Facebook’s move to launch a cryptocurrency has been met with strong opposition from the gatekeepers of the global financial system. Joy Macknight explores the concerns surrounding an 'immediately systemic' digital currency, and whether it will get off the ground. 

Libra dream

The announcement that Facebook – along with 27 other organisations including Uber, Spotify, eBay and Booking.com – was planning to launch a global cryptocurrency, called Libra, in the first half of 2020 sent a shockwave through regulators, supervisors, policy-makers, finance ministers and central bankers across the world.

The ability to flick a switch and enable more than 2 billion people to transact on a global level outside the traditional financial system, effectively bypassing banks and other payment providers, is a game changer for the financial industry. US Federal Reserve chairman Jay Powell and Bank of England (BoE) governor Mark Carney both remarked on the Libra coin’s potential to become immediately systemically important.

Unsurprisingly, the shock provoked swift and, in most cases, negative reactions. A multitude of concerns have been raised, including Libra’s potential impact on monetary and fiscal policy, money laundering and terrorism financing, competition, data security and privacy.

Cartel concerns

Some of the more scathing remarks were made by Yves Mersch, member of the executive board of the European Central Bank (ECB), speaking at the ECB Legal Conference in September 2019. He warned of Libra’s “cartel-like” ecosystem of private companies and the “beguiling but treacherous promises of Facebook’s siren call”.

Yet, according to the Libra Association’s white paper, its goal is for the greater good. “Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people,” it says. It aims to bring the 1.7 billion adults that are currently unbanked into its fold.

“Libra’s potential is that it presents an opportunity to exchange value in a frictionless and lower cost way that engenders inclusion, gets liquidity into economies and allows people to do more business,” says Lawrence Wintermeyer, chair of Global Digital Finance, an industry membership body that promotes the adoption of best practices for cryptoassets and digital finance technologies.

However, it needs to be a system that is trusted. “Consumers must be confident – through codes of conduct, voluntary standards, light regulation of some sort – that protection is built into this new digital payment system and that they are not being ‘gamed’, in the modern parlance. That is one of the big design questions [around Libra],” says Mr Wintermeyer.

The Libra model

The Libra whitepaper, released on June 18, 2019, outlined its foundations. It is governed by the Libra Association, a not-for-profit association headquartered in Switzerland; it is built on a permissioned blockchain; and it is a ‘stablecoin’ backed by a reserve of assets.

The association’s 28 founding members (which include Facebook financial services subsidiary Calibra; payment companies Mastercard, Visa and PayPal; telecoms firm Vodafone; and venture capital firm Andreessen Horowitz) have signed a letter of intent and reportedly agreed to invest $10m each. The association hopes to increase its membership to 100 by mid-2020.

According to its governance rules, each member organisation will be represented on the Libra Association Council, which will be responsible for the Libra Blockchain and manage the Libra Reserve, which will “hold a basket of currencies in safe assets such as cash bank deposits and highly liquid, short-term government securities”. Each member will have one vote, which will hold Facebook’s influence in check.

Oliver Bussmann, CEO of Bussmann Advisory, highlights the difficulty of working in a not-for-profit, decentralised association in Switzerland, where equal voting rights also means compromise. “Getting an agreement on the business and technical standards with other founding members and the ecosystem, when one organisation isn’t running the show, is a very different way to manage an enterprise business,” he says. It also calls into question the ambitious launch date.

Yet the Libra Association has already taken steps forward, and in September announced its intention to apply for a payment system licence under the Swiss Financial Market Supervisory Authority, which recently published information indicating how it will assess such stablecoins within its supervisory remit under Swiss supervisory law.

Many have speculated that the main advantage of being based in Switzerland is to be beyond the reach of US lawmakers; however, the association highlights the country’s “principle-based and technology-neutral regulatory framework” as the reason behind the choice. Mr Bussmann, former president of the Crypto Valley Association in the Swiss town of Zug, also mentions the legal and technical talent pool specialising in crypto that exists in the country.

A permissioned blockchain

The Libra Blockchain is open source (so that anyone can build on it), decentralised and permissioned, which means that access to the network is restricted. The latter characteristic has drawn fire from the crypto community and blockchain purists, who argue that Libra cannot be a true cryptocurrency unless it is based on a permissionless, or public, blockchain, where anyone can validate transactions.

