There are many types of cryptocurrencies available, and as with any venture, you must also be up-to-date with the trends and news about crypto. This is to avoid buying or trading cryptocurrencies that might empty your pocket. In keeping abreast with the news about cryptocurrencies, one hot topic involving that right now is Facebook Libra.
You may or may not have heard about this controversial topic, but what matters essentially is knowing about the coin you’re trying to buy or learning about it before investing in it. Facebook Libra may be famous, but you must first weigh whether it’s worth the risk or not.
What is Cryptocurrency?
Before tackling the issue of Facebook Libra, you must first be aware of what exactly cryptocurrency is. From the words crypto and currency, cryptocurrency, or popularly known as crypto, is a type of digital currency. It has anti-counterfeiting and security measures called cryptography, which is used in crypto exchanges or transfers from one person to another.
In layman’s terms, cryptocurrency is a digital currency that is exchanged in a decentralized currency system. This means that no banks or middlemen or central server charges you fees to record your balances. All it has is a shared database known as the blockchain to keep every financial transaction done by parties exchanging such currency.
Unlike banks, crypto transactions are not run by only one organization but by different companies and people.
Is Libra a Cryptocurrency?
Cryptocurrencies like Bitcoin, altcoins, and many more are the ones already known. Libra, on the other hand, is a stable coin according to Facebook.
Unlike cryptocurrencies that use a decentralized system, a stable coin is backed by government security. Although it’s a fiat currency, stable coins, as compared to cryptocurrencies, are less volatile and more stable, hence the name. Facebook, therefore, claims that Libra is a stable coin. To understand more about cryptocurrencies, one must first know the different types of cryptocurrencies that are in circulation.
Difference between Libra, Bitcoin, and Other Cryptocurrencies
Although Libra is pegged as a cryptocurrency, it’s a bit different from Bitcoin. The major difference is the technology used for each currency.
Bitcoin and other cryptocurrencies use blockchain to record every transaction. Blockchain is a network of computers forming a database so no individual can easily tamper with or control it.
Libra uses a distributed ledger technology, which is similar to the blockchain. However, technology is permissioned, which means that trusted parties are the only ones who can add transactions. These parties are from companies like Uber, Visa, and the like, forming what they call the Libra Association.
The Libra Association manages and holds the funds of the currency through its permissioned ledger.
Generally, when it comes to purpose, Bitcoin is used as an investment, while Libra is mainly used in money transfers and cross-border payments. Libra is said to be stable as other assets and government currencies back it up so that it won’t be as volatile as other cryptocurrencies.
While this may sound advantageous, there are concerns that have arisen.
Concerns on Facebook Libra
Facebook Libra’s primary goal is to become a currency that can be used worldwide without the complications that regular money has when exchanged. But governments around the world have voiced out their fears over Libra, prompting them to interrogate it before its launching.
Here are some reasons why governments want Libra to be interrogated:
Controlling – Although met with opposition by some government officials, Facebook claims that it will not have sole control over Libra because of the existence of the Libra Association members. When it comes to financial aspects, Libra Founders will gain from their invested money into Libra. Each founder has at least 10 million USD into it.
Having a New Global Financial System – With Facebook’s network, it can potentially replace state currencies if not compete with them. Because Libra’s primary purpose is to be used globally, government entities such as the Bank of England, the French Senate, and others are questioning Libra’s proposal, which they claim to be vague and not sufficiently detailed. In addition, some countries like India are already planning to ban Libra even before its launch.
Unregulated – Since the Libra Association are a group of private entities that will be responsible for Libra’s blockchain, central regulation is out. Although Facebook plans to partner with the government, the former still insists on less monitoring. Moreover, the US is adamant about subjecting cryptos and Libra to banking regulations.
Attracting Criminals – One of the major issues surrounding Facebook’s Libra is its possibility to become a financial platform for crime syndicates and other high-rated criminals. Criminals such as drug syndicates, terrorists, and money launderers are only a few of the criminals that governments believe can use Libra’s financial system without breaking a sweat.
What is Money Laundering?
One of the principles of money laundering is the act of crime syndicates or terrorists to get their funds to look like they came from a legitimate source. For instance, criminals will take advantage of complicated financial transactions so that authorities cannot trace the origin of the laundered money.
How Does Crypto or Digital Currency Cater to Money Laundering?
Although transactions can be viewed by anyone publicly, it cannot be denied that a lot of criminals use Bitcoins for their illicit activities. The reason for this is the possibility of hiding the real identity of the person spending, receiving, and sending cryptocurrencies.
Here are ways on how the criminals can launder their illicit money:
- Mixing Bitcoins – Tumblers or Bitcoin mixers launder money through wallets hosted on the dark web. They divide and bounce clean cryptocurrencies to different addresses before recombining it. However, you would need two or more Bitcoin wallets so you can run them on the dark and standard web. It may cost them fees, but it’s not a big loss on their funds since it will turn their illicit money into a clean one.
- Using Unregulated Exchanges – One way to launder money without using a mixer is through an unregulated cryptocurrency exchange. These exchanges do not adhere to AML or Anti-Money Laundering Laws, or KYC or Know Your Customer procedures. These platforms do not require identity checks for the sender or receiver so they can exchange altcoins or Bitcoins across different markets. After which, they can withdraw it to their external wallet, though it’s quite hard for unregulated exchanges to find fiat markets accepting them.
