As Originally Published on forbes.com

Michael del Castillo

Believe it or not, Facebook will be the company that brings cryptocurrency to the masses. Today the social network giant published detailed plans for a cryptocurrency called libra, backed by currencies from the most trusted central banks around the world, and accessible even without a bank account.

Considering that only a few years ago publicly traded companies wouldn’t even mention cryptocurrency in public for fear of startling investors, the fact that one of the largest public companies in the world is creating a new cryptocurrency might seem hard to believe.

But for Facebook, a company that generated $55.8 billion revenue in 2018, almost exclusively by monetizing a shared social network, the push into blockchain, a shared financial network of transactions, represents multiple possible new revenue streams.

While top competitors in the cryptocurrency space like Blockchain LLC and Coinbase have fewer than 40 million total users each, Facebook has 2.7 billion monthly active users, giving its cryptocurrency a potential for adoption that competitors can only dream of. While the cumulative market cap of all cryptocurrencies is $290 billion, Facebook’s market cap is almost twice that at $539 billion.

With plans to integrate its own cryptocurrency wallet in with Facebook-owned WhatsApp and Messenger when the cryptocurrency goes live in 2020, Facebook will instantly bridge the world’s largest social network with the brave new world of cryptocurrency. All that’s left is for users to use it.

Considering that cryptocurrency technology was originally designed to take power out of the hands of giant banks that were deemed too big to fail, this masterful business maneuver by one of the least trusted companies in the world is bound to reek of co-option among the early users who helped build cryptocurrency up to its current success.

Like it or not though, in one deft move, libra, with a battalion of supporting enterprises ranging from Uber to Visa, has become the pitch on which the global cryptocurrency battle will be fought, and Facebook the foe to beat.

“The libra currency and reserve will enable people around the world to trade in one single native currency,” says David Marcus, Facebook’s head of blockchain, and now head of Facebook’s newly created cryptocurrency subsidiary, Calibra. “What we’re hoping is we will have the ability to foster a lot of innovation in the ecosystem across all dimensions.”

The Tale of Two Tokens

Of course, the cornerstone inaugural Blockchain 50 member Facebook’s innovation is the libra cryptocurrency itself. Unlike bitcoin and ether, which have free-floating prices based on demand, volume and other variables, libra is what’s called a stablecoin, meaning its price is pegged to a more stable asset. But unlike most stablecoins, libra isn’t going to be pegged to a single asset, but rather a basket of assets including yet-to-be determined currencies and short-term government-backed securities in currencies from central banks.

According to Marcus, who was previously president of PayPal, those assets will “likely” include currencies from the U.S. Federal Reserve, the Bank of England, the Bank of Japan and the Swiss National Bank, at the very least. “With assets backing every single coin, you can extrapolate the currency itself will be very stable, low volatility, low inflation, and a good store of value and medium of exchange,” says Marcus.

Libra will be created and secured by a separate organization called the Libra Association. The association is in conversations with multiple regulated banks around the world but has not yet confirmed which will custody the assets. The libra coins will be available for purchase at any supporting exchange, stored using Facebook’s Calibra wallet or any competitor’s wallet, and spent with any merchant or individual in the world who has a libra wallet.

But there’s a second crypto asset in play here: Libra Investment Tokens (LIT), so-called security tokens that aren’t pegged to any currency and float freely, similar to how a stock in a company might move. To purchase these tokens, investors are required to meet several criteria including either a $1 billion valuation for traditional companies or $1 billion in assets under management for cryptocurrency companies.

Once the basic business and technical requirements are met, aspiring members of the association are required to pay at least $10 million, or 1% of the total amount being raised in the security token offering (STO). The resulting investment capital is then stored in the same treasury accounts as the libra cryptocurrency.

In exchange for the the investment, companies will receive a form of cryptocurrency called a security token, which have yet to be created or issued. Once issued, the tokens will be used in much the same way that a token is used at a video game arcade to prove that real money was spent. This proof of investment, or proof of stake as it is called, allows the token holder the ability to validate transactions on the blockchain, cast votes on how the blockchain code will evolve, and decide how the association with be governed.

