Why Is Libra Such a Headache for Regulators and Banks?

Why Is Libra Such a Headache for Regulators and Banks?
Photo: BTC Keychain / Flickr

For the last couple of months, there has been a continuously heated discussion on Libra, global digital currency drafted out by Facebook. While some treat it as the next logical step in the evolution of financial services and not something revolutionary, others see the next step in Zuckerberg’s quest for power and nothing less than a serious threat from a company that so far stores data on 2,7 billion users around the world. Just as Bloomberg was teasing, Libra already started to fulfill its promise to ‘bring the world closer together,’ as central banks and financial regulators have jumped in to finally share views on cryptocurrency on the level of G7 workgroup and US Congress. 


The polar criticism of Libra has spilled over to the whole world. While Capitol Hill witnessed the most intense debate during the two-day hearings, it was just one arena, and the opposite views on the role of Libra and its potential impact keep clashing on the internet. From Trump to Stiglitz, from Antonopoulos to Forbes, from Huawei in China to British parliament — who hasn’t got an opinion yet?


The public opinion on the launch was best summarized by congressman Tom Emmer during the hearings on July 17: ‘People have concerns with the amount of data you have on them, and now you want to be their money too’.


What is Libra?


Alpari Org / www.alpari.org/ 


Libra (also referred as ZuckBucks or GlobalCoin) is a reserved-backed digital currency or, if you have been following the crypto market news for a while, a stablecoin which value is pegged to fiat currencies and real-world commodities like gold. 


The organizational structure is proposed as following: 100 diverse members to comprise Libra Association when it’s fully formed, where Facebook will only have 1 vote and no control over the whole organization. At the moment it has already partnered with 27 allegedly independent companies in payments, tech, telecom, blockchain, venture capital, and non-profits. For Libra to appear in users’ pockets, a digital wallet Calibra will be offered by eponymous Facebook’s subsidiary, led by David Marcus, ex-president of PayPal and former board member of Coinbase. The awaited wallet will be born to the family of other Facebook’s applications, such as Messenger, WhatsApp, and Instagram. 


Libra’s marketers make it sound like the coin is the solution the world is long overdue. Not only will the company ‘meet if not exceed the standards of the global financial system,’ but also improve its integrity, fighting terrorism and money laundering, as well as safeguarding privacy and consumer protection. Given that Facebook’s digital money will allow for accessible, cheap and safe peer-to-peer transactions, it declares it will solve the problem of the unbanked, as its adoption will lead to greater financial inclusion. But let us all just stop them right there and take a closer look.


What’s the problem with it?



  • New asset class?


A great deal of the scrutiny comes from the inability to easily put a label on what Libra actually is. Is it security? Is it a commodity? Is it an exchange-traded fund? David Marcus, the head of the project, answered ‘no’ to all of these questions at U.S. House Committee on Financial Services. Being none of the above, it doesn’t have to comply with corresponding regulations and have appropriate licensing. The definition of a ‘payment tool’ is less controversial than the pretentious ‘stable global cryptocurrency’ from the official webpage, since it can hardly be called a cryptocurrency, but it is just as vague as David’s answers during the congressional hearings. It’s not clear how the company that wants to avoid oversight from regulators, such as FSAC, is going to tackle systematic risk, given the fact that even the 10% of Facebook’s users (the amount of the current audience of PayPal) will already increase its exposure. What’s clear is that Facebook insists on presenting Libra as a new asset class and wants to have a carte blanche.


  • Competition concerns


The second issue stems from the first one: there is a concern that Facebook will not ‘spur competition’ but, on the contrary, act as a monopoly. Even within the crypto wallets marketplace, ‘welcoming Libra to the family of Facebook apps’ will result in Calibra being the main wallet embedded with WhatsApp and Messenger (at least Marcus promised it won’t be the only one), giving it the tremendous upper hand. 


After all, there is a reason why this digital coinage and not any other has flustered people of the highest ranks. It is not a coincidence either that there is a bill called Keep Big Tech Out of Finance being quickly drafted to prevent large platform utilities like Facebook from acting as financial institutions and launching their own currencies, ‘inappropriately mixing commerce and bank activities.’ At least not without surrendering themselves to the oversight. Blockchain expert Andreas Antonopoulos, although not sharing the panic around Libra’s potential impact on the industry, says that if a company with more users than JPMorgan Chase wants to act as a bank, banks should be scared indeed.


