I actually don’t know if libra is going to work, but I believe that it’s important to try new things. When Facebook first announced it was getting into the crypto business with a basically unregulated currency called libra, the reaction from Wall Street and government bankers was about as expected. Libra raises a lot of serious concerns. I’m not a big fan of what they’re doing there. I think it’s a big mistake. It was a neat idea that’ll never happen, and I have nothing else to say about it. Libra is in trouble. The social media giant had lined up a long list of corporate backers for the initiative, including major players in the payment space. In early October 2019, PayPal became the first company to back out of the libra coalition.
That led to an exodus of other companies from the project. MasterCard, Stripe, Visa and eBay all followed PayPal and ditched libra. So, why are all these companies ghosting Facebook’s digital currency all of a sudden? First, let’s explain how Facebook got into another mess like this. I like the libra concept, but you got to drop it. It’s clearly doing more harm than good. Facebook first announced libra in June 2019. Introducing Libra, a new global currency. It formed the Libra Association in Switzerland to run the cryptocurrency project and lined up 27 companies to oversee it. Facebook also set up a subsidiary called Calibra, designed to host the financial services and payment software built on top of the libra digital currency. Why did Facebook get into crypto in the first place? Facebook is big. It has 2.41 billion monthly active users. That’s a huge base. Even if a quarter of the users ended up using Libra for payments.
That’s 600 million people, about twice the population of the United States. Facebook, though, also has a ton of baggage. Think 2016 presidential election and Russian hacking kind of baggage. So, when a company that big and that influential plans to introduce a product that could potentially disrupt the global financial community, you can see why U.S. lawmakers are paying even closer attention to the social media giant. This is Facebook’s currency chief David Marcus testifying before the House Financial Services Committee back in July 2019. The reason we designed libra in such a way that Facebook will only be one among 100 different members of the Libra Association and we’ll have no special privilege, means that you will not have to trust Facebook. Well except, Mr. Marcus, you know better than that. You know that only Facebook has access to 2 billion people and all, all to say that, that you are just one of many is simply, is simply not true after people’s data and private messages have been stolen. And this is Facebook CEO Mark Zuckerberg testifying before the House Financial Services Committee about the proposed cryptocurrency in October 2019.
I want to be clear. Facebook will not be a part of launching the libra payment system anywhere in the world, even outside the U.S., until the U.S. regulators approve. Lawmakers are really, really nervous about Facebook getting into digital currencies. Libra could be misused by money launderers and terrorist financiers. Cryptocurrency such as Bitcoin have been exploited to support billions of dollars of illicit activity. Facebook designed libra to be a digital global currency. Like other digital currencies, libra will be built on top of a blockchain or a digital ledger. Unlike other cryptocurrencies, libra would be backed by a basket of real world currencies. That would stabilize its price, protecting it from wild swings seen in the bitcoin market. The libra reserve will hold bank deposits and short-term government securities for every libra coin created online. If all goes according to Facebook’s plan, users would have a virtual wallet where they could buy, sell, send and receive libra through platforms like Facebook or Instagram or WhatsApp. And, those payments would move within seconds for small fees. With bitcoin transactions, it could take several minutes to confirm a transaction. And in some cases cost a few dollars.
Bitcoin is known for its volatility and steep price swings because it isn’t backed by government. That means things like inflation and monetary policy don’t influence its value. Instead, cryptocurrencies move with supply and demand and basic market forces, fear and greed. Bitcoin, for example, has a fixed supply. The total number that will ever be minted is hard-capped at 21 million, and experts say that hard cap won’t be reached for another 120 years. Facebook says all that volatility wouldn’t happen with Libra because it will be backed by a bunch of currencies, effectively maintaining a stable price even when demand changes. I think Libra is being designed right now to be spent because it’s a stable coin and it’s pegged to a basket of currencies, and so most people today are going to assume that people will be buying burgers or coffee. That’s Tom Lee. He’s head of research at FundStrat Global Advisors, an independent research firm. He says Facebook entry into cryptocurrencies is a huge positive. It brings a lot of credibility to space, but also with its 2 billion users, it’s a massive increase in the addressable market, and arguably one of the biggest headwinds for crypto adoption has been the user interface or the ease of sort of finding on ramps.
Libra would use blockchain technology, which is what all cryptocurrencies run on. The blockchain is a secure, digital collection of financial accounts. So, it’s basically a decentralized bank ledger. There’s no middleman. The currency is exchanged person to person and recorded on the blockchain so you can see who owns what. Traditionally in crypto, anyone could access that blockchain, but not with Libra. This is David Yermack. He chairs the finance department at New York University’s Stern School of Business and he teaches courses on cryptocurrencies. It’s very different than cryptocurrency like bitcoin or ether, which is decentralized, has no leadership and relies on a community of people who compete to build the blocks that update the transactions. Because of the design of something like bitcoin, it really can only accommodate a small amount of traffic, but something with central management like libra could really grow to almost any size that you wished. Libra would be permissioned, which means transactions can only be added to it by a group of trusted parties.
That’s where the Libra Association comes in. It’s the Swiss-based consortium of nonprofits and companies like Lyft, Uber and Spotify. Each partner of the Libra Association invested a minimum of $10 million into the project. David Marcus is the Facebook executive leading the blockchain initiative, who also once served as the president of PayPal, previously testified to Congress that libra would work more like a traditional currency than a cryptocurrency. The intent of libra is not to compete with other cryptocurrencies. It’s to compete with the real currencies issued by the central banks. That raised a red flag among government regulators. And that’s a big reason why libra’s corporate backers began fleeing.
