Facebook’s proposal to create its own digital currency has gotten a lot of backlash from global regulators. Facebook has burned down the house over and over. It’s been the subject of acidic U.S. congressional hearings and France’s finance minister went so far as to say that it was an assault on national sovereignty. Officials in other countries, including China, Germany, Italy and Australia have expressed similar concerns.
The social media giant had lined up a long list of corporate backers for the initiative, including major players in the payment space. In early October 2019, PayPal became the first company to back out of the libra coalition. That led to an exodus of other companies from the project. MasterCard, Stripe, Visa and eBay all followed PayPal and ditched libra.
Facebook first announced libra in June 2019. It formed the Libra Association in Switzerland to run the cryptocurrency project and lined up 27 companies to oversee it. Facebook also set up a subsidiary called Calibra, designed to host the financial services and payment software built on top of the libra digital currency. Why did Facebook get into crypto in the first place?
Facebook is big. It has 2.41 billion monthly active users. That’s a huge base. Even if a quarter of the users ended up using Libra for payments. That’s 600 million people, about twice the population of the United States. When a company that big and that influential plans to introduce a product that could potentially disrupt the global financial community, you can see why U.S. lawmakers are paying even closer attention to the social media giant.
Facebook’s currency chief David Marcus testified before the House Financial Services Committee back in July 2019 and said, “the reason we designed libra in such a way that Facebook will only be one among 100 different members of the Libra Association and we’ll have no special privilege, means that you will not have to trust Facebook.”
Well except, Mr. Marcus, you know better than that. You know that only Facebook has access to 2 billion people and all, all to say that, that you are just one of many is simply not true after people’s data and private messages have been stolen.
Facebook’s CEO Mark Zuckerberg testified before the House Financial Services Committee about the proposed cryptocurrency in October 2019 and said, “I want to be clear. Facebook will not be a part of launching the libra payment system anywhere in the world, even outside the U.S., until the U.S. regulators approve.”
Lawmakers worry that Facebook’s cryptocurrency, Libra has the potential to disrupt the international monetary system. If Libra becomes the currency for Facebook’s 2.4 billion or so users, to say nothing of other companies that might accept it, it could become a globally-significant currency.
Libra is going to be what’s called, in crypto markets, a stablecoin. It’ll be a pegged currency that maintains, basically, a one to one value with the U.S. dollar. That’s a different model than bitcoin. Bitcoin trades freely, and its value is determined solely upon what people are willing to pay for it.
To maintain that peg, the group that will be governing this currency, called the Libra Association, will maintain a reserve. For every dollar’s worth of Libra that is created, one dollar is going to be put into the reserve. Theoretically, that means that this reserve could hold billions or even trillions of dollars’ worth of currencies and short-term securities. That is a very powerful tool in capital markets. If that money got moved around significantly from one currency to another, it could absolutely upset global markets.
Now, that’s not to say that Facebook or the Libra Association is expected to do something like weaponize these reserves. However, this is the first time that, not a government, but a private company or group of private companies would have that kind of power.
Facebook and the Libra Association of companies backing the project say they are committed to working with authorities to achieve a safe, transparent, and consumer-friendly implementation of the digital currency. Lawmakers, who are already looking into Facebook for a number of other reasons, are not comfortable with Facebook’s power. The tech company is battling scrutiny on multiple fronts, from its role in elections to privacy to even antitrust investigations.
At the core of a lot of the distrust among governments is that Facebook has been criticized for its handling of user data before, and Libra would create a traceable record of all its users’ transactions. Just imagine a company being able to combine your identity, your online habits, and your spending patterns. That is an unprecedented ocean of data.
Regulatory scrutiny is one of the reasons Libra’s viability has been called into question, and some key companies that initially backed the project have ducked out, with Visa saying its decision to work with the project in the future depends on Libra’s ability to satisfy regulatory expectations. We’ll have to wait and see if this scrutiny from regulators makes Libra stronger or ends up threatening its existence altogether.