In our first take on Facebook’s Libra, we touched upon its basics aspects and left the more complex aspects for a later blog. So much has changed since then for Libra, and not positively so. In this article, we give a quick status of Facebook’s Libra project as there have been some interesting and not-so-positive developments for Facebook’s ambitious digital currency project since the announcement of its launch.
Quick facts about Libra
Libra is Facebook’s global digital currency, a GDC, that is backed by a group of companies and organizations, known as the Libra Association. In addition to Libra Association, the 2 other important aspects of the GDC are the Libra Reserve and the Libra Blockchain. The Libra Reserve backs the value of each Libra, unlike a cryptocurrency. The Libra Blockchain is the technology and the “financial infrastructure” behind each Libra unit.
Libra Association has following 28 founding partners (other than Facebook itself): -
Payments Sector - Mastercard, PayPal, PayU, Stripe, Visa
Tech and consumer - Booking Holdings, eBay, Calibra (Facebook’s subsidiary), Farfetch, Lyft, Mercado Pago, Spotify, Uber
Telecoms - Iliad, Vodafone
Blockchain - Anchorage, Bison Trails, Coinbase, Xapo Holdings
Venture Capital - Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures
NGOs - Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking
At a time, Facebook expected a total of 100 companies to back Libra at the time of its scheduled launch in 2020. It is noteworthy that tech giants like Amazon, Apple, Google and Microsoft have not yet signed up as a member of the Libra Association. Similarly, there is no bank that signed up with Libra as an original founding partner due to the lack of clarity on regulation.
Libra is actually what is a special class of cryptocurrencies known as a stablecoin. The concept of a stablecoin has emerged primarily due to the volatility in the price of existing cryptocurrencies such as bitcoin. A stablecoin is designed such that its price doesn’t exhibit uncomfortable volatility and therefore is backed by a basket of assets. Such assets could be cryptocurrencies, fiat money or commodities. On similar lines, Libra is backed by the Libra Reserve which is nothing but a basket of fiat money, i.e. highly liquid global currencies, such as US Dollar, Euro, Pound Sterling and Yen. At the moment, the largest stablecoin, by market capitalization, is the controversial cryptocurrency Tether.
Right after the launch of Libra, regulators, politicians and central banks have come out in direct criticism of the GDC. Their primary concerns are safety of money, security of data, money laundering, financial stability, consumer and investor protection, tax evasion, data privacy, consumer choice and anti-trust concerns. International Financial Stability Board (FSB), UK’s Financial Conduct Authority (FCA), Bank of England (BoE), and G7 have explicitly stated that they will not let Facebook launch Libra without close and thorough scrutiny.
Specifically, the FSB said in Jun 2019 that these new crypto-assets “warrant close scrutiny” and that FSB, with other bodies, will “closely monitor the risks” to find and fill the regulatory gaps on a priority basis. FSB admitted that current regulations will not suffice for these new assets and therefore “a different kind of regulatory response would be needed” for the “potential systemic importance” of such assets.
The Financial Conduct Authority of UK said in Jul 2019 that the size and scale of Libra poses ”questions for society and government more generally about what is acceptable and desirable” as far as crypto-assets are concerned. FCA plans to look at all crypto-assets on a case-to-case basis and assess whether each such asset “would benefit competitive markets and consumers, or cause harm by raising complexity and other risks.”
Mark Carney, the Bank of England governor, indicated in June 2019 that the Bank of England was keeping an “open mind but not an open door” to Libra. He, in fact, defended Libra when he said in August 2019 that a GDC (not necessarily Libra) could prove to be an alternative reserve currency to the Dollar in order “to end a savings glut resulting from the ultra-low interest rates” as the dominant position of the US Dollar is proving to be a “barrier to a sustainable recovery”. However, Carney did explicitly indicate that Libra was not in a position to be such an alternative but a well-thought out GDC could. In his Jackson Hole speech, Carney also said that a new "synthetic" currency from central banks, termed CBDCs (Central Bank Digital Currency), should be considered instead of currencies backed by private parties e.g. Libra. Later, in October 2019, Carney further seemed to defend GDCs supporting Libra’s ambition to speed up and reduce costs of money transfers. Carney, while mounting defenses for GDCs and stablecoins, indicated that the responsibility of creating, implementing and monitoring such assets and related technologies can’t be trusted with the social media. As a result, the leading central banks need to bring themselves up to speed despite their inability to be the forebearers of innovation.