Zuckerberg took heat from lawmakers looking for clarity. Given the company’s size and reach, it should be clear why we have serious concerns about your plans to establish a global digital currency that would challenge the U.S. dollar. For the richest man in the world to come here and hide behind the poorest people in the world and say that’s who you’re really trying to help.
You’re trying to help those for whom the dollar is not a good currency. Drug dealers, terrorists, tax evaders. He acknowledged the risk of digital currency like libra poses, but also argued it could ensure the U.S. position as an innovative financial world leader. I just think that we can’t sit here and assume that because America is today the leader, that it will always get to be the leader if we don’t innovate. And innovation means doing new things. And that does mean new things have risks. And we need to address the risks and we need to be careful in doing that. But when pushed to explain why corporate backers exited the libra project, Zuckerberg put the blame on risk.
Why have they departed? Scores of stable partners have dropped out. Why? Well, Congresswoman, I think you’d have to ask them specifically for- Why do you think they dropped out? I think because it’s a it’s a risky project and there’s been a lot of scrutiny. Yes, it’s a risky project. And when asked about potential privacy concerns, he told Congress there are millions who trust Facebook. Billions of people come to our services because they trust that they can share content, messages, photos, comments with the people they care about. And more than 100 billion times a day, people do that. They share something with a set of people because they know that that content is just going to reach the people that they want it to. So I think that if we’re able to move forward with this project, there may be some people who who don’t want to use it because they don’t trust us or don’t like us. And that’s one of the values of having an independent association where there will be other competitor wallets and other approaches, too.
Zuckerberg spent most of the hearing reassuring lawmakers libra wouldn’t launch without approval from U.S. regulators. Facebook’s push into digital currency served as a big wakeup call for lawmakers and central bankers. It’s pitting Facebook against the U.S. and other governments. And Facebook is losing so far. In September 2019, France and Germany both agreed to block libra.
The government said, “no private entity can claim monetary policy, which is inherent to the sovereignty of nations.” A few weeks later, libra began to lose its corporate backers. PayPal was the first company to leave in early October 2019. Days later, two senators on the Senate Banking Committee sent letters to the CEOs of Visa, MasterCard and Stripe to express concerns over their involvement in the Libra Association. Senator Sherrod Brown of Ohio and Brian Schatz of Hawaii told companies “to proceed with caution” until Facebook provides more details on the risks posed by libra, like financing terrorism and disrupting the global financial system.
A few days after the senator sent the letters, eBay, MasterCard, Visa and Stripe announced they would leave the Libra Project. The U.S. Treasury Department had also been privately pressuring libra’s corporate backers, according to the Wall Street Journal. The opposition to libra is coming from countries with established financial and payment systems, where a majority of the population already has bank accounts. That’s not really the kind of user Facebook has in mind with libra. It’s going after the world’s unbanked population. You know, that unbanked world is a lot larger than we all appreciate because anyone living in the U.S., you know, has pretty simple access and low-cost access to banks. Facebook points to statistics that show 31 percent of adults in the world don’t have a bank account.
That’s about 1.7 billion people globally. And those numbers are worse in developing countries and even worse for women. Turns out, the unbanked community of 1.7 billion people can be leveraged through reliable internet infrastructure and mobile phones. Those two things alone have given rise to a new generation of financial services without requiring fancy tech. 1.1 billion of those 1.7 unbanked people have a mobile phone. For example, in sub-Saharan Africa, simple, text-based phones have popularized mobile money accounts. So, Facebook has a lot to gain from winning over the unbanked with a global payment service based on its own digital currency. It’s not just Facebook making waves in the digital currency market. China’s government also wants a piece of the action.
China’s central bank has made some very public announcements that they’re going to compete with the private digital currencies in their economy by having a crypto version of the renminbi, their own currency. And there have been a lot of central banks around the world researching this over the last five or six years. The People’s Bank of China announced in August 2019 that it’s close to launching its own digital currency, saying the rationale behind the move is to protect its foreign exchange sovereignty.
Some say the move would encourage the worldwide use of the yuan, the Chinese currency and the deputy director of the People’s Bank of China’s Payments Department said this currency will have similarities to libra and would be as safe as the central bank-issued paper notes Libra is really trying to mimic what has already occurred in China, where two social media companies, Tencent and AliBaba, have launched payment services. They’ve run very, very quickly and have begun to push aside the regular banks as sources of payments for people.
And if you look at how quickly the Chinese social media companies have grown and the fact that they’re now going abroad into other countries, there seems to be an opportunity for companies like Facebook, Google, Amazon to create a very similar service. China’s central bank plans to launch this digital token through a two-tier system, where both the People’s Bank of China and commercial banks would be legitimate issuers. All this means that Facebook doesn’t just have to contend with the opposition, with regulators and politicians. It means the social media giant is also in a race against time with governments that want to build their own digital currencies. While libra still may be in deep trouble, despite Zuckerberg’s performance on Capitol Hill, the promise of digital currency should live on, according to Tom Lee. I mean, I think the future is really bright for digital assets. one, because I think it is reducing a lot of friction in traditional financial architecture. The average person spends almost a month of every year paying for the right to use banks.
So, I think that that’s a level of value capture that’s high, and so digital assets are going to help sort of create productivity around that. No one knows when the federal government will enact regulation that would impact how the libra coin operates or what that regulation would look like. All they do know is it’s coming at some point. Some even speculate Facebook won’t be the first public tech company in the U.S. to issue a currency. I don’t think other majors Silicon Valley technology companies are far behind, so I think Facebook is the first, but I think we’ll see many other versions..