For Mark Zuckerberg’s Facebook, the embryonic Libra cryptocurrency might be the digital equivalent of the sorcerer’s stone, the legendary material alchemists believed could prolong life and turn lead into gold. It would give the social media giant a new and sought-after capability in parts of the world where the company is growing rapidly but some 1.7 billion people lack access to banks, depriving them of the ability to buy goods online.
Ensuring that its platforms, such as Messenger and the encrypted WhatsApp, have payment services would also prevent potential loss of customers to rivals and open new ad revenue streams, noted Bank of America analyst Justin Post. “Digital payments will amount to $4.1 trillion in 2019 and will grow to $6 trillion in 2022, a large market for Facebook to tap into,” he noted.
Zuckerberg’s firm could gain a commanding edge in cryptocurrency, still in its infancy and lacking a widely accessible platform, by providing access through services already used by 2.4 billion people a month, roughly a third of the world’s population.
Before Libra delivers any of those lucrative benefits, however, it will have to survive scrutiny by government agencies worldwide and a U.S. Congress skeptical of both Facebook’s data-privacy safeguards and cryptocurrency’s potential to obscure financial misconduct.
“Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks, and trading risks that are posed by cryptocurrencies,” Rep. Maxine Waters, the California Democrat who heads the powerful House Financial Services Committee, said after Libra was announced.
“Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues,” she added, calling for company executives to testify at a hearing on the proposal requested by the panel’s top Republican, Rep. Patrick McHenry of North Carolina.
Libra in many ways appears designed to sidestep concerns lawmakers might raise. It’s unlike older cryptocurrencies, including bitcoin, since it would be tied to major world currencies including the U.S. dollar, euro, and yen, and overseen by a panel with members including Mastercard, Visa, and PayPal, each of which would have voting rights equivalent to Facebook’s.
Bitcoin, generated through so-called mining — validation of transactions on a shared ledger known as blockchain — has no such links. It’s issued by neither governments nor companies, meaning users have no recourse when its value sinks and no way to recover lost passwords for their bitcoin holdings.
Bitcoin’s fluctuations in value have been fodder for critics, who likened it to the tulip bubble that wiped out investors speculating on flower prices in the 17th-century Netherlands. The cryptocurrency began tumbling from a peak of $17,060 in late 2017, and a subsequent rally has only pushed it up to a little more than half that value, $9,265 as of June 17.
“Mass-market usage of existing blockchains and cryptocurrencies has been hindered by their volatility and lack of scalability, which have, so far, made them poor stores of value and mediums of exchange,” Libra’s developers wrote in a white paper.
“Some projects have also aimed to disrupt the existing system and bypass regulation as opposed to innovating on compliance and regulatory fronts,” the developers wrote. “We believe that collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, is the only way to ensure that a sustainable, secure and trusted framework underpins this new system.”
Teaming with known financial services providers such as Mastercard and Visa is among those steps. It lets providers assure users that Libra isn’t a Facebook-only product, Dexter Thillien, a senior research analyst with Fitch Ratings, told the Washington Examiner.
Facebook can argue that “we have many different partners; therefore, we can be trusted with your financial data,” he said.
On its own, Facebook plans to enable transactions through a new subsidiary, Calibra, that will offer a digital wallet as soon as 2020 through WhatsApp and Messenger as well as a stand-alone basis. With few exceptions, Calibra transactions won’t be visible to either the parent company or others, Facebook said.
Libra “seems like a diversification play,” Thillien explained. “Facebook gains a globally scalable source of commerce and payments data across all of its platforms, data which boost its ability to target ads to users.”
He sees Facebook’s trajectory as more closely aligned to Google, which still relies heavily on advertising revenue despite developing new income sources, than to that of the Chinese company Tencent, where advertising generates less cash than businesses such as gaming, membership, and livestreaming.
With the wide adoption of Facebook platforms, its backing of Libra may prove to be a game changer for cryptocurrency, said Thillien and Kirill Bensonoff, the CEO of OpenLTV, a business powered by blockchain.
“It will introduce people who would otherwise not be introduced to cryptocurrency, make them more comfortable with using technology, and perhaps see that it’s not that difficult to use,” Bensonoff said. “A lot of people don’t trust these decentralized systems.”
Regulators have been among the skeptics. Trump administration officials from Treasury Secretary Steven Mnuchin to Securities and Exchange Commission Chairman Jay Clayton have worried that cryptocurrency investors didn’t understand what they were buying and that the products could undermine financial stability.
Indeed, currencies that don’t exist outside cyberspace and have suffered rapid price fluctuations represent “the mother of all scams,” Nouriel Roubini, the New York University economist who predicted the 2008 financial crisis and was nicknamed “Dr. Doom,” told the Senate Banking Committee in October.
The panel, led by Sen. Mike Crapo, an Idaho Republican, announced Wednesday that it would hold a hearing on Libra in July, underlining the political and regulatory risks to Facebook.
While Libra avoids some of bitcoin’s pitfalls by linking to sovereign currencies, it may nonetheless encounter a high bar in complying with anti-money laundering laws that require banks to verify the identities of their customers.
Those laws have led to billions of dollars in fines for lenders including HSBC and BNP Paribas, noted Brian Nowak and Betsy Graseck, analysts with the New York investment bank Morgan Stanley.
The white paper on Libra notes that users are allowed pseudonyms and accounts that aren’t linked to their real-world identities, “one area that likely won’t align with regulators’ goals and has the potential to attract money laundering attempts,” the analysts said.
“Washington has the power to end Libra and any other cryptocurrency,” said Jaret Seiberg, an analyst with Cowen Washington Research Group, which has tracked federal policy for the past 40 years. “This can be done by denying it access to the banking system, which would make converting the currency to cash impossible.”
While Congress isn’t likely to do that now, politics is a huge risk for Facebook, already under scrutiny over data privacy, misuse by Russian agents seeking to sway voters in the 2016 presidential election, and claims by GOP lawmakers that it suppresses conservative opinions.
“That is only going to get more intense as the 2020 presidential campaign heats up,” Seiberg said. “That all but ensures there is no way Facebook can embark on this project in a nonpartisan fashion. Democrats and Republicans distrust the company.”
