Why is Facebook Starting the Libra Cryptocurrency?
Facebook announced in June of 2019 that the company is planning to launch a new digital wallet named Calibra, along with a new digital currency named Libra in 2020. Instead of focusing on whether or not Libra will be successful or not, let’s focus more on why Libra makes sense for Facebook strategically.
Back in early 2019, Mark Zuckerberg announced that the future of Facebook is going to become a more privacy-focused messaging and social media platform. This hints at a larger shift away from openness and towards privacy after the 2016 election which will have wide-ranging impacts on the products they put the most focus on and how they seek to differentiate their revenue streams. That’s where Libra comes in as one new way for Facebook to make revenue to balance their advertising revenue, and likely increase their ad business as well.
More Advertising Revenue for Facebook
Speaking to Congress on October 23, 2019, Mark Zuckerberg said:
The way that this will help Facebook over time is that basically in our ads system, it’s an auction. If you’re a small business, we don’t have a rate that you have to pay — you bid and tell us what the ads are worth to you if you can get customers into your store or if you can complete a transaction.
And what we basically see is when we eliminate friction for a customer buying something from a business, then the value for that business of advertising on our system goes up, so they bid more in the ad system. If we can make that now, in addition to finding businesses that people want to interact with, people can also transact with them directly. I would expect that over time that will lead to higher prices for ads because it will be worth more to businesses so they will bid more on the ads system.
Zuckerberg makes good points in regard to the relevance of payments to many of the businesses who advertise on Facebook, and it makes sense that introducing their own payment system would benefit other parts of Facebook’s business. There are also some significant improvements in terms of the speed and security of transactions. The overtly idealistic tone ignores the privacy concerns that many Facebook users have. Having the same company that has made huge mistakes with social data now seeking to manage financial transaction data definitely raises some red flags. Congress and other governments around the world are also rightly concerned about wither Libra will undermine their own currencies and weaken their ability to control their economies.
Earning Interest from the Libra Reserve
Despite those concerns, increased advertising revenue is certainly one piece of how the company stands to make money from the new currency, but it’s hardly the only one. Libra also stands to make Facebook and the other investors a ton of money from the accrued interest that they earn. This is evident from the way that the white paper announcing the new cryptocurrency describes the details of the Libra Reserve:
How will the reserve be invested? Users of Libra do not receive a return from the reserve. The reserve will be invested in low-risk assets that will yield interest over time. The revenue from this interest will first go to support the operating expenses of the association — to fund investments in the growth and development of the ecosystem, grants to nonprofit and multilateral organizations, engineering research, etc.
Essentially this means that Facebook and other Libra investors will make interest off of their investment into the Libra Reserve, which could increase astronomically if the currency really takes off. There’s a detailed breakdown of just how much money this could generate over on Coindesk, ranging from the millions to the trillions if Libra attains significant market share.
Influence from China’s WeChat
In some sense, this new push towards messaging and digital transactions mirror changes that are already producing massive profits over in China. WeChat has its own payments service that makes tens of millions of dollars per year, as well as significant revenue from selling virtual goods, as well as value-added services in games and advertising similarly to Facebook.
The success of Tencent’s WeChat has definitely influenced the decisions that Facebook is making towards becoming a more messaging focused company, as well as developing its own payments system, though Facebook’s efforts go further in terms of creating a new cryptocurrency.
Payments in a VR Future
We also know that Facebook has big plans for virtual reality. In September 2019, Facebook announced Facebook Horizon, which they describe as a “New Social VR World,” coming in 2020. Imagine a virtual world where everyone can interact with one another regardless of where they are physical space, it’s possible that having a virtual currency built-in would make it easier and more frictionless to conduct transactions regardless of where you are. This culminates in an immersive social world where people can interact in a number of the same ways that they can in the real world, a world in which Facebook will find more ways for people to connect and increase profits for the company.
The implications of a global currency at the scale that Facebook operates is both exciting and terrifying in its implications. Given the size of Facebook’s footprint and influence in the world, any major move that the company makes will impact billions of people. The deeper you look at many of Facebook’s strategic decisions, the more it seems that Libra fits in very well with their long-term plans in a number of areas.