It has been about a month since Facebook pulled back the curtain on its vision for Libra – a blockchain-backed cryptocurrency with the lofty aim of connecting the 1.7 billion people around the world without access to a bank account to the world of digital payments at low or no cost.
In short, Facebook wants to build the internet of money – and it has attracted a lot of high-caliber experts and big-name support. Mastercard, Visa, PayPal, Stripe, PayU, Andreessen Horowitz, Union Square Capital, Coinbase, Xapo, eBay, Uber, Lyft, Farfetch, Mercado Pago, Spotify and Vodafone are just a short sampling of the 28 founding members of the Libra Association, which will collectively develop the charter for the organization and frame its governance structure.
They will also kick in the capital to support the project – $10 million apiece – with some exceptions. Payment (or technically the purchase of $10 million in Libra tokens) obtains founding membership and the voting rights associated with it. Facebook has confirmed that it will have no more standing in the association than any other founding members, though its engineers are building the blockchain rails on which the system will ride.
To ward off the currency speculators that have tended to plague high-profile crypto projects like bitcoin, Libra will be a stablecoin, with its value pegged to the U.S. dollar.
“Freedom, justice and money – which is exactly what we’re trying to do here,” noted David Marcus, head of Facebook’s Libra, as the project details went public in June, according to Reuters.
The reactions to Facebook’s big announcement, however, have been decidedly mixed. The promoters of the plan have been positive on its potential, but naysayers have noted that it is poorly calibrated for the problem it proposes to solve. And regulators in the U.S. and around the world have been skeptical – to put it mildly.
Tomorrow, July 16, Marcus will go to Washington for the first of what will likely be an ongoing series of meetings with global regulators and legislators. That tour will start with the Senate’s Banking Committee. In a letter submitted in advance of his testimony to the full committee, Marcus sought to underline Facebook’s commitment to working with regulators to “take the time to do this right.”
“We want, and need, governments, central banks, regulators, nonprofits and other stakeholders at the table and value all of the feedback we have received,” he said.
But will regulators want to come to the table – or is it more likely they will want to shut it down? It’s early to make any predictions, but given the chorus of questions that have arisen in the last month, it is safe to assume Marcus will face some rather difficult inquiries about the internet of money Facebook is trying to build, how exactly it will work and why any government should want to get on board with it. Going into the hearing, that is very much up in the air.
The Draw for Supporters
In the immediate days following the announcement of Libra, PYMNTS spoke to two of its higher-profile backers, Mastercard and PayPal, via Mastercard’s Executive Vice President of Digital Solutions Jorn Lambert and PayPal’s Chief Operating Officer Bill Ready.
Both noted that while the rollout and media coverage has mainly focused on Libra as a “Facebook product,” that is not how they view the opportunity to sign on as a founding member. The concept behind the project is to draw a hard and fast line between the Libra rails and the currency they support – and the social media network that is Facebook.
“Right now, you have that amalgamation of the two ideas that is not particularly helpful – and we will work hard to draw a distinction between the two things,” Lambert told Karen Webster. “We would not participate if we thought one firm was pulling more weight than the others, and breaking trust in the system.”
And in fact, Ready told Webster, the appeal of the Libra project is that it is a collaborative effort among the players on the planet that know the absolute most about global payments and marketplaces. Because when looking at the nearly two billion people on the planet who lack access to traditional banking channels and are essentially locked out of the digital economy, it becomes apparent that the scope of the problem is beyond any simple solution anyone can offer up.
“This won’t happen overnight,” Ready noted. “When you look at these places with a high concentration of the unbanked, there are things we can do, but it is beyond any one player.”
But, he continued, if done correctly and with the right cooperative spirit, it is not beyond the reach of a dedicated collaborative to build an entirely new infrastructure to access that last segment of unbanked humanity.
The challenges, Ready and Lambert agreed, are sizable – and there are a lot of steps to undertake in the next year as the charter is being developed and the details are being hammered out. Some players that first signed on may drop out, and new players will come on board. Plus, there will be regulatory challenges to overcome.
But the founding members are, in many cases, more than familiar with the intricacies of global AML/KYC concerns and with working closely with a variety of regulatory regimes. Libra, Lambert noted, is a very new idea – and as is typical of most new things, there are no existing regulations to govern it. But that isn’t a reason to pause innovation – it’s a reason to work with regulators to build the regulations.
“We have to understand what they really want: protecting consumers, avoiding fraud, avoiding terrorism financing, avoiding money launderers. Our task is to work with regulators to achieve a framework in which that can exist,” Lambert told Webster.
And, Ready and Lambert agreed, if they can build that framework – and connect those 1.7 billion unbanked consumers to it – they can accomplish something remarkable that would have otherwise been unattainable.
But it is a big “if” – and one that has drawn its share of doubts.
Libra and its Limitations
As big, bold and novel an approach Libra could be to building a banking infrastructure for the unbanked, it has attracted its share of questions as to whether it is actually the right solution.
