Did you know that there are 180 currencies in the world? You’ve probably heard of the big ones like the US Dollar, Euro, and British Pound. Most currencies are connected to a specific country or a group of countries, with governmental regulations in place to keep currencies, and economies, stable. The entire world market is influenced by the interaction between these currencies and their differing values.
Today, you can invest confidently in the stock market because of the relative stability of the financial system. However, recent developments in the financial world have threatened this stability. For example, the rise of digital currencies and payment systems in the 21st century has introduced new challenges to the market.
Bitcoin is the most recognizable example of a digital currency. But there are a lot of problems with Bitcoin: it has no intrinsic value, is completely unregulated, and has potential to be hacked. Digital payment systems, on the other hand, like Apple Pay or PayPal, are generally successful but are based on the existing credit card and debit card systems, which limits them.
Here’s where Facebook comes into the picture. Facebook actually had its own payment system in 2015, which failed. This time around, with the announcement of its own currency, the Libra, Facebook is trying to change the game and become a major player in the finance world.
What is the Libra?
The Libra is a digital currency to be released in 2020. 28 large companies have already pledged to back the currency. The Libra will be pegged to other major global currencies. Nonetheless, the announcement threw governments and major financial players into a bit of a panic due to the major effects the currency could potentially have.
Just think about it. Facebook has 2.4 billion members, way more than the population of any single country in the world. Facebook’s goal is to allow easy transactions across borders even for people who don’t have a bank account in their home country. Of course, the currency will be available for everyone, in every country.
Why is the Libra Making People Nervous?
Libra is a new financial concept that the world hasn’t seen before. It is a combination of digital currency and standard currency because it is influenced and based on the current currency market. This new, and quite powerful, currency making an entrance to the market can have monumental effects and is causing concern across the world market.
First of all, the world market is nervous about the security aspects of the currency. Facebook has had security issues and leaks in the past, which may make people uneasy about banking with the internet giant.
A second concern for major banks and financial institutions is the loss of income from people moving to the Libra. The three largest credit card companies in the US get 0.25% of each sale- resulting in 30 billion dollars a year of combined income. Cross border transactions will also become much easier with the Libra, resulting in loss of fees for banks and other financial institutions.
Will the Libra Succeed?
This isn’t the first time that an alternative currency has tried to break into the global market. There are multiple cryptocurrencies, including Bitcoin, which ultimately failed to achieve their goals. However, it seems that Facebook is acting wisely in order to ensure the Libra’s success. For example, the entire system will be monitored by an outside body and not by Facebook itself. Major companies, including Uber and Spotify, are among the first to back the new currency, giving it legitimacy and support. Others are soon to join with the open digital wallet plan that the Libra offers.
Having a basic understanding of world currencies and their influence on the economy is important in order to be a wise investor. Large changes in the market can have a direct effect on our finances and investments. We’re certainly going to keep an eye on the Libra and we recommend that you do too.