Facebook, the new central bank.

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The cryptohype is totally back after the announcement of Mark Zuckerberg about a week ago. 

Facebook wants to release it’s own currency onto the market, the Libra. The Libra might look like a cryptocurrency, but it has one major difference when compared to ‘traditional’ cryptocurrencies. The main difference is that a bitcoin, for example, is totally decentralized whilst the Facebook will implement monetary policy to regulate the Libra. The underlying value of the Libra is determined by treasury bonds and stocks. For this reason you could also compare it to a derivative instead of a currency. It also does not make use of the innovative blockchaintechnology. These two aspects were what made bitcoin great in the past. People argue that traditional currencies are to much influenced by politics. So a libertarian option in the form of bitcoin, which wasnt regulated by a central entity, solved this issue. 

To carry out transactions and to regulate payments between entities has become a good of society, which is why there is a lot of regulation when conducting these activities. Due to the strict rules it is not possible to transfer from business to bank as you like. Furthermore, there are a lot of privacy regulations when carrying out transactions, but also safety and systematic risk are problems that need to be tackled. It is important to regulate the Libra well, due to the reach of Facebook. Facebook has more than 2 billion users, thus having more influence on the monetary market than China. 

A lot of controversy  and discussion arised within the Senate of the United States due to the announcement of the Libra. The senate immediately demanded a debate with Mark Zuckerberg. The introduction of the Libra could be seen as an attack on the US dollar. There are approximately 50 countries with high inflation, above 5%. These people would benefit from the Libra by exchanging their inflating currency for Libra. This could be seen as an attack, because these people would have otherwise chosen for dollars in order to store value. This reduces demand for the dollar and leads to a weaker dollar. However, this might fail. In the past countries with high inflation, such as Argentina, have implemented capital controls in order to stop people from exchanging their home currency to another currency. The Libra will be less important in western societies, because the west has stable currencies and many easy ways to carry out transactions online. 

But will the public make use of the Libra? There is one aspect central for the succes of any currency, whether it be dollars, euros or gold: Trust. If there is no trust in the currency and the system, the people won’t make use of it. Trustworthiness is an issue with Facebook due to it’s massive violation of privacy together with Cambridge analytica. Where Facebook hopes to find trust in her currency are the easy and low-value transactions. The introduction of the Libra has the purpose for you to easily conduct payments through the multiple platforms of Facebook, like Whatsapp and Instagram. Furthermore there are chances to succeed in developing countries, where many people aren’t connected to a bank. Annually a small 500 billion dollar flows from rich to poor countries. This happens with very high transaction costs, at around 11% (by banks or telephone companies). Facebook promises to do this at far cheaper transaction costs. 

Facebook wants to implement the Libra in 2020.