Facebook’s plans to launch Libra, a global crypto-currency, and a stable coin, is the talk of the regulatory world. But will it be a force for good or could it destabilize financial services and result in massive security problems?
In Facebook’s words, Libra is a global, digitally native, reserve-backed cryptocurrency built on the foundation of blockchain technology. People will be able to send, receive, spend, and secure their money, enabling a more inclusive global financial system. It is due to launch in the first half of 2020, providing it secures the go-ahead from Swiss regulators, where the venture is based.
However, globally, regulators are making their concerns known loud and clear. Bank of England governor Mark Carney said there were no plans to grant Facebook an ‘open door’ even if an ‘open mind’ was being maintained. In the US, Facebook was told to halt its plans while regulators studied the launch in detail, while France called for the establishment of a working group of central bankers and the IMF to study stable coins.
Facebook has outlined its plans in a 100-page white paper but there remain many unanswered questions swirling around. These include, whether bank status will be sought, what type of license is required, if it will hold deposits or even if it will need to become a new category of financial services provider. Clearly there are also concerns about hacking and criminality and what would happen if users lost money. Facebook is powerful but it must still abide by rules, the problem for regulators is whether new rules are needed.
Seeing the positives
Many would argue that we need innovation in financial services and Facebook claims Libra will bring benefits, particularly to the 1.7 billion individuals who do not have bank accounts.
Libra aims to facilitate cheap transfers of money globally and in time, open up other channels such as public transport and retailers. It will also offer a digital wallet to hold users’ currency through a subsidiary called Calibra and this will be integrated into Facebook Messenger and WhatsApp.
CEO Mark Zuckerberg said:
“Being able to use mobile money can have an important positive impact on people and their lives because you don’t have to always carry cash, which can be insecure, or pay extra fees for transfers. We aspire to make it easy for everyone to send and receive money just like you use our apps to instantly share messages and photos.”
Stable coins – more stability
Libra is intended to be less volatile than some other crypto-currencies – such as Bitcoin – because it is a stable coin, meaning it will be pegged to a basket of currencies and assets. It also does not require mining – users simply buy it. In contrast, crypto-currencies such as Bitcoins have values based on supply and demand and this can result in huge price swings.
Value in validators
Facebook has some trust issues and perhaps wisely, is not running the project alone. It has set up a group of 28 ‘validators’ and is planning to grow this to 100. It was reported each validator paid up to $10 million to join and these include some big names such as Uber and Spotify as well as Visa and Mastercard – as yet, there are no banks. Although some have questioned why payment services providers would want to work with Facebook, others have said that being part of a potential disruptor is also an effective hedging strategy.
Facebook may be the leading player in the project, but it is operating at a distance – the overarching Libra Association, which the validators and Facebook are part of – has been set up as an independent, not-for-profit governing entity based in Geneva, Switzerland. Although Facebook has run into past data security issues – such as the Cambridge Analytica scandal – it states the Libra blockchain has been built to “prioritize scalability, security and reliability, as well as the flexibility required to evolve over time”. Blockchain acts as a verifiable database of transactions and once transactions are entered, they cannot be changed.
Will Libra appeal to those seeking to launder money? Facebook has said it will comply with all regulations even though crypto-currencies have a track record in attracting wrongdoing. Libra transactions will apparently be visible but those doing them can be anonymous until they move money into traditional accounts. Meanwhile the Calibra wallet will have a verification process, but security experts will want to know more before they can endorse this. Facebook has also said it will not share data from Libra with the main social networking site – but said exceptions could include doing this to ‘keep people safe’.
Exciting or worrying times? Certainly, a rise in Facebook’s share price after the announcement suggests there is support and a place for Libra. The challenge now is to convince the regulators that the risks do not outweigh the benefits.