Facebook’s launch of its own cryptocurrency, Libra, has been anticipated for quite some time. According to a plethora of world-wide news reports last week, Facebook’s Libra is to be made available across all of its platforms, including Messenger and WhatsApp.
Developed in collaboration with a number of firms, Facebook’s cryptocurrency forms part of its wider Calibra digital wallet package which will be developed into a stand alone app in the course of the next 12 months, ready for use by the middle of 2020.
Libra will be open source, and while initially it is intended to allow payments between users, it is expected to be included in digital wallets. Claiming to be creating an inclusive and open ecosystem, Facebook has stated that Libra will be included on trading exchanges. Furthermore, as a stablecoin whose value will be tied to a set of fiat currencies and underpinned by real assets including bank deposits and short term government securities, Libra can be exchanged or converted to physical currency.
The positives of Project Libra are causing some excitement in the crypto space. Facebook plans to heavily market Libra in developing countries, where the traditional banking system is notorious for managing the value of their fiat currencies. These all too often experience sudden losses in purchasing power causing intense problems for the stability of businesses, individuals and the wider economy. Access to a stable cryptocurrency will provide a viable alternative for underpinning economic activity in those countries and could, if some predictions are correct, exert an accelerative force to the implementation of monetary discipline. This in turn could improve the day to day lives of millions. While the sentiment sounds idealistic, the reality is not impossible.
Libra could also be of benefit for cryptocurrency in general, as exposure to a relatively stable cryptocurrency could lead new users towards use of other more decentralised and privacy-focused cryptocurrencies. The numbers of users on Facebook’s platforms are huge – 1.5 billion on WhatsApp and 2.4 billion on Facebook – while there are currently an estimated 35 million cryptocurrency users. Project Libra will open up the use of cryptocurrency to a vast customer base. However, this means that Libra has the potential to become the dominant medium of exchange in the crypto market; being open source and thereby allowing everyone to run smart contracts on its platform, it is expected that many wallets will appear on the network, which in itself could prove a threat to other stablecoins and smart contract blockchains. This level of potential centralisation has given rise to criticism from the crypto world. Nevertheless, it is unlikely that Libra would prove a threat to bitcoin; bitcoin is entirely different, a fully decentralised network that is meant to be censorship resistant and permissionless.
However, many of the world’s regulators continue to be wary about cryptocurrencies and the greatest threat to Libra’s success could come from the regulators. The parties behind Libra are subject to regulations and therefore the cryptocurrency is exposed to the threat of being stifled by rules. In fact, it is Libra’s inability to perform in a permissionless environment that has given rise to the question whether it is in fact a cryptocurrency at all, or whether it will simply become an extension of the existing financial system. Libra already cannot operate in countries that have banned cryptocurrencies or are under US sanctions, such as Iran.
The announcement by Facebook has sparked heated debate across the world, with strongly expressed views across a spectrum of opinion. As is perhaps to be expected, financial institutions have reacted negatively, with the Bank of England’s Governor, Mark Carney, stating that the Bank of England is keeping an “open mind but not an open door” to Libra.
The concerns are complex, ranging from nervousness at this latest addition to the threats posed by disruptive use of technology that will continue the trend for decentralising away from traditional institutions, to genuine fears on security and privacy. According to recent reports in Bloomberg, French Finance Minister, Bruno Le Maire has observed that Libra must not be allowed to become a sovereign currency, while a German member of the European Parliament has stated that regulators should be “on high alert”. Meanwhile, in the USA, House Financial Services Chairwoman, Maxine Waters has requested that Facebook halt its cryptocurrency plans for the time being.
These concerns are not without foundation. Facebook’s recent privacy scandal and the fact that user data could be manipulated to achieve specific ends, such as influencing election results, are features of the social media platform that have created a high degree of public and regulator discomfort. Project Libra requires users’ bank details and any vulnerability in Facebook’s system could expose millions of accounts to fraud. Bruno Le Maire spoke on Europe 1 radio saying: “This instrument for transactions will allow Facebook to collect millions and millions of data, which strengthens my conviction that there is a need to regulate the digital giants.”
With Facebook yet to make clear its vetting structures, Mark Carney added concerns regarding the risk of Libra being used to fund terrorism and money laundering and Markus Ferber, a German parliamentarian has spoken to Bloomberg about his fears that Facebook could become an unregulated “shadow bank”. From institutions and regulators alike, there have been calls for clear and strict regulations to be applied, with Carney adding his view that “anything that works in this world will become instantly systemic and will have to be subject to the highest standards of regulation.”
Where regulations are already in place, such as Gibraltar and Malta, it will be interesting to see how the regulators respond as Project Libra develops.