However, Mr Wintermeyer argues that a permissioned, or consensus, network should be able to work alongside public networks and is necessary at this stage to prove that Libra works. “A permissioned network can build up trust by ensuring that protections are put in place through the design and the governance system. This is what regulators and policy-makers should be looking for,” he says. “It is incumbent on Libra’s founding organisations to have the moral fiduciary obligation to ensure that the protections that regulators and consumers want to see are in place.” Significantly, the association plans to move to a permissionless network within the next five years.

The blockchain community is also wary of Libra’s more centralised version of a decentralised network, returning to its governance model. Mr Bussmann believes that the community would firmly push back if Facebook tried to dominate the network. “If Facebook wants the blockchain community to embrace Libra, then it can’t be a closed shop environment. In the end, the rate of adoption will depend on how much the ecosystem can be mobilised to contribute to the set-up and build new services on top of the infrastructure,” he adds.

The association’s willingness to open source the Libra Blockchain code partly addresses this concern. According to the whitepaper: “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.”

The stablecoin debate

Libra will be backed 1:1 by a reserve of real assets, which sets it apart from other cryptocurrencies. According to the whitepaper: “A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value.” This, it claims, will prevent the fluctuations in value that have characterised Bitcoin, for example.

However, the interface between Libra and fiat currencies is under the greatest scrutiny by finance ministers and central bankers. Their concern is that such a supranational currency could threaten the financial system’s stability and weaken the sovereignty of governments and central banks.

In his ECB conference speech, Mr Mersch said: “Depending on Libra’s level of acceptance and on the referencing of the euro in its reserve basket, it could reduce the ECB’s control over the euro, impair the monetary policy transmission mechanism by affecting the liquidity position of euro area banks, and undermine the single currency’s international role, for instance, by reducing demand for it.”

At the EU finance ministers meeting in mid-September, French and German finance ministers Bruno Le Maire and Olaf Scholz opposed Libra’s development, saying: “No private entity can claim monetary power, which is inherent to the sovereignty of nations.”

Small matters

Both Pascal Bouvier, managing partner of fintech venture capital firm MiddleGame Ventures, and Marcus Treacher, senior vice-president of customer success at blockchain-based payments firm Ripple, warn that Libra could have a harmful impact on countries whose currencies are not included in the basket. “This could be disruptive in smaller countries where there is a greater need to maintain local currency,” says Mr Treacher. “Imagine something happens in Kenya and people move their assets into Libra, which puts the Kenyan shilling under pressure because people aren’t holding it – what does that do to the Kenyan government’s attempts to manage the economy and fiscal policy?”

He emphasises the importance of working within the existing financial system and with regulators. “Fiat currencies are not going to go away; they are intrinsic to nation states and how people think about and manage money. We believe that digital assets must be developed in partnership with fiat assets; they must be interconnected and play a supporting role,” he says, adding that Ripple’s approach is to sit down with regulators to go through its designs and then fine-tune its solutions to fit in with the regulatory framework.

On September 16, Libra representatives were called to a meeting in Basel with 26 central bankers, including the Federal Reserve and BoE, to discuss regulatory and public policy issues around global stablecoins. The findings will feed into a report for G7 finance ministers in October.

Ahead of the meeting, Benoît Coeuré, chair of the Committee on Payments and Market Infrastructures, and also chair of the G7 working group on stablecoins, voiced his concerns. “As a new technology, stablecoins are largely untested, especially on the scale required to run a global payment system. They give rise to a number of serious risks related to public policy priorities,” he said. “The bar for regulatory approval will be high.”

During his testimony at the US Senate Committee on Banking, Housing and Urban Affairs in July, David Marcus, head of Calibra at Facebook, tried to alleviate some of these concerns. “The currencies represented in the Libra Reserve will be subject to their respective government’s monetary policies – policies those governments will continue to control,” he said. “The Libra Association, which will manage the reserve, has no intention of competing with any sovereign currencies or entering the monetary policy arena. It will work with the Federal Reserve and other central banks to make sure Libra does not compete with sovereign currencies or interfere with monetary policy. Monetary policy is properly the province of central banks.”

