How Facebook's crypto competition is different

Facebook has made headlines late with its plans to create a crypto competition.

The social media company has been forced to defend the project on Capitol Hill, including in the regulatory issues of privacy and potential illegal use, while the G-7 has warned that it constitutes "serious" legal dangers.

It is an experiment in monetary systems for the digital age, and has inevitably been compared to popular cryptographic curves such as bitcoin. But many experts question whether Libra can even be called a cryptocurrency.

Other than the fact that they both come with a white paper and are called crypto curves, Libra and bitcoin are actually very different. Here is an overview of the most important differences between the two.

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

With bitcoin, transactions are recorded anonymously on a public spread known as blockchain. It is basically a database maintained by a network of computers, where transactions are secured in such a way that it is almost impossible to tamper with.

Libra also uses some form of block chain or distributed management technology. But, unlike bitcoin, Libra's blockchain is allowed ̵[ads1]1; at least for now – meaning that transactions can only be added by it by a group of trusted parties.

This is where the Libra Association, a Swiss-based consortium of companies, including Visa and Uber, comes in. Each of the nonprofit's members has invested at least $ 10 million in the project.

"Libra will create a centralized structure governed by an unelected" association "consisting solely of large institutions that have acquired their voting rights," said Ido Sadeh Man, founder and president of the Saga Foundation, a crypto-curator who counts JP Morgan leader Jacob Frenkel as an advisor.

It's different from the bitcoins network, which can be accessed and maintained by anyone with decent enough hardware and internet access.

"Cryptocurrencies are defined by their lack of trust in trusted intermediaries," said Peter Van Valkenburgh, research director at Cryptocurrency Policy Think Tank Coins Center, in a recent blog post.

"We believe that Libra is not a crypto competition because of the use of an authorized ledger and its confidence in a trusted issuer to hold and manage a fund of assets that return the currency."

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

It is often used today as a form of investment, with the term "HODL" as a common slang expression in the Industry describes to buy and stay invested in the crypto curve in the long term. It has often been referred to as "digital gold."

The primary purpose of the weapon is to be used in cross-border payments and money transfers. The currency is linked to a basket of government-backed currencies and other assets to avoid the volatile fluctuations that are often set in cryptographic baskets such as bitcoin and ether.

Referred to by many in the industry as "stable", Libra is aimed at maintaining a stable value. David Marcus, the Facebook leader who leads the blockchain initiative, has previously said it will work "more like a traditional currency" than a cryptocurrency.

"Bitcoin and Facebook's Libra represent both stages in the development of currency, but in very different ways," said Charles Hayter, co-founder and CEO of digital currency comparison platform CryptoCompare, CNBC.

"Bitcoin is permissible, completely decentralized, deflationary and volatile. Libra is a license, more centralized, governed by supply and demand and linked to fiat currencies."

What Hayter means by "controlled by supply and demand" is that Facebook and its partners can adjust the offer to match a variety of other assets held in reserve, effectively maintaining a stable price even when demand changes.

However, Bitcoin has a fixed supply. The total number of bitcoins that will ever be coin is "hardcapped" at 21 million.

"The Bitcoin supply is fixed and cannot respond to market demand," said Saga Foundation Sadeh Man. "Libras is created or burned when one of Libras authorized dealers deposits or withdraws money from the reserve."

Facebook's currency has been the focus of talking about regulating crypto curves. But some concerns that the company's blockchain project could be lumped with other digital assets of regulators.

It would be problematic given the difference between Libra and a digital currency like bitcoin. While bitcoin calculates the need for financial intermediaries, the Libra model is dependent on the units that form the Libra Association, the Coin Center's Van Valkenburgh said.

"A non-intermediary system is a system without intermediate risk, and therefore no need for regulation aimed at protecting against the types of risk presented by intermediaries," he said.

The weight association currently consists of 28 founders, according to Libra white paper, and hopes to reach 100 members when the currency starts. The token is slated for launch in the first half of 2020.

Although the bitcoin network involves so-called "miners" who record transactions, it would not make sense to regulate them as they are not trustworthy asset management managers, Van Valkenburgh said. Cryptocurrency exchanges and wallets, on the other hand, require legal supervision, he added.

Questions about how Libra would fit into existing financial regulations were raised in Wednesday's hearing. Facebook's Marcus was grilled on whether Libra could be considered a financial security, which he said could not be the case. But Marcus said it could possibly be considered a commodity.

Securities and Exchange Commission leader Jay Clayton told CNBC that cryptocurrencies such as bitcoin could not be considered as securities. Cryptocurrencies are "substitutes for sovereign currencies" such as dollars and euros, he said.

Regardless, if Facebook and its partners manage to overcome the regulatory hurdles that have followed Libra, the currency will undoubtedly have a major impact on the global economy – possibly enlarging it by bitcoin, CryptoCompare's Hayter said.

For Andy Bryant, chief operator of crypto exchange bitFlyer's European business, Libra could start convincing people that there are "other ways" to save value than using fiat currencies like US dollars. "If it's all that Libra achieves, I think it will be a good step forward," he said.