Facebook says it will work with regulators in order to get Libra off the ground. Everyone has their doubts about this launch.
Mark Zuckerberg and friends are going to save the world. They are going to bring a form of capital to the unbanked, most of them residing in emerging and frontier markets. Economies of scale, and all. It’s going to be great. But imagine this: A foreign company, arguable one of the most distrusted names in social media, comes to India and tells its microlenders that it wants to compete against them. It has this cryptocurrency called Libra. It doesn’t charge banking fees. What are the odds of nationalist Indian Prime Minister Narendra Modi saying, Sure guys, come in on! This is not only regulatory nightmare in the U.S., it’s not even something microlenders in India are going to want to welcome into their country.
“Indian regulators already have United Payments Interface and 24/7/365 real-time free payments across India,” says Shamir Karkal, CEO at Sila and a pioneer of Simple Bank, a digital bank founded in 2009 and later acquired by BBVA for $117 million in 2014. Karkal says IndiaStack, a set of linked application programs across government and the private sector for cashless service delivery is ahead of the game anyway and is “so much better than Libra that its hard to imagine regulators allowing it into the country.” “It’s like telling the Germans that you want to launch a coal-powered car business in their country,” says Karkal, a graduate of Bangalore University and the Tepper Business School at Carnegie Mellon. “First they’d laugh, then they would ban you. Indian regulators will most likely do the same with Libra.”
Libra isn’t a done deal yet. Facebook only released the white paper this week. The cryptocurrency world has jumped all over it. The takeway is twofold. Crypto is legit, and other big names like Amazon will use this as a petri dish for their own cryptocurrency someday.
The second takeaway is: Oh, God, not Facebook.
Libra will not be launched in the U.S. initially. It will target smaller markets, where it can woo those dependent on microcredit. In Facebook’s home, the IRS and Treasury and other regulators are sure to frown about this. The IRS is probably not going to like Libra. Facebook said it will work with a country’s financial regulators in order to make sure their new cryptocurrency passes muster with the authorities. Photo: Joshua Doubek/Wikimedia Commons/CC BY-SA 3.0
“The U.S government isn’t sitting back and just watching,” says Clement Thibault, a senior analyst at Investing.com, a news and information website. The House Financial Services Committee has already requested that Facebook put a moratorium on Libra’s development until Congress and regulators have the opportunity to examine these issues and take action. “Big Tech is now one step closer to shifting the balance of power away from government agencies,” says Thibault.
That means issuing a currency, based on a basket of other currencies and assets, without a monetary authority. Libra would be a stable coin, unlike Bitcoin, which has massive volatility.
“Monetary policy would be totally out the window,” says Naeem Aslam, chief market strategist for ThinkMarkets in London. “It’s a major challenge. The U.S. would regulate Libra big time, and this comes at a time when Facebook is already being scrutinized by regulators in Europe and in the U.S.” Facebook said it will shape the project to abide by government rules. Libra isn’t meant to defy government regulators since the value of the cryptocurrency hinges on the value of sovereign currencies it is backed by.
Libra will initially be controlled by some of the world’s largest companies, who will profit directly from the use of this currency. It will likely be integrated into existing financial structures via VISA, Mastercard and PayPal.
Cryptocurrency aficionados frown upon the Libra as much as regulators and the American congress. This setup Facebook outlined in its white paper is exactly what cryptocurrencies were created to avoid. “The end goal of any monopoly is to become ‘Too Big To Fail.’ Libra is how Facebook plans to become the latest vampire corporation in modern capitalism,” says Kadena’s CEO, Will Martino. Prior to founding the New Haven, Connecticut-based blockchain developer, Martino led JPMorgan’s blockchain group and was a senior science advisor at the Securities & Exchange Commission (SEC). “Libra represents Facebook and Silicon Valley taking a major step towards becoming a sovereign state. Do we really want corporations becoming governments?” Martino asks. “From the corporation that has sold out user privacy, Facebook now offers you a bank account without interest rates, insurance or oversight. There are no term limits on who runs Libra. You can’t vote out Mark Zuckerberg for screwing up monetary policy. How does it make sense for the CEO of a $500 billion company to control a new currency? The concept of Facebook, a large corporation accountable only to shareholders, running a currency is worse than a government.”
Facebook’s old adage of ‘Move fast and break things’ is not in line with how the SEC operates. Nor Treasury. And surely not the Internal Revenue Services, which will want its share from Libra transactions.
“Using blockchain the right way can be a game-changer allowing for new economic models based on trust with partners and users,” says Danny Brown Wolf, head of partnerships and strategy at enterprise blockchain firm Orbs, based out of Tel Aviv. “Using it the wrong way may lead to a countermovement that will only highlight the lack of trust in their existing model,” he says.
Wait, is this Facebook he is talking about? The company that says sorry, my mistake, each time someone is banned? The company that, like Google, banned cryptocurrency ads a couple of years ago, during the crypto craze caused by initial coin offerings? It is. The very one, and the very Silicon Valley companies also being accused of censorship.
Which brings up the trust factor and another problem with Facebook’s Libra. Now imagine holding a few thousand Libra — and being banned from using it? Possible?
“The obvious answer is yes. If you’re banned from the Facebook platform, how would you be able to use Libra?” says Jake Yocom-Piatt, cofounder and project lead of Decred, yet another blockchain-based cryptocurrency like Bitcoin. “I don’t think a number of the promises of crypto were ever part of the plan for Libra,” he says. “Facebook is not out to make Libra permissionless, uncensorable or immutable. There are other compelling use cases, but certainly not for most of the crypto community.”