Monetising data

Another significant concern is around data privacy and sovereignty, given Facebook’s previous transgressions with data, not least the Cambridge Analytica scandal and the recent $5bn Federal Trade Commission fine for violating consumers’ privacy. In August, data protection and privacy enforcement authorities from seven jurisdictions produced a joint statement criticising the Libra Association’s whitepaper for failing to “specifically address the information-handling practices that will be in place to secure and protect personal information”.

Unsurprisingly, Mr Marcus fielded a slew of questions during his grilling by the Senate Committee on the issue of data usage. He said: “The association will not separately hold any personal data on people who use the blockchain, no matter how it otherwise could be collected, and will not run any infrastructure. As a result, the association cannot, and will not, monetise data on the blockchain.”

However, Jamie Burke, CEO of Outlier Ventures, a blockchain and Web 3.0 venture capital firm, has major reservations around Facebook’s involvement in Libra. “Given everything we know about Facebook and its business model, which is centred around the profit maximisation of personal data, I naturally have strong concerns about its intentions,” he says.

“It is apparent that its goal is to be able to unlock new data sets that could be coupled with social media data. And while Facebook has been careful to say that it won’t connect the data sets, for a customer to derive any value from Libra, which is effectively social payments, then they would need to opt into connecting those two things,” he adds.

Lack of bank engagement

It is significant that there is not one bank among the founding Libra members, despite several, including JPMorgan and Mitsubishi UFJ Financial Group, experimenting with their own crypto coins. “The banks have a slight standoffish stance around the Libra project. But one of the difficulties for financial institutions – and something we have all been struggling with in this context – is the different and complex legal and regulatory frameworks that apply,” says Peter Chapman, partner at law firm Clifford Chance. “Unsurprisingly, most banks are reluctant to put their name to it until there is a bit more certainty around the legal and regulatory basis.”

Mr Bussmann believes most banks are still stuck in the phase of not touching cryptocurrencies. “That has been a red line for five years, so I am not surprised that no bank is involved in Libra,” he says. “However, the problem is that then they are not part of the learning curve. This is a new infrastructure and new business model, and they are missing the opportunity to build expertise in house.”

Mr Bouvier agrees. “If this is a new payments ecosystem, with some old functions being done in different ways, then it is important for all stakeholders to do some experimenting and understand the different roles. Because even if Facebook is not successful with the Libra network, I believe that the business model may be made successful by others,” he says.

“What Facebook is doing should have been done by either a large bank, or a consortium of large banks, because there is an identity management play, as well as a payments play, and a merchants and customers play. All of these plays independently are what banks do, but for some reason they have been gun shy in developing a new business model,” he adds.

Positive impact?

Despite all the criticisms, Mr Burke believes that the Libra project has helped legitimise cryptocurrency, at a time when its reputation has been sullied by the initial coin offering scramble. “It has also pushed the industry, and governments around the world, to think about how they engage with cryptocurrency,” he says, pointing to Mr Carney’s recent reference to a “synthetic hegemonic currency” to reduce global reliance on the dollar and the soon-to-be-launched Chinese government-backed digital currency.

Mr Chapman agrees that the Libra project has forced a policy debate and discussion at a regulatory and political level. “Regulators have been thinking, engaging and discussing but not making decisions around where the regulatory perimeter should lie and whether the existing regulatory framework is sufficient,” he says. “The Libra announcement has had the effect of starting to crystallise some of that thinking and drawing out the different views around the use of these technologies and the potential impact on the existing financial industry.”

Although he is bearish as to whether Libra will succeed because of the hurdles in its way, Mr Treacher believes the Libra announcement will be heralded in future as a critical catalyst for change. He says: “Facebook’s chess move into this space has created so much of a wake-up call that the blockchain and distributed ledger technology industry will move significantly more into the commercial space from the innovation space.”

Echoing Mr Bouvier’s point, Paul Thomalla, global head of payments at fintech firm Finastra, says: “It is a great concept and we will look back at Libra being the one that made the headlines. But I think it will be the next version of Libra from a different company, which will take the idea, address some of the problems and create a slightly better, less challenging version, that will succeed.”


All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker

For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Request a demonstration to The Banker Database

Join our community

The Banker on Twitter