For years, Wall Street's big capitalists feared that the titans of Silicon Valley would shake up the financial industry. Facebook thinks it has found a way, and it will launch its digital currency Libra in 2020. Mark Zuckerberg's company has previously failed to promote payment services. Given the company's habit of abusing privacy and evading taxes, it's an unlikely guardian of other people's money.

But whether you like the company or not, it has support for this new initiative. The value of Libra will be pegged to a basket of mainstream currencies, it will be able to handle a large number of transactions, and 28 other large companies said they will also join an alliance supporting Libra currency (note: the Libra Association). If Facebook's 2.4 billion users adopt Libra to shop and transfer money, the company could become one of the world's largest financial entities. This would herald a revolution in consumption, but could also make the existing financial system less stable and weaken governments' economic sovereignty.

Facebook is interested in its own survival as the new financial facility connects users of its social media and chat apps.

Still, the digitization of finance promises to make life easier and cheaper for billions of people. In China, where digital payments are ubiquitous, people send money to friends and businesses via a messaging app (WeChat) for next to nothing. The United States signs 18 billion checks every year, and handling fees account for 5% of cross-border transfers. Every year, the Big Three of credit card payments (note: UnionPay, Visa, and MasterCard) take a cut of about 0.25% of the global transaction volume they process, worth over $30 billion.

Much of the current effort to redesign the Western financial system is dubious. Cryptocurrencies like bitcoin have no intrinsic value, no central oversight, are susceptible to fraud, and consume electricity and computing power. Digital payment systems, such as PayPal and Apple Pay, are just leveraging the debit and credit card system, not undermining it. In 2015, Facebook launched an experiment with payments based on bank debit cards, but it failed.

Libra is designed to avoid these pitfalls. It will be fully backed by a reserve fund backed mostly by government bonds, limiting volatility in its price. Libra will be managed by an independent organization (note: the Libra Association), which will oversee a central database that stores users' anonymous transaction records. The Libra system will be open source, so any company will be free to create digital wallets that allow customers to spend Libra coins. Major companies such as Uber, Vodafone and Spotify are members of the independent body. In order to encourage shops and merchants to accept Libra, they are doing a fund reserve.

So what's not to like? Zuckerberg's plan, which Zuckerberg has been preparing for 18 months in Menlo Park, could pose two major problems [note: Facebook is currently headquartered in an office park in Menlo Park, California].

First, it could destabilize the financial system. JP Morgan Chase, the largest US bank, has 50 million digital customers. Libra could easily have ten times that number of users. If every saver in the West transferred a tenth of their bank deposits to Libra, its reserve fund would exceed $2 trillion, making it a significant force in the bond market. Banks that suddenly find themselves flooding deposits with Libra are vulnerable to a solvency panic and will have to scale back lending; the spectacle of large flows of money across borders will worry countries with fragile balance-of-payments positions.

This brings up the second question: Libra's governance. Libra will be run by a Swiss association and initially controlled by the consortium. The alliance will be independent of Facebook, although the social media company will provide Libra with a large number of users and may eventually dominate. While Facebook says it is in talks with regulators, their assumption seems to be that Libra will eventually be able to overtake governments and central banks. Facebook also pledged to protect users' data. Buyer beware.

Zuckerberg used to move fast and break things. But this time he walked very slowly and gave advance notice. But that doesn’t hide the fact that while digital currency has the potential to make the world a better place, it can also do a lot of harm. Governments let social media run wild, but Facebook is about to discover that governments don't make the same mistakes with money.

What does Facebook's new currency mean for the banking system? Should banks worry about losing business to Libra?

Consumers may view holding Facebook's Libra coin as an alternative to keeping money in the bank. If they see it as an attractive option, Libra will likely grow rapidly. As noted above, if every Westerner now held a tenth of their bank deposits in Libra, this newly circulating currency would be worth more than $2 trillion. How worried should banks be about this?

At first glance, Libra looks like a banking system. The "Libra Reserve" will hold enough liquid safe assets to back every Libra Coin issued.

For decades, a handful of staunch economists have called for a model known as "narrow banking" to replace the existing "fractional reserve" model (note: "fractional reserve") "The model is that bank deposits are backed by mortgage loans and other illiquid loans; the "narrow bank" model is to implement a full reserve system, requiring commercial bank deposits (bank liabilities) to have 100% deposit reserves (commercial banks in the central bank's Deposit) support). In their view, narrow banks would not suffer a run.

On the face of it, the only apparent difference between Libra's Reserve and a narrow bank is that the former will contain assets denominated in multiple currencies.

However, a closer look reveals that Libra's treasury reserve will not be a bank, narrowly defined or not. Some of the safe assets underpinning Libra are themselves deposits in “fractional reserve” banks. Libra’s reserves will not have access to central bank funding used to clear transactions between banks.

Purchasing Libra will not reduce the amount of deposits in the banking system. Suppose a British person buys Libra coins with money in his bank account. He would transfer the pound to the Libra reserve or to other sellers who would need a pound bank account to receive the payment. The payment will be deposited in this account. In the modern banking system, deposits can be passed between accounts, converted into cash, and used to repay bank loans or purchase assets from the bank. These deposits are not going to disappear in non-bank institutions.

Does this mean banks can relax? No.

First, Libra could lead to a tightening of bank balance sheets if Libra’s reserves use customers’ funds to buy securities such as government bonds from banks.

Second, Libra could cut lucrative bank revenues from cross-border payments, as Facebook hopes to charge almost zero fees for cross-border payments via Libra coins.

Third, Facebook may still decide to make itself a full-fledged bank. The company says that's not their plan, but the temptation is sure to grow if Libra becomes a big hit. The data Facebook has already helped the company make decisions about servicing loans. While Libra's wallet will be largely independent of Facebook, the company will offer its own digital wallet, Calibra, for users who want to hand over their private keys in order to protect their digital currency. They also provided their own personal financial data.

Individuals holding Libra coins face other risks. One is the volatility of the price of the cryptocurrency. For example, if the value of the yen rises against the basket of assets, Libra holders in Japan will suffer losses. And this new currency will not accrue interest (although there are predictions that Libra users may get a cut of the reserve’s interest income, these are just predictions). Stores may welcome the shift to credit card payments, which often charge high fees for transactions, but consumers who enjoy the perks that come with credit cards may not. Libra also has no government-provided deposit insurance. Finally, the public may shy away from Libra due to non-financial reasons such as privacy, and Facebook has failed to protect user privacy.