There is a place for cryptocurrencies and they will start to edge into mainstream payments, but if this statement in today’s New York Times article is correct, Facebook will face the wrath of every government (as if Facebook wasn’t already in their sights):
“The company has sky-high hopes that Libra could become the foundation for a new financial system not controlled by today’s power brokers on Wall Street or central banks.
‘It feels like it is time for a better system,’ David Marcus, head of Facebook’s blockchain technology research, said in an interview. ‘This is something that could be a profound change for the entire world.’ ”
This statement is a bit tone-deaf, considering that Visa and MasterCard, the epitome of the existing system, are partners (although, tellingly, no banks).
Already France’s Finance Minister Bruno Le Maire has declared, “It is out of [the] question [that Libra be allowed to] become a sovereign currency…. It can’t and it must not happen.”
Apparently, Facebook did not even engage with U.S. regulators or with Congress before announcing its plans. This is just the first wave in what will become a flood of regulatory scrutiny and resistance.
Next in the article was this:
“With Mr. Marcus, who was the president of PayPal before he joined Facebook, Mr. Zuckerberg has tapped someone who already has experience managing an alternative payment system.”
Mr. Marcus did indeed create an alternative payment system, but note that it was implemented on the U.S. Dollar (as well as banking networks like the ACH and credit card networks). When it expanded internationally it utilized local currencies (and, again, banking networks). This is nothing like implementing a new currency!
Next in line is this:
“The payment system would also help Facebook and other American companies compete for financial transactions in developing countries, where WeChat, developed by the Chinese company Tencent, already offers a highly profitable payments system built into its popular messaging product.”
While targeting the smallest currencies or perhaps those that are already close to collapse (I’m thinking of you Venezuela) may appear to be a valid strategy, it would be important to recognize that even small countries can push back, take for example Nepal’s crackdown on WeChat Pay and AliPay.
In fact smaller countries may be able to establish laws and regulations to block such a move faster than large countries. It is also worth noting that Tencent is a state-supported company, as well as a tool for the Chinese government to monitor its citizens. Comparing Facebook to Tencent only reinforces the worries people have about Facebook and its role in society.
The New York Times, for its part, identifies that Libra is designed to address skeptics by creating a cryptocurrency that will be pegged to local currencies:
“To acquire Libra (a reference to the Roman measurement for a pound, once used to mint coins) through a new Facebook subsidiary, called Calibra, users are likely to have to show government identification like a driver’s license, which would make it unappealing for black market transactions like buying drugs.”
This is a critical design point, but it also suggests that Calibra is intent on addressing government concerns for AML, prevention of terrorist financing and Know Your Customer requirements. That recognizes the power of government regulators to shutdown networks that fail to address government concerns and while bitcoin dodged the bullet by being called a commodity it is clear Libra will not be a commodity as it’s pegged to a basket of currencies to eliminate volatility. Arguably, that makes Libra a security, and under the jurisdiction of the SEC.
While the article claims Libra will be quickly exchanged into local currencies and deposited into bank accounts, that wouldn’t be living up to the concept of an alternate currency which is used to maintain liquidity for daily payments. Perhaps Facebook is already hedging against that “Libra . . . not controlled by today’s power brokers on Wall Street or central banks” statement?
Whatever its merits or deficiencies, a quick look at the comments on the New York Times article or on Twitter reveals that there is a great deal of skepticism about the whole enterprise; Facebook’s involvement, no matter how minimal it may actually be, has become the focal point of anxiety.
In this respect, Facebook’s involvement may be more of a hindrance than a help. We don’t doubt that Facebook’s intentions are good, but the way the company has handled the initial roll-out leaves much to be desired.
This article was co-authored by Tim Sloane, VP, Payments Innovation and Aaron McPherson, VP, Research Operations at Mercator Advisory Group
