How Facebook's cryptocurrency is different

Facebook has recently made headlines in its intention to create a cryptocurrency.

The social media company was forced to defend the project on Capitol Hill, facing regulatory concerns over data privacy and possible illegal use, while the G-7 warned that it posed legal risks " serious ".

It is an experience of monetary systems in the digital age, inevitably compared to popular crypto-currencies such as Bitcoin. However, many experts wonder if Libra can even be called cryptocurrency.

Aside from the fact that they are both accompanied by a white paper and that they are called crypto-currencies, Libra and Bitcoin are actually very different. Here is an overview of the main differences between the two.

One of the biggest differences lies in the underlying technology of both currencies.

With Bitcoin, transactions are anonymously recorded on a large public book called blockchain. It is essentially a database managed by a network of computers, on which transactions are secured in such a way as to make it virtually impossible to falsify.

Libra also uses a form of blockchain, or distributed ledger technology. But unlike bitcoin, the Libyan blockchain is allowed – at least for the moment – which means that transactions can only be added by a group of trusted people.

This is where the Libra badociation, a consortium of Swiss companies including Visa and Uber, comes in. Each member of the non-profit organization has invested a minimum of $ 10 million in the project.

"Libra will create a centralized structure governed by an unelected" badociation "composed exclusively of large institutions that have purchased their voting rights," said Ido Sadeh Man, founder and president of the Saga Foundation, a cryptocurrency company which includes JP Morgan chairman Jacob Frenkel as adviser.

It differs from the bitcoin network, to which anyone with sufficient hardware and having access to the internet can access and be maintained.

"Cryptocurrencies are defined by their lack of dependence on trusted intermediaries," said Peter Van Valkenburgh, director of research at the Cryptocurrency Policy Center, Coin Center , in a recent blog post.

"We believe that Libra is not a cryptocurrency because of its use of an authorized ledger and its reliance on a trusted issuer to hold and manage an badet fund guaranteeing currency."

The Bitcoin white paper describes virtual currency as a peer-to-peer payment system, allowing people to exchange money without going through a bank.

It is commonly used today as a form of investment, the term "HODL" being a common term in the industry to describe the purchase and maintenance of investment in cryptocurrency in the long run. We often talk about "digital gold".

The main purpose of Libra is to be used in cross-border payments and remittances. The currency is linked to a basket of currencies and other badets guaranteed by the government, in order to avoid the volatile fluctuations often observed in crypto-currencies such as Bitcoin and Ether.

Nominated by many industry players as a "stablecoin", Balance aims to maintain a stable value. David Marcus, the Facebook executive at the helm of the blockchain initiative, previously said that it would work "more like a traditional currency" than a cryptocurrency.

"Bitcoin and Facebook's Balance are both steps in the evolution of the currency, but in a very different way," Charles Hayter, co-founder and CEO of the CryptoCompare digital currency comparison platform, told CNBC.

"Bitcoin is unauthorized, totally decentralized, deflationary and volatile – Libra is allowed, more centralized, supply-driven and demand-driven and indexed to fiat currencies."

What Hayter means by "governed by supply and demand" is that Facebook and its partner companies can adjust the offer to match a quantity of other badets held in reserve thus maintaining a stable price, even as demand evolves.

Bitcoin, on the other hand, has a fixed stock. The total number of bitcoins that will ever be hit is "limited" to 21 million.

"The supply of bitcoins is fixed and can not react to market demand," said Sadeh Man, of the Saga Foundation. "Libraries are created or burned when one of its authorized dealers deposits or withdraws money from its reserve."

The currency of Facebook has taken the limelight when it comes to regulating cryptocurrencies. However, some fear that the company's blockchain project will be badociated with other digital resources by regulators.

This would be problematic given the difference between Libra and a digital currency such as bitcoin. While Bitcoin rules out the need for financial intermediaries, the Libra model relies on the entities that make up the Libra Association, said Van Valkenburgh of Coin Center.

"A system without intermediaries is a system without intermediate risk, and therefore does not require regulation to protect against the types of risks presented by intermediaries," he said.

According to the White Paper on Libra, the Libra Association currently has 28 founding members and hopes to reach 100 members by the time the currency is put in place. The token should be launched in the first half of 2020.

Although the Bitcoin network involves "miners" who record transactions, it would not make sense to regulate them because they are not trusted depositories of user funds, Van Valkenburgh said. Crypto-currency exchanges and portfolios, on the other hand, require regulatory oversight, he added.

Questions about the integration of Libra in the current financial regulation were asked at Wednesday's hearing. Facebook's Marcus was questioned about whether Libra could be considered financial security, which, he said, could not be the case. But Marcus said that this could possibly be considered a commodity.

Last year, Securities and Exchange Commission Chairman Jay Clayton told CNBC that cryptocurrencies such as Bitcoin could not be considered securities. Crypto-currencies "replace sovereign currencies" like the dollar and the euro, he said.

In any case, if Facebook and its partners manage to overcome the regulatory hurdles that accompanied Libra, the currency "will undoubtedly have a huge impact on the global economy – perhaps even eclipse that of bitcoin", declared Hayter of CryptoCompare.

For Andy Bryant, director of European operations bitFlyer's operation in cryptocurrency, Libra could begin to convince people that there are "other ways" of storing value than it is. Use fiduciary currencies such as the US dollar. "If this is all that Libra is doing, I think it will be a big step forward," he said.