In June 2019, the company announced the official launch of Libra, its new cryptocurrency. The technical documentation,white paper, and testnet for developers described Libra as a global currency and financial infrastructure dedicated to ‘creating a more inclusive financial system’. Libra’s plans indicate that the cryptocurrency will be available to users in July 2020. However, both David Marcus (Co-creator and Head of Libra, Vice President of Messaging Products at Facebook, CEO of Calibra, and former president of PayPal) and Zuckerberg voiced their clear decision not to rush Libra deployment until regulatory issues are addressed by the main players in the field. In an interview in late September 2019, Zuckerberg said, ‘Obviously we want to move forward at some point soon [and] not have this take many years to roll out, but right now I’m really focused on making sure that we do this well. That’s a very different approach than what we might have taken five years ago’.
Libra’s underlying technology
In its white paper, Libra is described as a currency developed on a blockchain and backed by a reserve of real assets, that is, money coming from investors and Libra users. This blockchain is private or permission based, which means that only select players (nodes) can use it and observe and verify transactions that it carries. The Libra Foundation suggests a US$10 million fee for a company to be selected as a node in this network. The entity also announced that it will start the transition to open/permissionless blockchain within the next five years.
The idea behind most FinTech companies is to make payments and financial services accessible via mobile phones, knowing that today, mobile networks cover most parts of the world. Building on this, Libra will offer an instant online payment service for all its users, so that ‘moving money around the world [becomes] as easy and cheap as sending a text message’. Bearing in mind the staggering number of 2.3 billion Facebook users, Libra promises to reach two-thirds of all Internet users.
Users will also be able to buy and sell Libra on online exchanges for fiat currencies, thus creating the liquid market. On the commercial side, different discounts through merchant partners and other e-commerce-related campaigns are expected. Libra will most likely allow users to make online purchases directly via Facebook, Instagram, and WhatsApp. These apps will become a de facto e-commerce platform, bringing Facebook even more revenue.
On the tech side: Blockchains can be considered as a programmable database. Libra’s blockchain is the central ledger of all transactions that will happen in the Libra payment system. Throughout history, banks and central financial institutions have kept ledgers of transactions as a trusted third party in financial transactions. Central banks keep ledgers (records) of all currencies issued in one country. These ledgers provided the clearance and settled trade issues. Libra’s blockchain will mimic financial institution ledgers, providing the global settlement for its users, and will be used to control the issuance of the Libra cryptocurrency. The blockchain will contain information on the final number of Libra in circulation and the exact state of each user’s account. The Libra Blockchain will be build on widely adopted blockchain data structures. The Libra will be accessible to anyone with an entry-level smartphone and data connectivity.
Libra’s governing body: The Libra Association
The currency is governed by the Libra Association,a non-profit organisation based in Geneva, Switzerland. According to the association, they chose Switzerland because it ‘has a history of global neutrality and openness to blockchain technology, and the association strives to be a neutral, international institution’.
Major payment companies were supposed to be among the founding members of the Libra Association – first announced as a consortium of 28 global companies. However, only days prior to the Libra Association charting in Geneva, major payments companies Visa, Mastercard, Stripe, and Mercado Pago along with the online retailer eBay, announced that they were leaving Facebook’s cryptocurrency project. In a statement for the Financial Times, eBay and Stripe said that regulatory uncertainty was a determining factor. Visa said in a statement, ‘We will continue to evaluate, and our ultimate decision will be determined by a number of factors, including the Association’s ability to fully satisfy all requisite regulatory expectations’. Earlier that week, payment processor PayPal also announced its withdrawl from the Libra Association. In reaction to the news, Calibra’s CEO David Marcus said on Twitter that he respects the companies’ decision to wait until there is regulatory clarity.
Despite the cancelled partnerships, the Libra Association established a Libra Association Council during a meeting held in Geneva, on 14 October 2019. The council’s founding members include private companies such as: Uber, Vodafone, Spotify, and Lyft, and non-profit organisations such as Kiva, Mercy Corps, and Women’s World Banking.