As recently as October 2019, the Financial Policy Committee (FPC) of the Bank of England (BoE) laid down a set of strict “rules of engagement”, that Libra and other cryptocurrencies must follow in order to do business in UK. It said: -
“Libra has the potential to become a systemically important payment system… The terms of engagement for innovations such as Libra must be adopted in advance of any launch... U.K. authorities should use their powers accordingly.”
Effectively, the FPC said that so-called digital wallets or e-wallets are akin to current accounts or checking accounts that are subject to certain rules like deposit insurance, liquidity and capital requirements. It also said that for now, it will apply existing rules instead of resorting to new rules.
Around August 2019, EU considered early anti-trust scrutiny amid concerns that Libra might provide unfair advantage to its founding partners. In October 2019, it sent a questionnaire to Facebook. The questions are an exercise to create a pathway for future regulation on digital currencies and stablecoins.
Facebook started persuading various merchants and customers to consider using Libra in the month of Jun 2019. Its major challenge, since then, has not been the persuasion itself. It’s also found it difficult to explain something that lies between a physical currency and a cryptocurrency to a lay person. In addition to above, a recurring challenge that Facebook itself has been facing is trust since the Cambridge Analytica scandal.
However, the most significant challenge faced by Facebook’s Libra effort, till date, has been the regulatory disturbance. As a result, out of the 28 original founding partners, several have pulled out indicating their concerns that Facebook hasn’t done enough to address regulatory backlash… especially over money-laundering concerns. PayPal pulled out in October 2019 indicating it “remained supportive of Libra's aspirations and would continue to discuss how the two could work together in the future”. In addition to PayPal, other founding partners that have pulled out are eBay, Stripe, Mastercard, Visa, Mercado Pago and Booking.com. With these 7 important backers out, the Libra Association now has 21 founding partners. Several of these leavers believe Facebook underestimated the regulatory bar, oversold their commitments, and didn't do enough to fan the fear that Libra was too closely connected to Facebook despite all founding partners having equal votes.
Facebook has also officially admitted that “regulatory bar is too high for the planned launch of Libra in 2020” promising “Libra would not operate anywhere in the world until it gets regulatory approvals in EU and US”.
Mark Zuckerberg admitted in a published testimony to US Congress (released before a hearing in front of House financial services committee) that Facebook is in a poor position to promote its plans to launch a global cryptocurrency. He also said that Facebook is keen to hand over leadership of Libra to an association of its partners. Libra would never share customers' financial information with Facebook without their permission or unless obliged by law, he added. Facebook also stands ready to work with Fed to make sure Libra cannot interfere with monetary policy.
Later, in a hearing in front of House financial services committee, Zuckerberg said, "China will steal a march on American Technology if US blocks FB's plans for a GDC”. He agreed to pause the launch until Congress has had a chance to legislate on how to regulate cryptocurrencies. He, however, largely refused to bow to pressure insisting that Libra Association would be based in Switzerland. In a concession, he agreed to consider having Dollar as the main currency backing Libra.
So, we believe, overall Libra has definitely ruffled more feathers than it has gained merchants. However, like any disruptive innovation, it has laid an important fact bare for all to see that is the need to solve the real problems in finance. The announcement of Libra has brought urgency and seriousness to look at global digital currencies (GDCs) and the need for government-issued electronic currencies i.e. e-cash. Many central banks have already undertaken theoretical research and several have undergone trials. As the saying goes, “What doesn’t kill you, makes you stronger.”
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