Facebook Inc.’s plan to create a digital currency, Libra, is a big idea. If a third of the social network’s 2 billion members use Libra, it might be in more (virtual) pockets than the U.S. dollar. On the other hand, it could flop if it turns out to offer little more utility than existing payment apps, or it might not ever see the light of day, if it’s strangled in its crypto-crib by regulators appalled by the idea of a potentially dominant global currency that could operate beyond their reach.

1. What is Libra?

A digital coin that, according to Facebook, initially would just allow its users to send or receive money or pay for things within the social network but could eventually be used for transactions outside it as well. Balances and transactions would be run on a blockchain, a shared digital ledger. Facebook originally planned to launch in 2020 along with partners that initially included Mastercard Inc., PayPal Holdings Inc. and Uber Technologies Inc.. In October, however, Paypal pulled out of the effort, saying it would concentrate on developing its own financial services offerings.

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2. How would I use Libra?

Facebook is creating an electronic “wallet” called Calibra that members could use to buy Libra using their local currencies; several rival products are in the works as well. How many Libra users receive in exchange could shift from day to day but in theory not by much: It would be a “stablecoin” — a digital currency designed to avoid the huge price swings that have made Bitcoin and many other cryptocurrencies all but unusable for real-life transactions.

3. What would keep Libra’s price steady?

Stablecoins often peg their value to that of another asset, one with relatively low volatility. Many of them back up the value of their coins by holding reserves of that asset — the way government-issued currencies once were backed by gold. The most popular stablecoin to date, Tether, is pegged to the U.S. dollar; its price in dollars typically varies only by a few cents.

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4. Is that how Libra would work?

Facebook has revealed very few details but has said that Libra would be tied to a so-called basket of assets that would include the dollar, euro, pound and yen, along with low-risk securities such as U.S. Treasury bills. They all tend to move within narrow ranges, and their movements often offset each other.

5. What’s the appeal for users?

The main service described by Facebook, sending money “as you might send a text message,” is already offered by plenty of other companies. It’s possible that using a blockchain could allow Facebook to handle transactions for the world’s 1.7 billion adults without a bank account more cheaply. In countries with high inflation, such as Venezuela, buying Libra could be a way for people to safeguard the value of their money.

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6. Why is Facebook doing this?

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Its revenue growth has slowed, and Libra could unlock new opportunities in payments and commerce. Facebook’s partners have their own motivations: If Libra disrupts the payments business, Mastercard, for instance, likely wants to be a part of that. The potential partners, however, are having to weigh potential scrutiny from politicians and regulators.

7. What makes stablecoins important?

Stablecoins are seen as a bridge between crypto and traditional currencies because they make it easier to convert one into the other. JPMorgan Chase & Co. is developing a stablecoin (called JPM Coin) for its clients to use in making payments to each other; it thinks stablecoins and blockchains will eventually outperform traditional payment systems. Libra has raised the concept’s profile.

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8. What are regulators upset about?

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Libra’s potential for use in money laundering, among other things. And Facebook’s proposal came on the heels of a string of scandals involving its misuse of data and infiltration by Russian bots during the 2016 U.S. presidential campaign. But their chief worry is the possibility that Libra could be so big that it could make it hard for countries to manage their own currencies. And if the U.S. Securities and Exchange Commission were to label Libra a security — a tradable financial asset rather than a currency — that would add layers of complexity that could be a potential death knell for the project.

9. What else do central bankers say?

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The debate has led a number of central banks, including China’s, to highlight the work they’ve been doing on their own digital currencies. And Mark Carney, head of the Bank of England, cited Libra while discussing problems caused by the U.S. dollar in its roles as the world’s unofficial reserve asset and as the most common medium of international trade and finance — a combination that gives it extra strength, especially in downturns, hurting the users of other currencies. Carney said a solution could be the creation of a new reserve asset he described as “an international stablecoin fully backed by reserve assets in a basket of currencies.” Meaning that it might be very much like Libra — except controlled by central banks instead of Facebook.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net, John O’Neil

©2019 Bloomberg L.P.

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