Who will “friend” the new Facebook cryptocurrency? Experts at the University of Maryland’s Robert H. Smith School of Business weighed in, after the social media giant’s announcement that it would launch a new blockchain-based payment service, called Libra.
They questioned the timing of the decision, forecast how Facebook might change the cryptocurrency marketplace with the strength of its 2.4 billion monthly active users worldwide, and explored what the move means for traditional banks.
“The fact that Facebook wants to enter the cryptocurrency marketplace is not surprising but a bit curious with respect to the timing. Facebook is trying to still address issues of privacy, security, and perceptions of consumer trust in the wake of the Facebook-Cambridge Analytica data scandal and government concerns. This does not seem like the best time to use its brand to move into the cryptocurrency marketplace. That said, I suspect that there may be a small window of opportunity to have a Facebook-supported cryptocurrency shape the already crowded market. If Facebook sees this market as a winner-take-all marketplace, the window of opportunity to potentially leverage Facebook’s network of users to become the cryptocurrency leader may be closing. I think we have seen some of the incumbent cryptocurrencies – such as bitcoin and Ethereum – have become vulnerable for disruption. Facebook is trying to ride this wave and potentially become a market leader here.”
– Joseph P. Bailey, associate research professor in the decision, operations and information technologies department at the University of Maryland’s Robert H. Smith School of Business and executive director of the QUEST Honors Program.
“Facebook’s announcement that it would launch a cryptocurrency called Libra ratchets up the pressure on commercial banks, at a time when they are already scrambling to learn how to compete against nimbler and tech-savvy fintech companies. While Facebook looks to tap a new reservoir of customer data, their spotty track record of late in protecting sensitive personal information, provides further proof that the tech giants should face tighter regulatory scrutiny. Linkages between cryptocurrencies and cyber-risk are not well understood at this point. The cryptocurrency revolution is here, and so are its risks. Beware.”
– Clifford Rossi, Executive-in-Residence and Professor of the Practice at Maryland Smith. Prior to entering academia, Rossi had nearly 25 years’ experience in banking and government, having held senior executive roles in risk management at several of the largest financial services companies. His most recent position was Managing Director and Chief Risk Officer for Citigroup’s Consumer Lending Group, where he was responsible for overseeing the risk of a $300+B global portfolio of mortgage, home equity, student loans and auto loans.
Big Picture in Detail (by former FTC official)
“Facebook has disclosed the first details of its long-anticipated cryptocurrency, called Libra. Libra is a new cryptocurrency – a digital currency that uses cryptography, a method of protecting information, to verify transactions – that Facebook will launch next year. Facebook is creating a regulated subsidiary, called Calibra, to ensure ‘the separation between social and financial data.’ Calibra will roll out a crypto wallet – a digital wallet that can be used to pay for items online and send money – using Libra. People who use Facebook’s Messenger service, WhatsApp, or who download a standalone app will be able to access it through a digital wallet. It is an alternative to bitcoin that is powered by blockchain. However, Facebook hopes it will be used by a much wider base. Facebook is looking to build a payments network by creating an online ecosystem on which users can buy things and pay each other. The cryptocurrency network will be governed by Facebook and more than two dozen founding partners as part of a nonprofit consortium the company hopes to grow further. Facebook will lead Calibra through 2019, but eventually the consortium will take over.” At this early stage, it is not clear to me how successful Facebook will be with this initiative nor how profitable it will be.”
– David Kass, clinical professor of finance. Before joining the faculty at Maryland Smith, Kass held senior positions with the Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis.
‘Huge Future Potential’
“Libra is an innovative and creative idea. It is clear that Facebook has the scale and resources to pull this off. A large number of partners are on board and making investments in the Libra effort. A Facebook subsidiary called Calibra will participate in Libra separately from the social media giant and Facebook is promising strong privacy and no targeted ads. The Libra Association will operate the system as a nonprofit in Switzerland. Libra will use blockchain technology which provides instant payments through a secure distributed ledger. A currency like Libra will enjoy low transaction costs and should appeal to people in countries that lack a well-developed financial system – the large population in the world without bank accounts and debit or credit cards. How will governments react? Does the U.S. Federal Reserve want a very large cryptocurrency ecosystem which it cannot influence through its traditional tools for managing our monetary system? These and other questions will have to be answered over the next few months. For now, Libra is an exciting venture with huge future potential.”
– Henry Lucas, Robert H. Smith Chair of Information Systems at Maryland Smith. His research explores disruptive technologies and information technology-enabled transformations of organizations.