As Karen Webster noted in her commentary shortly after the Libra whitepaper went public, the crypto-based system seems to somewhat misunderstand the actual payments needs of the unbanked populations they hope to connect. Nearly half of the world’s unbanked population lives in one of seven countries: Bangladesh, China, India, Indonesia, Mexico, Nigeria and Pakistan. Most of those countries, as Prajit Nanu, CEO of InstaReM, noted in an interview, have absolutely no regulatory enthusiasm for cryptocurrency of any flavor, and it is hard to imagine that Libra could be welcomed there.
Moreover, as Webster noted, unbanked populations tend to have some characteristics in common: low education levels and extremely low income.
“These people are living hand-to-mouth, and access to a bank account alone, sadly, isn’t likely to change that fact,” she wrote.
Moreover, Webster continued, these consumers come from nearly entirely cash-dependent payments economies – which means they need an easy way to both cash in (add funds to their Libra accounts) and cash out (convert their Libra into fiat currency that they can spend locally). Libra, as it is currently explained, isn’t built to cash in and cash out of easily – which means it likely won’t work for most of the users for which it is intended.
“As low-tech as cash is, it’s trusted by people because they have it, see it, hold it, count it, store it and use it everywhere, and can access it anytime they need it,” Webster pointed out. “The success of every successful digital payments network in these economies is, therefore, linked to cash.”
Other critics, like billionaire Mark Cuban have been sharper in their questions, noting that the problems with Libra go beyond structural issues. The reality, Cuban noted, is that Libra could be a dangerously destabilizing factor in some regions where it is proposed for use.
“I think globally, and in countries where there isn’t a lot of rule of law, or a lot of government stability, or currency stability, then it could be dangerous,” Cuban said. “There’s going to be some despot in some African country that gets really upset that they can’t control their currency anymore, and that’s where the real problems start occurring.”
And in fact, it seems it’s not only despots in African countries who are concerned about the prospect of not being able to control their currency, or having to compete with Facebook/The Libra Association for control. Regulators in first-world places like the U.S., U.K., EU and Japan also have concerns – lots of them.
The Regulators React (Badly)
Worldwide nations and regulating bodies reacted quickly – and, on the whole, negatively – to the prospect of the Facebook-built project.
“This instrument for transactions will allow Facebook to collect millions and millions of data, which strengthens my conviction that there is a need to regulate the digital giants,” said French Minister of Finance Bruno Le Maire in an interview on Europe 1 radio within a day of the new announcement.
Le Maire also noted that he has asked central bank heads in G7 countries to write a report on Libra by mid-July. Markus Ferber, a senior German lawmaker in the European Parliament, said Libra should put “regulators on high alert.”
The group of nations that comprise the G7 (the U.S., Canada, England, France, Germany, Italy and Japan) also staked out an early position noting some concerns. The coalition of nations is calling for an investigation into the supposed risks of cryptocurrencies and how they would affect the current financial system. To carry out that investigation, the G7 is looking to form a working group with the International Monetary Fund (IMF) to determine whether there are proper controls against the threat of money laundering with cryptocurrencies in general, and Libra in specific.
Japanese authorities have also formed a task force – made up of the Bank of Japan, the Ministry of Finance and the Financial Services Agency – to study the impact of Facebook’s proposed cryptocurrency. That group is tasked with determining how Libra will impact monetary policy, as well as the stability of the financial landscape. The group aims to work on policies that will deal with Libra’s effect on payments, monetary policy, regulation and taxes.
As for regulatory reactions that were slightly more positive, Mark Carney, the governor of the Bank of England, has affirmed he will keep an “open mind” when it comes to Libra. However, he has also noted that as far as the Bank of England is concerned, Libra should not expect an “open door,” and that it will have to live up to the “highest standards.”
Stateside, lawmakers have been vocally pretty dubious.
Virginia Senator Mark Warner expressed worry, given Facebook’s rocky relationship with consumer trust in the U.S.
“The idea that we are going to turn over our financial data and information to that company – I think they have a big uphill effort to try to convince Americans that they ought to trust in Facebook’s proprietary interest in keeping their data secret,” he said.
Democratic Representative Maxine Waters has gone farther, demanding that Facebook cease and desist in developing Libra until they can get on the same page as regulators and legislators.
And then, just a few days before Marcus’ testimony to the Senate was slated to kick off, a draft bill to limit “Big Tech’s” entry into finance and crypto has leaked online.
The early draft of the “Keep Big Tech out of Finance Act,” which was leaked on July 13 from the U.S. House of Representatives Financial Services Committee, aims to prevent big tech firms from becoming financial institutions.
“A large platform utility may not establish, maintain or operate a digital asset that is intended to be widely used as a medium of exchange, unit of account, store of value or any other similar function, as defined by the Board of Governors of the Federal Reserve System,” the document said.
The discussion draft defines “a large platform utility” as a tech company that earns annual global revenues in excess of $25 billion – a definition that would surely stop Libra dead in its tracks if the bill were to pass.
Though most experts agree it is unlikely to do so.
But it does serve to highlight that tomorrow, David Marcus will walk into an audience of legislators that is dubious at best, and outright hostile at worst. Marcus, per the remarks he released prior to tomorrow’s testimony, seems confident in Facebook’s and Libra’s ability to bring the doubters on board.
We’ll update you tomorrow on how that initial effort goes.