Facebook wants to reinvent money and disrupt global finance. But regulators and its trust deficit may block its ambitions.
The social media giant has finally announced its foray into fintech with a new digital currency named Libra.
Libra has been pitched as a “global currency” that could “reinvent” money and transform the global economy “so people everywhere can live better lives”.
Facebook says its target is to launch Libra in the first half of 2020.
What is Libra?
Libra is a virtual currency that can be bought by users on platforms like Messenger and WhatsApp (owned by Facebook) and stored in a digital wallet called Calibra, which would be a standalone app.
Libra will initially be used for transactions between individuals - for example, to purchase a cup of coffee, shop online or pay for a cab ride. Over time, Facebook aims to establish Libra as the first mainstream global crypto-currency, which can be used by anyone with an entry-level smartphone and an internet connection to buy anything and to avail a variety of traditional financial products from banking services to loans.
Technically Speaking: The transactions on Calibra would reportedly be seamless, charge close to nothing, and be as easy to conduct as sending a text message. The currency is built on the “Libra Blockchain” software, which is open source so that anyone can build on it.
According to Facebook’s white paper on the project, the software will securely store transactions as a single data structure that records the history of transactions over time, instead of as blocks which is the present practice.
Now that we know what Libra is, it is important to understand what it is not – and it is not your typical Bitcoin-like blockchain-based technology. This is for two main reasons:
Backed by Money: To avoid the wild fluctuations that plague most crypto-currencies today, Libra is to be backed by a reserve of real assets (to be held by a “geographically distributed network of custodians”). This Libra Reserve Facebook argues, would ensure the stability of the digital currency’s value over time.
How Would This Be Ensured?: According to the social media company, the fiat currency generated from users and investors purchasing Libra will be invested as bank deposits or as “short-term government securities in currencies from stable and reputable central banks”.
The reserves themselves would expand over time as more people engage with Libra. The assets would increase in quantity and value from mainly two sources – users and investors, as well as any yield gains coming in organically. (The users will purchase Libra units from Facebook’s platforms like Messenger and WhatsApp. And investors can contribute to the project in exchange for both Libra units and future returns.)
This means that while users can purchase Libra with fiat money, they can also sell their Libra for local money at (as the white paper puts it) “an exchange rate”. This exchange rate, Facebook purports, should not fluctuate much as the reserve will comprise low-risk assets to minimise volatility.
So, money by users and investors will be exchanged for Libra, which would be backed by a fiat currency to ensure the digital currency's stability. And the money that the Libra units were bought with will be kept in a bank and invested in low-risk assets, the interest generated from which would be used to pay the project's investors and generate revenue.
Your Data is Secure?: To allay concerns over data security, Facebook says Calibra (which will conduct Libra-based transactions) will be an independent subsidiary.
And to govern the entire project, the Libra Association, an “independent, not-for-profit membership organisation...comprised of diverse and independent members” will be founded in Geneva, Switzerland.
The Association will include businesses, charities, academic institutions and NGOs and will eventually have 100 members, of which Facebook will be one (the Association already has 27 members, including MasterCard, Visa, PayPal, Uber, Spotify and Vodafone).
Libra: Challenges & Obstacles
Facebook’s plans to disrupt global finance will undoubtedly sound mellifluous to its many millions of apostles.
But to regulators, policymakers and the millions who see the company as a serial privacy violator and an untrustworthy behemoth hell-bent on eliminating competition and flouting the law, Libra just looks like a new attempt to hegemonise and monopolise.
We Know You Don’t Trust Us: Even as Facebook announced its new project, it rushed to assure the public that measures to ensure the safety of user information and the integrity of data have been put in place.
By making Calibra a standalone app and the Libra Association an independent body, Facebook obviously hopes its distance from the project’s administration will convince the public, merchants and investors that users’ privacy will be taken care of.
This reflects its tacit acknowledgement of the lack of public faith in its intentions after the numerous controversies surrounding it in recent years.
The acknowledgement is well founded. Cambridge Analytica, Russian bots in the US and European elections, hate speech in Myanmar, accusations of political bias, accusations of curbing free speech, a series of massive data breaches, sharing users’ personal information with third-party apps without the users’ consent – all these controversies (among several more) are still fresh in collective memory. And people are in no hurry to forget.
Regulators Are Gearing Up: Europe has already called for the regulation of Libra. US politicians from both major parties pilloried Facebook with concerns over management of the digital currency, even calling on it to stop its development.
And across the world, where crypto-currencies themselves are viewed suspiciously (if not banned outright), it is unclear how Libra will be able to gain a foothold.
In India, the regulatory framework for digital currencies is hostile to say the least. The RBI has said that it doesn’t want crypto-currencies to spread like “contagion” and considers them harmful. Meanwhile, the draft Banning of Cryptocurrency and Regulation of Official Digital Currency Bill 2019 wants to jail anyone who “mine, generate, hold, sell, transfer, dispose, issue or deal in crypto-currencies”.
After Facebook revealed the project, some reports suggested that the company might skip India entirely in its launch of Libra, given the RBI's restrictions on crypto-currency transactions.
You’re Not Crypto Enough: Crypto enthusiasts have their own problems with Libra. As explained earlier, the currency will not be truly blockchain technology since it will be backed by reserve assets and will comply with regulatory norms mandated by central banks – two things that are in violation of blockchain principles.
Conflicts of Interest: The Libra Association will have 100 members, and many of these will be multinational corporations with deep pockets. And one class of contributors to the Libra Reserve will be investors, who will purchase Libra units for fiat currency.
The members of the Libra Association can also be investors in the Libra Reserve, purchasing Libra units in exchange for fiat currency. They are also responsible for "legitimising" the acceptance of Libra units through their own ecosystem e.g. accepting it as a viable payment currency for their services to the common public. By what criteria can they be considered as independent regulators?
Unless Facebook has a reliable workaround, policymakers and financial regulators might find this loophole grounds for stalling the project, if not disqualifying it altogether.
History Repeats Itself?
While some crypto commentators are optimistic about the project’s potential, some are worried that Libra Blockchain (which would be an open source platform that “any consumer, developer or business” can build on) will lead to a second Cambridge Analytica.
In 2013, a data scientist was able to harvest many Facebook users’ information because of the company’s lax approach to data mining (he accessed the data using the platform’s Open Graph feature, which was launched in 2010). A political consultancy firm, Cambridge Analytica, was able to use this data, mine even more, and chart the users’ political ideologies to target specific political ads at these demographics. Overall, 87 million users were victims of this gross violation of privacy.
Libra’s approach to public innovation is as lax as Open Graph’s, if not more. There are fears that this low barrier to entry will lead to yet another data breach – only this time, instead of passwords and usernames it would be crores of digital currency that will be stolen.
Libra: Daring Disruption or Hare-Brained Hassle?
We must remember that this is not the first time Facebook has dabbled with fintech. Around 2010, the company had launched Facebook Credits, a virtual currency that enabled people to purchase items on its apps.
The project was disbanded in less than two years after it failed to generate traction.
Now, as Facebook expands its plans to become an all-encompassing platform not just vital but indispensable to our lives (a Western WeChat, basically), it will be interesting to see if users (and, crucially, regulators) forgive Menlo Park for its many sins and give it a second chance.
If the public is unconvinced and sceptical, Libra will be another Facebook Credits. However, if the public is indulgent, Libra could be the next big thing.
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