  • Privacy concerns


Referring to the latest scandal of Facebook’s leaking 15 million users’ consumer data to a political consulting firm (resulting in a $5 billion fine to FTC), he also used the words ‘surveillance coin’. Actually, Andreas called it ‘the worst kind of surveillance coin connected to the worst kind of surveillance company that’s exercising the worst kind of surveillance capitalism,’ but let's try not to get that emotional and just agree that everybody’s privacy concerns are not without ground.


‘Remember that every time you make an easy transaction and you hear the little ding-ding sound of that, remember that’s the sound of democracy dying. That’s the sound of independence dying. That’s the sound of personal privacy dying. And you just made someone rich while killing all of the things that matter in free societies.’


Andreas Antonopoulos, interview to London Real



Photo: David Berkowitz / Flickr


  • Who’s really in?


Facebook doesn’t shed the light on Libra’s questionable governance either. Although it claims to only have 1% control over the Association, it is not clear what will happen if a company with close ties to Facebook like Spotify joins, let alone the other 26 interested company’s friends, nicknamed ‘cryptomafia’ beforehand. It is noteworthy that none of them have officially put their money where their mouth is yet, probably because $10 million is a hell lot of money even for them to fund unclear operations. Neither did the Swiss regulator that was said to back the project, saying that it hadn’t been contacted by Facebook, as it was revealed at the House Financial Services Committee.


  • Diversity


The allegations do not end at the level of the association’s facade but break into the company’s walls where the lack of women and minorities in upper ranks also rises the diversity concerns.


  • Mission


Yet where it really becomes interesting is Facebook’s vision of Libra’s role. ‘To exceed the needs of the global financial system’ is a tough goal to claim, and just because the company has dealt itself with some great cards doesn’t mean it will be able to play them. Given it even knows how to, since only now, having been put under fierce regulatory pressure, Facebook suddenly started to admit it doesn’t have ‘significant’ experience with crypto and blockchain after all. 


Apparently, global financial exclusion is another matter the social network giant isn’t very proficient in. From from the mission statement, it is obvious that Facebook misunderstands the problem and won’t be able to solve it. Just as it is vague how Libra will operate, it is unclear how exactly they propose to reach greater financial inclusion, which only proves the assumption. If they really wanted to play a role in this global issue, or it least gain some real insight on it, they could’ve founded a think-tank to conduct research ages ago, without creating a new currency. The financial industry doesn’t need Libra in particular to help the unbanked; on the contrary, blockchain-based projects that are actually decentralized can do more good. Nor does it need scope: introducing the unbanked to the financial system is ‘personal, detailed, local work,’ and on-spot initiatives are already well underway.


Wait, is it cryptocurrency or not?



No, it is not. We have already mentioned the feature of decentralization Libra currency doesn’t have, since it is founded by Facebook (ok, by Libra Association, but a blockchain with 100 nodes is still not an open blockchain). Now we will see that it doesn’t have any of the features attributed to cryptocurrency. According to Antonopoulos, to be classified as a cryptocurrency a ‘payment tool’ should be open, public, neutral, borderless, and censorship-persistent. Facebook cannot grant its users open access to its platform without being an intermediary. Libra is not publicly available nor transparent given the association structure. They cannot be neutral or censorship-persistent since to become more efficient than the current financial system (to fight money laundering and terrorism, to ensure better control) they will have to prevent the transmission of funds from and to certain entities (like North Korea or Venezuela) and thus identify every user. That is why Libra isn’t borderless either. Given the amount of data Facebook already stores and has access to, it is not hard to imagine them implementing somewhat effective internal censorship, although they keep insisting that Libra is an independent venture and promise that separate servers will be used for data storage. The identification process is actually one of the reasons it can’t really help the unbanked since IDs and lack of internet connection are among the main impediments to the financial inclusion for people in poor and rural areas. 


All in all, Libra is not based on the ‘five pillars of blockchain’, just as any corporate initiative wouldn’t be. Relocating to Switzerland wouldn’t make it decentralized or borderless, the project will still exist in a particular jurisdiction, though a different one, and be a subject to correspondent legislation, no matter how many loopholes they are able to find. The reluctance of Libra to comply with regulations doesn’t make it cryptocurrency, it only makes it shady.


Is there a real basis to worry? Will it change the status quo?



As we have observed, the opinions have divided: on the one side, there are those who think Libra shouldn’t be taken very seriously and should only be seen for what it is: a corporate version of digital coinage that has nothing to do with decentralized money. On the other, there are those who see a threat to the whole financial system. They believe that not only will Libra not solve the existing financial system issues, like helping the unbanked, but it can, in fact, aggravate them. 