- Turning to Peer-to-Peer Markets – Since fiat markets don’t generally accept the withdrawal of unregulated exchanges, these criminals turn to dark deeds or peer-to-peer markets so they can change their Bitcoins into cash. For instance, a drug syndicate can sell their drugs using Bitcoins then later withdraw their Bitcoins into cash.
Facebook Libra and Money Laundering
Since money laundering can now be done through digital currencies, the more that governments are becoming concerned about the issues involving Facebook Libra. Fears of using Libra’s financial system to launder illicit funds from different criminal entities have heightened, especially with Facebook’s numerous connections. The secretary of the US Treasury plans to look into the whitepaper of Libra until regulatory issues are solved.
This is what Facebook has to say about money laundering issues:
- Register with FinCEN – Facebook vows to wait for the decision of the US government before launching its Libra. In its proposal, the Libra is set to register with the FinCEN or Financial Crimes Enforcement Network of the Treasury Department. FinCEN combats financial crimes like terrorist financing, international and domestic money laundering by analyzing the information collected from financial transactions. With this registration, Libra will be forced to comply with anti-money laundering rules and regulations.
- Follow Regulatory Frameworks – Since Geneva is the headquarters of the Libra Association, Facebook expects that its privacy regulator will be the Swiss Federal Data Protection and Information Commissioner. Moreover, it says that they are planning to follow the proper regulatory framework set by the Swiss Financial Markets Supervisory Authority.
- Comply with Anti-Money Laundering Laws – Facebook claims to also intend to adhere with the Anti-Money Laundering Laws on cryptocurrencies. AML Regulation has gone worldwide. Its standards apply to all virtual assets operations or activities. Here are some of the AML’s salient features:
- Virtual Currency Exchanges or VCE’s special licensing requirements
- AML rules cover wallet services and administrators
- Securities law cover ICOs
- FI or Fulfilling Identification – Needed to establish a customer relationship. This process includes confirming the real identity of the client before any deal or transaction. For instance, a person wanting to use a crypto wallet must verify his identity by taking a photo of himself together with his national or valid ID as required by the wallet.
- Account Monitoring or KYC – This involves letting your customer understand what the business relationship is all about
- Transaction Recordkeeping and Reporting – Crypto transactions, as well as the real identity of crypto holders, are sent to FIs for verification and audit.
- Expect Licensing – Facebook also planned to be licensed before its full launch. It has already applied to the Department of Financial Services of the US for it to operate a crypto business legally. Since they will be licensed, Facebook will also incur capital gains taxes and sales tax.
Partnership with Local Stores – With Libra being a digital currency, Facebook also stated that it has been collaborating with local money exchanges and stores against money laundering. Facebook will use QR codes to let people sell or buy Libra in person, or when people will cash out or cash in Libra for state currencies.
Complement Financial Systems Already in Existence – Facebook also said that it wouldn’t work as a bank, but only to support the existing financial system.
Operate in Specific Areas – Since Libra’s goal is to be compliant and regulated, markets allowing Libra operation will proceed only where they will be.
Use Anti-Fraud/Laundering Check – Since Calibra, the wallet of Libra, will be integrated into WhatsApp and Messenger, only people with connected government ID and bank accounts can trade Libra.
Partnering with NGOs – Since a lot of areas do not have an ID, such as those in refugee camps, Facebook also stated that it would let non-government organizations or NGOs be part of the Libra Association. With it, they can expect to work with entities for identity authentication and confirmation.
Moreover, during the July 12, 2019 Senate Banking Committee, Facebook has presented the following:
1. Outdated US Financial Regulations Have been Shunned – Facebook has shown that the traditional financial system lessens commerce due to its limitations and barriers. For instance, the trade of US dollars and digital currency is made difficult as the majority of banks has banned these transactions. And to solve this problem, stable coins such as Libra have been created so that investors can trade state currencies and digital currencies without any complications. Moreover, Facebook claimed that if Congress had allowed banks to let investors trade in fiat and cryptocurrencies, then stable coins would not have arisen.
2. Payment Systems Have been Innovated – Digital currencies, including Libra, is seen to be one of the most significant innovations for payment from all over the world to become more efficient. Traditional payment systems take time for money to be transferred from one platform or bank account to another. As a result, capitals are trapped in banks as it takes days for it to be confirmed. But with Libra, it aims to transfer money from one wallet to another in a matter of seconds. Only then will fast flow of cash can help more companies to work out their capitals.
3. Compliant Framework Can Fit Digital Currencies – Since lawmakers have developed a roadmap and guidelines for digital currencies, all bankruptcy and legal disputes will follow regulated and established rules. For instance, if Libra will have a legal discussion, a law has already been built where judges know what to do with cases on digital currencies.
To sum it up, it appears that Facebook Libra has been developing more of its whitepaper since its first announcement. Facebook said that its announcement is a way to gather information on what areas should they focus on or establish. As with money laundering issues, Facebook claims that Libra will use KYC as a defense against any laundering or illicit activities of criminals. Moreover, Facebook has been collaborating with government and private entities to ensure that measures against money laundering will be hindered.