Less than 12 hours after it was announced, Facebook’s new libra cryptocurrency was already causing the kind of concern in European financial circles that even Bitcoin has not been able to generate.
A number of elected and banking officials are already worried that the libra could grow big enough to compete with their traditional fiat currencies.
“That Facebook creates its own currency, a transaction instrument, why not,” French Finance Minister Bruno Le Maire told French business publication Capital. “In contrast, it is out of the question that [Libra] becomes a sovereign currency.”
That “must remain in the hands of states, and not private companies, which respond to private interests,” he added.
European concerns about the Libra project were probably inevitable, given Facebook’s legal problems with privacy rules in the E.U.
Bank of England Governor Mark Carney addressed libra at the European Central Bank’s (ECB) annual symposium in Portugal on June 18, according to Bloomberg. “Anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation,” he said.
Global organizations like the G-7, the International Monetary Fund, Bank for International Settlements and Financial Stability Board will have to look at libra “very closely and in a coordinated fashion,” he added.
It didn’t help that the Geneva-based Libra Association (in which the social media giant in theory has only one vote) described the Facebook-invented libra coin as a “global currency and financial infrastructure that empowers billions of people,” that will “reinvent money [and] transform the global economy.”
And while that’s not very different from the way cryptocurrency advocates describe the goals of bitcoin [BTC] and other digital currencies, with Facebook and its WhatsApp messaging service bringing libra to 2.7 billion people on its launch, it’s being taken very seriously.
Compare that to ECB President Mario Draghi’s May declaration that cryptocurrencies, “are not significant enough … that they could affect our economies in a macro way,” according to Cointelegraph. That comment was based on a May 2019 paper by the ECB’s Crypto-Assets Task Force, which concluded that “crypto-assets are not effectively competing against cash and deposits.”
The American backlash
The response in the U.S. was even harsher, with House Financial Services Committee Chair Maxine Waters (D-CA), calling for a moratorium on moving forward with Libra until congress can hold hearings on it, CNBC reported. While the core of the concerns she cited were about Facebook’s less-than-sterling record with private consumer data, Waters was skeptical about cryptocurrencies in general.
“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users,” she wrote. “Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data … Facebook has also been fined large sums and remains under a Federal Trade Commission consent order for deceiving consumers and failing to keep consumer data private.”
She was not alone on this. Sen. Sherrod Brown (D-OH) took to Twitter to say “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
The Senate Banking Committee didn’t wait for the formal announcement to call for more information about Facebook’s commitment to data protection, privacy, and regulatory compliance in an open letter to Facebook CEO Mark Zuckerberg after news of the project became public in May. The company has not responded as of yet.
Still, there’s plenty of suspicion in the cryptocurrency world, too. Binance cryptocurrency exchange CEO Changpeng “CZ” Zhao tweeted out, “Facebook Libra coin don’t need KYC. They have so much more data on the 2 billion people. Not just name, id, address, phone number. They know your family, friends, real-time/historic location, what you like… They know you more than yourself. And now your wallet too. Best AML!”
Citing the lack of a clear regulatory framework for cryptocurrencies in the U.S., Waters said, “[r]egulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks, and trading risks that are posed by cryptocurrencies.”
Regulatory concerns abound
It’s not like Facebook didn’t see this coming. Earlier this month, outgoing Commodity Futures Trading Commission (CFTC) Chair Christopher Giancarlo said that the social media company was already in “very early stages of conversations” with his agency. And the Libra Association has registered as a money services business (MSB) with the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN), The Block noted. But that’s just one of the many regulatory requirement money transfer companies have to fulfill.
Facebook has gone to great lengths to separate itself from control of the Libra Association, an independent entity in which it has just one of the 28 votes on the Libra Association Council directing the project. The plan is to grow that to 100 voting members by the time libra launches in the first half of 2020.
Along with its libra coin, the Libra Association also intends to launch a Libra Investment Token for voting members of the Libra Association. That token will entitle holders to a share of the interest earned on the basket of currencies and government bonds that will back libra coins. Facebook said that will be classified as a security, meaning talks with the U.S. Securities and Exchange Commission (SEC) are either ongoing or about to start.
Then there are the anti-money laundering (AML) and know your customer (KYC) regulations. Libra has addressed them to an extent, noting the “network’s main endpoints will need to follow applicable laws and regulations and collaborate with law enforcement.” And, Facebook-owned Calibra will requiring a government-issued ID for its digital wallets
But there is plenty of concern about the ability of cryptocurrencies in general to avoid being used by criminals and terrorists. With Facebook’s size, Libra instantly becomes a bigger threat.
In Europe, France’s Le Maire demanded a “guarantee that this instrument of transaction can not be diverted to finance terrorism or any other illegal activity.”
Moving away from permission
The Libra white paper said that while the open-source Libra Blockchain will initially be a permissioned blockchain open only to companies and organizations that fit criteria that amount to a high barrier to entry.
The goal, however, is to transition to a permissionless network within five years. It uses a proof of stake model.
To become a Libra Association member and sit on its governing Council currently requires the $10 million investment to host a blockchain node. Companies must be large, with more than $1 billion market value or $500 million in customer balances, and reach at least 20 million people per year. Being an industry leader as shown by membership in lists like the Fortune 500 or S&P 1,200 is also necessary.
There are different criteria for blockchain and cryptocurrency companies, such as $1 billion under management or more than $100 million in assets in custody or staked. Nonprofits and universities have other, reputation-focused criteria.
“The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network,” the white paper said.
Whether permissioned or permissionless, the Libra Blockchain “will be open to everyone,” according to the white paper. “Any consumer, developer, or business can use the Libra network, build products on top of it, and add value through their services. Open access ensures low barriers to entry and innovation and encourages healthy competition that benefits consumers. This is foundational to the goal of building more inclusive financial options for the world.”