This is a crucial part of the elaborate business model revealed today, and Facebook’s first possible cryptocurrency-based revenue stream. Both the amount invested by the founding members and the funds used by customers to purchase libra, will then be invested in low-risk, low-yield assets, according to documents provided to Forbes. While cryptocurrency owners will not earn any interest on the money they leave parked in the libra reserve, the interest will be used to cover expenses of running the organization, and if successful, used to pay out dividends to the investors.

From the document:

“Because the assets in the reserve are low risk and low yield, returns for early investors will only materialize if the network is successful and the reserve grows substantially in size.”

Details about how many security tokens each participant will receive, whether the amount of tokens can be capped, and whether token holders will be required to hold the tokens for a set period of time have yet to be agreed upon, and will be decided over the coming months by the founding members.

Enterprise Crypto

Based in Geneva, Switzerland, the Libra Association is a not-for-profit membership association comprising some of the largest companies in the world. Like many non-profit cryptocurrency foundations, such as the Ethereum Foundation, also based in Switzerland, one of the Libra Association’s jobs is to oversee such issues as technical development and issues related to how the group is governed. However, unlike most existing cryptocurrency foundations, the Libra Association also manages operations around the Libra Reserve, including the creation and destruction (called burning) of the cryptocurrency.

These influential founding members are: payments companies Mastercard, PayPal, PayU, Stripe and Visa; technology firms and marketplaces Booking Holdings, eBay, Facebook and its subsidiary Calibra (each with separate membership), Farfetch, Lyft, Mercado Pago, Spotify AB, Uber Technologies, Inc., telecommunications companies Iliad, Vodafone Group; blockchain startups Anchorage, Bison Trails, Coinbase, Inc., Xapo Holdings Limited; venture capital firms Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures; nonprofit academic firms CreativeDestruction Lab, Kiva, Mercy Corps and Women’s World Banking.

“The end goal is to insist that these types of partners have a seat at the table,” says Dante Disparte, head of public policy and communications for Libra Association, hinting at the diversity of the membership. “So that the type of innovation it would spur takes crypto to places it hasn’t gone before, but critically also extends the last mile of finance and financial inclusion.”

While the association appears in some ways to be noncompetitive, in that it has an open call to any potential member who meets the business and technology criteria, it was created in an ecosystem of other similar organizations.

Instead of partnering with each other to improve existing infrastructures, this ecosystem of membership-based organizations, including Circle and Coinbase-backed Centre, and even more traditional banking payments platform Swift, are largely competing for the right to have their standards become the default global payments standard.

“We tried to achieve broad representation so that it’s representative of use cases and applications,” says Christian Catalini, Facebook’s head cryptocurrency economist. “So that we can really shape it as a global technology standard.”

The Right to Rebel

To spend libra, customers will need to set up a wallet from any provider and purchase the cryptocurrency in their native currency. For example, newly launched Facebook subsidiary Calibra is building a cryptocurrency wallet that will let users buy, store, and spend the cryptocurrency from WhatsApp, Messenger, or via an iOS or Android mobile app.

After customers go through an elaborate onboarding process designed to verify their identity and prevent money laundering, they will be able to select the amount of libra they want to send in their native currency, and see the amount received in the recipient’s native currency.

While the fiat currency will be stored in a series of unconfirmed banks distributed around the world, the private keys that give users access to the cryptocurrency can be stored by the wallet maker, as is the case with Calibra and other so-called custodial wallets, or stored by the individual as other wallet providers may choose to do, called a noncustodial wallet.

Each of these wallets can send and receive currency to any other wallet that supports libra, similar to how email from one provider, such as Gmail, can correspond to another provider, like Yahoo. While anyone will be able to build a wallet on the platform, all of the four founding blockchain members—Andreessen Horowitz-backed Anchorage, Mike Novogratz-backed Bison Trails, Coinbase, Inc., and Xapo Holdings Limited—provide either cryptocurrency software wallets or hardware-based custody solutions.

