocurrencies that have made a mark
•Bitcoin Cash (BCH)