The Business Times
Challenges ahead for Facebook’s Libra
Emir Hrnjic and Nikodem Tomczak
Facebook’s recently unveiled digital currency, Libra, has drawn much excitement over its potentially transformative impact.
Facebook’s 2.5 billion users around the world and the firm’s extensive experience in developing user-friendly apps undoubtedly provides Libra with a huge head start. Users will be able to use Libra to purchase goods, transfer money, as well as for in-app purchases on the Facebook Marketplace, WhatsApp, Instagram, and other affiliated platforms.
This gives Facebook an unrivalled ready market through which to accelerate Libra’s early adoption.
One crypto insider tweeted that Facebook’s announcement would “go down in history as THE catalyst that propelled digital assets… (including bitcoin) to mass global consumer adoption.”
Yet despite all the breathless excitement, achieving Facebook’s high ambitions for Libra will not be without challenges. Critics have warned that Libra will effectively be Facebook’s private currency and financial regulators have been cautious at best in their response to the news.
The Financial Times proclaimed that Libra was “nothing more than a brazen attempt to override national monetary sovereignty by creating a global-scale Federal Reserve equivalent.”
So is Libra really the game changer some have suggested? Here are three main challenges Facebook’s new cryptocurrency needs to overcome.
Libra will be pseudonymous like Bitcoin. All transaction data will only be available to and tracked by the members of the consortium who have access to its network. Facebook says it will not be available to the public.
The social network’s business model centres on collecting droves of personal data that allows advertisers to accurately target their marketing efforts. However, following some major data privacy scandals – think Cambridge Analytica as just one example – the firm has been under huge pressure from regulators to be more stringent about how this data is used.
Facebook faces an uphill task of convincing the public that Libra will be serious about data protection. Since Facebook’s official position is “there is no expectation of privacy” with Facebook data, it is not clear whether that culture will be reflected in Libra’s policies in the future.
Additionally, while Facebook’s wallet, Calibra, may not share its user data with Facebook, there is nothing preventing this or other apps built on the Libra Blockchain from having access to Facebook’s data. In fact, it would be very advantageous for these apps to tap into Facebook data for credit scoring and advertising purposes, for example.
Indeed, access to Facebook’s personal data trove and its potential misuse or manipulation is what many regulators fear.
While cryptocurrencies have a great potential, they have a very bad reputation due to widespread scams, frauds, and hacks that have cost investors billions of dollars. As regulators are trying to protect average consumers, their scepticism toward Libra is justified.
Anticipating regulators’ reluctance, Facebook discussed the launch of its cryptocurrency with central banks, including the US Federal Reserve and the Bank of England. Mark Zuckerberg reportedly met with the Governor of Bank of England, Mark Carney.
After the currency was announced, while Mr Carney publicly stated that the Bank would have “an open mind” about Libra, he also called for “strict regulations” if it takes off. What these might be remains to be seen.
In the US meanwhile, Congresswoman Maxine Waters, chair of the House Financial Services Committee, requested a moratorium on the development of Libra, comparing it to “starting a bank without going through any [regulatory] steps.” She also announced that Congress would hold a hearing on Libra.
And in France Finance Minister Bruno Le Maire said that “it is out of question [that Libra will] become a sovereign currency,” citing concerns about privacy, money laundering, and terrorism financing.
DISTRIBUTED BUT CENTRALIZED
Economist and former US presidential advisor Nouriel Roubini, a famous crypto sceptic, stated bluntly that “[Libra] has nothing to do with blockchain [since it is] fully private, controlled, centralized, verified and authorized by a small number of permissioned nodes.”
Indeed, Libra is centralized and controlled by traditional financial intermediaries such as PayPal, Visa, and Mastercard. Tech giants including Uber, Lyft, and eBay have also invested at least U$10 million each to join the Libra Association. As of now, there are 28 founding members, with plans to expand to 100 members by the Libra Blockchain launch next year. These founders will act as “nodes” to continuously verify and add transactions to the Libra ledger.
While the transacting parties in Bitcoin and other decentralized cryptocurrencies do not need to trust each other, financial participants will have to trust Libra and the validating node operators. Indeed, trusting financial institutions proved disastrous to many customers prior to the financial crisis of 2007-2008. Moreover, blockchain purists denounce Libra for going against decentralization and trust-less nature in favour of centralized consensus protocols.
While cryptocurrencies aim to eliminate powerful intermediaries, Libra’s concept puts intermediaries back in the middle of the system enabling them to make excessive profits and capture valuable data.
At its development conference in May this year, Mark Zuckerberg said one of Facebook’s key development areas was to “make it as easy to send money to someone as it is to send a photo.” He identified payments and private commerce as “one of the areas we're really excited about.”
In fact, Facebook seems eager to build on its vast social media user base to dominate financial services. A parallel could be the case of Alibaba’s Alipay in China.
In order to reach that goal, Facebook will have to overcome significant hurdles. Whilst investors seem excited and optimistic about Libra – as evidenced by the five per cent increase in Facebook’s share price – it faces an arduous task ahead.