Former Facebook business development director Jim Migdal, hired last year by Coinbase, says his new employer is hoping the competition among wallet providers spurred by libra will improve the quality and security of every wallet. Further, Migdal says, a bridge could form between Facebook’s billions of users and other cryptocurrencies by mixing libra with cryptocurrencies in more traditional wallets, and by Facebook’s Calibra accepting other cryptocurrencies. “We view the whole initiative as an effort to try to bring crypto to a much wider audience,” he says.

At launch, Calibra aims to be live in as many jurisdictions as possible. Marcus says a team of his former PayPal colleagues now working at Facebook, and others, has already applied for several U.S. state money-transmitter licenses, and New York’s BitLicense, and that it has received approvals on several applications. Competing wallets will each be responsible for obtaining their own licenses—and will have the freedom to build wallets that don’t comply with anti-money-laundering (AML) and know-your-customer (KYC) regulatory requirements.

“We expect and welcome people to build noncustodial wallets on top of the blockchain, and there are going to be lots of people around the world who aren’t able to KYC for a number of reasons,” says Kevin Weil, vice president of product for Calibra. “You could be in a refugee camp, you might not have a government identity, and it’s really important that libra is accessible to everybody in the world.”

New Revenue Streams

In addition to potentially receiving interest from its investment in the Libra Association, Facebook hopes to make money from Calibra, via unannounced products. “Over the long run, my mission, and our mission is to build more services through Calibra and start providing customers with more financial services,” says Calibra head David Marcus.

Facebook has traditionally made money by selling ads targeting specific individuals based on the personal information they share with their friends, last year generating $55 billion, or 98% of all its revenue from advertising.

While many of the ads are of the more traditional business marketing type, allegations that personal data is being used to sway political opinions and more have also surfaced. Given the increasing severity and regular flow of allegations, Marcus promises that user financial data will not be used to target advertising.

“We’ve heard loud and clear from people that they don’t want their financial and social data to be comingled,” says Marcus. “So your financial data will actually not be shared with Facebook.”

However, since the transactions are open-source, anyone will be able to view them, and—as has happened with bitcoin, ethereum, and many other popular cryptocurrencies—deduce the spending habits of users and even their identities.

Going Public

Beneath all of this is the Libra Blockchain, an open-source blockchain launched for testing purposes today under the Apache 2.0 Open Source software license. Unlike bitcoin and ethereum, which are called public blockchains, not anyone can run a node or auditing software to help ensure a blockchain is accurate with such a setup.

Called a private or permissioned blockchain, only invited members can participate in the process by which consensus is formed about which libra transactions are accepted. In this case, the c28 founding members of the separate nonprofit Libra Association are being given permission to run can run nodes, with the goal of having 100 members running nodes by the launch next year.

While bitcoin, ethereum and other public blockchains use a type of consensus mechanism called proof of work to validate transactions by expending computing power to audit the system, Libra Blockchain will use something called proof of stake, in which node operators agree to lock up or “stake” funds to prove they have skin in the game and are therefore more likely to act in the network’s benefit.

While proof of stake is controversial because it gives authority to a few trusted entities, it also allows for more transactions volume. Facebook’s goal is to be able to conduct 1,000 transactions per second (compared with the seven transactions per second that bitcoin can process and 65,000 transaction per second from Visa), each of which will settle in ten seconds or less (traditional global payments settle in about three days, with bitcoin settling in 10 minutes), according to Calibra tech lead, Ben Maurer.

As blockchain technology improves, Facebook plans to move its governance structure from permissioned to permissionless, in the hopes that it will lower the barrier to entry for startups looking to participate in future governance decision. The target for the switch is within the next five years. “Permissionless here will help the network scale further because, people will be more likely to join us other founding members if they believe that there’s a level playing field,” says Catalini.