The influential policy committee of the Bank of England has put forward concrete proposals for how regulators could deal with Facebook’s controversial Libra project.
A 9 October document released by the central bank’s Financial Policy Committee states that while the payment stablecoin “has the potential to be…systemically important”, bankers will need “access to be able to monitor payment chain information”. Crucially, it emphasises that the “terms of engagement for innovations such as Libra must be adopted in advance of any launch”.
Since June’s launch of the Libra white paper, we have seen a torrent of complaints, recriminations and barely-concealed alarm from legislators. Rumours began circulating last year that Facebook was developing its own cryptocurrency in secret, referred to internally as ‘GlobalCoin’. By December 2018, reporters had noticed Facebook’s blockchain division was hiring like crazy, poaching talent from other promising crypto start-ups.
In response to a Bloomberg article that followed, claiming Facebook was developing a stablecoin to roll out cryptopayments on WhatsApp, a spokesperson would only say: “Like many other companies, Facebook is seeking to leverage the power of blockchain technology. This new small team is exploring many different applications. We don’t have anything further to share.”
Almost a year later, we now know Facebook was working on the most contentious project in its history. Libra is “a new decentralized blockchain, a low volatility cryptocurrency, and a smart contract platform” all rolled in to one.
Facebook framed the development as a uniquely democratic form of progress: providing financial services for the unbanked and the poor. Anyone with a $40 smartphone could use the new currency, they argued. But Libra put Facebook squarely in the crosshairs of financial regulators.
Adding an entirely new privately-issued currency onto Facebook’s bad habits — famously scraping data on its vast audience, then allowing third parties to access that data for political or monetary gain — has officials seriously concerned.
Within hours of the white paper landing, European Data Protection Supervisor Giovanni Buttarelli outlined concerns over Facebook’s push into cryptocurrency, flagging “any further concentration of personal data” as posing “additional risks to the rights and freedoms of individuals.”
The director of the People’s Bank of China (PBOC) research bureau told a fintech conference in Peking that Libra was nothing less than a threat to China’s monetary stability. Wang Xin warned that Libra would function like money, be widely used for cross-border payments and so have a huge influence.
“Sovereign currencies would coexist with US dollar-centric digital currencies [and] there would be in essence one boss, that is the US dollar and the United States [bringing] a series of economic, financial and even international political consequences,” he said. The PBOC was one of the first central banks to study cryptocurrencies, beginning research in 2014 and launching a dedicated institute in 2017.
Indeed, the latest reports via Der Spiegel and Reuters suggest Libra will be backed by five currencies, chiefly the US dollar, and crucially, not involving the Chinese yuan.
US lawmakers did not gloat over Libra’s US dollar-centricity, though. Almost immediately, the head of the US financial services committee Maxine Waters urged Facebook to halt all development on Libra until regulators had had a chance to consider the ramifications of a private currency controlled by an entity “already in the hands of a quarter of the world’s population”.
Senators pulled David Marcus in front of their Banking Committee in July 2019. Marcus is a former PayPal exec who took over Facebook Messenger in 2014 and is now the head of Calibra. Calibra is Facebook’s digital wallet, which will hold and store Libra coins and process payments. Facebook say Calibra will be available across Messenger and WhatsApp and will launch in 2020.
The Committee was not impressed by Marcus’ performance, even as he took pains to ask for help and support from regulators.
Senator Sherrod Brown established the mood in the room by stating: “Facebook is dangerous. It doesn’t intend to be dangerous but it doesn’t respect the power of the technologies…they are playing like a toddler who’s gotten his hands on a book of matches, burned down the house over and over, and called every arson a learning experience.”
The financial watchdogs began to circle. Across the EU, antitrust regulators are now probing Libra to see if it poses a risk to competition. The FATF, a powerful intergovernmental organization that proposed the cryptocurrency ‘travel rule’ to combat money laundering and terrorist financing, said it was “closely monitoring” Libra too.
And governments have fired warning shots across Facebook’s bow. France’s Minister of Economy and Finance Bruno Le Maire said told an OECD blockchain conference in Paris in September the “privatization of money contains risk of abuse of dominant position, risks to sovereignty and risks for consumers and for companies.”
“I want to be absolutely clear. In these conditions, we cannot authorise the development of Libra on European soil,” he said.
Germany then added its voice to the chorus of disapproval. MEP Markus Ferber warned that Libra could turn Facebook into a “shadow bank” operating outside sovereign systems.
Devs rush ahead
Headquartered in Switzerland, the Libra Association developing Facebook’s stablecoin is insulated from the political firestorm its management now faces. Developers posted in a 2 October update that they are making “good progress” on building the Libra blockchain.
Libra’s ‘Pre-Mainnet’ is now up and running, as per the diagram below, but it is still in its private phase.
“A handful of partners has already deployed their nodes and have them communicating with each other,” the team reports, with “the end goal for all partners to have nodes deployed on the network.
The next phase of development will see Libra issue a testnet to take them from private to public, as per the image below. This main net could be just months away from launch, based on current calculations.
More than just Libra
The issue of very rich, resource-heavy private companies issuing their own currencies is one world economies will face more and more in the next five years.
Whether all of them are intending to become “shadow banks” is a moot point.
The idea was popularized 40 years ago by Nobel prizewinner Freidrich Hayek of the Austrian School of economics. His 1976 book ‘Denationalisation of Money’ proposed that there could be many competing currencies not issued by centralized banks. Government-issued currency “has the defects of all monopolies,” he wrote. “One must use their product even if it is unsatisfactory.”
In August Walmart — itself a $338bn company — filed its own patent for a cryptocurrency-like stablecoin. This dollar-backed effort apes Libra in many ways.
As Senator Mike Rounds told David Marcus in the Senate committee hearing: “I think you’re going to have a lot of competition. I think there’s going to be a lot of different organizations that understand that this is the wave of the future.”