Can Facebook reinvent money?

By Megan Bradshaw and Rebecca Kirkman on June 21, 2019

On Tuesday, June 18, Facebook and a consortium of 27 partners announced a new cryptocurrency—Libra—with a public launch date of 2020.

The cryptocurrency is intended to allow anonymous users to shop online or send money to people with nearly zero fees. The currency is backed by a reserve fund of real-world currency and governed by members of the Libra Association—companies like Visa, Uber and eBay.

Users store it using Facebook’s own Calibra wallet built into WhatsApp, Messenger and its own app or through third-party wallet apps.

According to Tech Crunch, the hope for Libra is that it “enables a simple global currency and financial infrastructure that empowers billions of people.”

But as with any networked technology, there are privacy and security concerns.

Four members of Towson University’s faculty—Babu Baradwaj, Natalie Scala, Subrata Acharya and Amina Sillah—discuss the pros and cons of Libra and cryptocurrencies in general.

What is a cryptocurrency?

Cryptocurrencies—or digital money—were developed about 10 years ago and gained traction around 2014. The most famous is Bitcoin. Cryptocurrency is mined and traded through a technology called the blockchain.

“It is basically an immutable electronic register with the information stored in pieces on a decentralized network. The basic advantage—and most essential part—is anonymity,” says Babu Baradwaj, chair of the finance department in the College of Business & Economics (CBE).

Up until Libra, however, cryptocurrencies have been treated mainly as types of investments, rather than as spending money. This has led to lower adoption rates.

“The technology is not complicated, but not many understand it,” continues Baradwaj. “It’s not easy to obtain cryptocurrency without specialized knowledge of mining and trading that most people do not have. The fear factor in not understanding the technology and how it works also keeps people away.”

How are cryptocurrencies regulated?

The unsupervised nature of cryptocurrency blockchains combined with pseudonymous users prevent regulation efforts. Another reason cryptocurrencies have not caught on is their reputation for being the financial version of the Wild West.

“It has become a haven for money laundering, drug dealing and payments for all sorts of illegal actions,” states Baradwaj. (The anonymous hackers that breached Baltimore City servers in May demanded 13 bitcoins in payment, worth about $100,000.)

The Libra Association has tried to address the wildly fluctuating values of cryptocurrencies by tying the Libra to a reserve fund of real-world currencies—like the dollar, yen, euro and Swiss franc—that is generated by a mandatory investment required of new members.

Baradwaj sees this as a way to increase adoption rates.

“It’s a security feature for people who don’t presently use cryptocurrency, a way to draw them into using or investing in the currency,” he says.

What about privacy?

Facebook has stressed that users’ financial and social information will be kept separate, but that doesn’t necessarily mean Facebook or the Libra partners won’t be able to collect data on you.

Natalie Scala, CBE assistant professor and director of graduate programs in supply chain management and project, program and portfolio management, points to the fact Libra transactions will be pseudonymous—users’ accounts will not be linked to their real-world identity. But that doesn’t mean Libra members can’t track user behavior.

Scala likens it to a grocery store loyalty card. Swiping the card gives the store a record of buyers’ purchasing habits, which allows the store to offer coupons and targeted advertising to them.

There’s also Facebook’s record of failing to protect users’ account data. The 2016 Cambridge Analytica scandal heavily damaged the company’s credibility, and, recently, as many as 20,000 Facebook employees had access to hundreds of millions of user passwords after a series of mistakes led apps to store those passwords in plain text.

Libra will be “a good litmus test for Facebook to see if their privacy practices have improved as much as the company says they have,” Scala says.

What are the security risks?

Cryptocurrencies have made headlines in the past for the thefts of eye-popping amounts of money.

Hackers can target users and their online wallets, service providers like a trading platform or merchant’s website, and the networks or protocols supporting cryptocurrencies.

Digital wallets rely on public and private keys to provide security for cryptocurrency. The private key is the most vital and must be kept secret at all times. A lot of digital wallets store these keys in a file on the user’s hard drive in a well-known directory, significantly raising the risk of theft.

“Facebook’s group is relying on digital wallets to store Libra, but where are the wallets stored?” asks Subrata Acharya, associate professor in the Department of Computer and Information Sciences. “Are they on networks with security strong enough to withstand attacks? On an individual level, are users being responsible with their accounts? Wallet apps are only as strong as their weakest user.”

As cryptocurrency usage grew to between 2.9 million and 5.8 million people in 2017, a number of companies have offered services to help users interact with cryptocurrency networks, usually as exchanges or key custodians. This is where the Libra Association and Facebook’s Calibra wallet fit in. These companies then become targets of intrusion activity.

“The computer science profession has worked toward common standards of network security since the 1950s, but security is only maintained when everyone follows the rules,” says Acharya. “Anyone can build and download an app, without following the standards or vetting the resulting app for vulnerabilities.

Why would Facebook create a digital currency?

According to data by World Bank, 1.7 billion adults around the world don’t have a bank account, including millions of Americans.

In its announcement, Facebook pinpointed this challenge as one it plans to address with Libra, and the social network’s wide adoption around the world—especially in developing countries among those with internet access—might just make it possible.

“Social media use, specifically Facebook, has skyrocketed in developing countries,” says Amina Sillah, assistant professor of political science in the College of Liberal Arts. “In fact, Pew research indicates that the developing nations are among the those who make up the majority of social media users.”

Take Ghana and Mexico for example, where more than three-quarters of internet users are active on social media. “There are already so many people using the platform, and Facebook is capitalizing on this,” Sillah says. “Kenya, for example, has registered tremendous success with M-Pesa (mobile money). There is already a culture of mobile money that Facebook can build upon and make it more accessible.”

Using Libra to send remittances home to family across the world with lower transaction costs would be attractive, too, Sillah notes.