  • Money laundering, terrorism, and tax evasion


The main concern, of course, is still the ability of Facebook and its allies to ensure AML and KYC requirements without the help of regulators, as to protect their users from cyber threats and the world from terrorism and money laundering. But how is Libra supposed to tackle tax evasion, if it doesn’t want to clearly comply with the regulations itself? Many seem to have overlooked what Nobel laureate Joseph Stiglitz noticed: since taxes occur with every Libra’s conversion, they must be another great barrier to its adoption, ‘unless Facebook believes it can ride roughshod over the tax system, as it has over privacy and competition concerns.’


However, the regulators’ concerns shouldn’t even be that much about unregulated money serving as an open back door for the crime. And not just because for the 10 years of Bitcoin, the US dollar and other fiat currencies are still the world’s leaders in crime, as congressman Emmer mentioned. In fact, a threat to financial stability can strike from an unexpected quarter. 


  • Hot money and bubbles


The idea of community landing is trending, getting more and more of the public attention: it even got its mention in the last season of Orange Is the New Black. That is why the concept behind Libra is so popular: it’s not what it is, but what it represents, even if it doesn’t fit the romanticized crypto box. However, it may be what the world wants, but it’s not what the world needs. 


Rana Faroohar, Associate Editor at the Financial Times and CNN’s global economic analyst, reminds us of the ‘hot money’ problem, saying that the digital money operating outside current central bank system will ‘grease the wheels of capital flows.’ The savings of millions of people will flow where they are able to flow, not where they can be most effectively allocated. Leaving the crime aside, Libra’s ‘accessible, safe, low-cost’ payments will facilitate massive cross-border speculation. GlobalCoin may be referred to as ‘digital gold’ by enthusiasts, but gold supply is limited and so is the amount of transactions with the commodity, unlike digital currency. Moreover, if illiquid fiat is exchanged into Libra, potential liquid coins, the bubbles underneath such transactions will mushroom and mutate into global crises. As it turns out, more capital mobility per se may endanger financial stability and make the central banks’ job of ensuring it harder.


  • Power abuse and lobbying


The US hearing also revealed that there are congressmen who hold with Stiglitz on the matter and want to shut the project down, especially since Marcus didn’t agree to launch a pilot project under the supervision first. But even he wouldn’t argue that the company can potentially have, as chairwoman Waters put it, ‘the economic power that could destabilize currencies and governments’, and what the regulators want is simply to prevent it from abusing that power. 


Of course, given the intellectual base, the American giants have acquired it would be a waste not to adopt as many tech advancements as there are available. And to be fair, some congressmen admitted that innovation cannot strive in a permission-based society. For example, McHenry, a representative from North Carolina pointed out that if the authorities stick to the line of ‘killing it before it grows’, the competitive advantage will be lost to other countries. However, if innovation is ‘unstoppable force,’ so is lobbying. 


The resources at their disposal are what indeed makes Facebook’s crypto initiative an unparalleled one. Millions of Zuckerberg’s money (more than $7.5 mln so far) are being spent on reinforcement, and on that, no one can put a hold. Lobbying mastermind Susan Zook has recently joined the team already consisting of firms like Cypress Group, Sternhell Group, and Davis Polk. Speaking of abusing the power.


So should Libra be launched?


Photo: Anthony Quintano / Flickr


Having considered all the threats, there are still those who hail Facebook’s digital currency and want Zuckerberg to become ‘Henry Ford to money and finance.’ As a matter of fact, it can really be cheaper to use Libra instead of local currency in many places over the world. It is designed to be more stable too: 48% of the world's population living in 94 countries suffers from at least 10% inflation per year, as congressman Hill brought up. On the other hand, if it launches without addressing all the issues, Libra can do more harm than good, and instead of being just the regulators’ pain in the neck become a global one. All in all, there is much more to the issue that appears at first glance, and Facebook started to acknowledge it, now saying that Libra might not even be launched.


Of course, it would be a huge disappointment. Especially since the project founders are not the only ones who are going to great lengths for the launch: for example, congresswoman Waters is taking the delegation to Switzerland to meet with the local regulators on spot.

Now we are all left hanging with the last question: were they even for real or were they just trying to ‘boost their Twitter mentionings’ and finance their $5 billion fine outstanding?


Eventually, it may seem like Libra can, in fact, do more good if it doesn’t see the light of day, given what it has already done: shaken the regulators and the banks and invited everyone to the discussion table. Besides, threatening banks and fiat currencies is not a bad thing, when it forces them to modernize and legislators to draft bills to keep up the pace. Let alone the fact that cryptocurrencies are now finally discussed at the level of US congress and G7 workgroup, the first time in 10 years.