Facebook is part of the Libra Association through its newly formed subsidiary – Calibra, which will develop electronic wallets for users to receive and spend Libra. Calibra is software that will enable Libra users to send instant money transfers via the Libra network. Calibra will first become available on WhatsApp and Facebook Messenger, and later as a stand-alone app for mobile users. User accounts on Calibra will be verified by government issued IDs, and will not have the option of being used anonymously. Regarding the privacy of user data, Calibra pledged not share account information or financial data with Facebook, Inc. or any third party without customer consent. Calibra has issued guidelines which address the privacy of its users. Calibra will also offer 24/7 support for its users through WhatsApp and Facebook Messenger.
On the one hand, Libra will bring the notion of easily transported, low-fee transactions, and programmable money to many people who have never used this kind of service before. This could become a game changer, and lead to the wider adoption of digitised currencies. At the same time, there is the risk that the Libra could stifle the development of many blockchain and FinTech-based services which offer similar solutions.
On the other hand, the Libra is not a typical cryptocurrency. Unlike prominent cryptocurrencies build on open blockchains, such as Bitcoin and Ether, Libra is not decentralised; it is governed by a central body – the Libra Association. It is not open; while everyone can use it, not everyone can confirm transactions or look at the blockchain data. It is not censorship-resistant; users’ funds can be seized.
It is often claimed that the main advantage of traditional cryptocurrencies lies in their independence from money issued by central banks. With the Libra, Facebook may be changing the narrative around cryptocurrencies, promoting them as tools whose main advantages are low transaction fees and fast payments.
This quick reaction and inquiry by the US government was triggered by Facebook’s (and its partners) ambitious plans to create a global cryptocurrency which will be integrated into Facebook’s social media networks and serve, as they describe it, as a unit of account and a payment service. The news was followed by an immediate response from regulators worldwide, mostly voicing their concerns around digital policy: data and privacy, cybersecurity, e-commerce and e-trade.
Here is a summary of the developments surrounding Libra, and the issues related to it.
Libra is being advertised as a financial innovation that will bring the benefits of trade and global payments to users who would not be able to get these services via traditional banking. The term ‘unbanked’ is often used in press releases launched by Libra and Facebook. Facebook also created the subsidiary company ‘Calibra’ that will be responsible for developing the electronic wallet (software/app which handle the Libra digital currency) to be used in this system. Global online payment systems have contributed in great part to the boom of the digital economy and e-commerce. Businesses can now compete on a global level, ship goods globally, and receive money from worldwide customers.
Instant global payments with low or no fees could help in reshaping the remittance industry worldwide, which is still lagging behind in technological innovations.
In addition to the benefits brought by payment services, Facebook is proposing a unique unit of account for its system, and advertising it as a cryptocurrency. This changes things from a regulatory standpoint. The proposed Libra cryptocurrency would be run by the Libra Association (based in Geneva, Switzerland) and would be backed by funds consisting of sovereign fiat currencies (US dollar, GBP, Euro, Yen) and other government issued securities. The creation of a sovereign cryptocurrency run by one of the worlds largest companies did not resonate well with regulators worldwide. In an interview on Europe 1 radio, the French Minister of Finance Bruno La Meire said, ‘It is out of question’ that Libra ‘become a sovereign currency’. A similar statement was made by the Bank of Japan Deputy Governor Masayoshi Amamiya and the US Federal Reserves Chairman Jerome Powell, who voiced their concerns regarding the Libra digital currency. Powell stated, ‘Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,’ at a hearing in front of the United States House of Representatives Financial Services Committee.
The main concern lies in the fact that Facebook’s 2.6 billion users presents a massive impact on e-commerce and would lead to Libra’s monopoly in the market. No bank or financial institution worldwide has a user base that big. In his testimony in-front of the US Senate House Financial Services Committee, Marcus stated that Facebook would not grant rights for all of its users to use Libra immediately. Calibra would start with a new user-base and would require users to sign-up for using the service. Nevertheless, he testified that around 90 million businesses that advertise on Facebook or use it as a trading platform would be implemented into their long-term strategy.
More and more financial international and intergovernmental organisations are opening up to the possible emergence of nacional digital currencies. The Bank of International Settlement (BIS) is building a network of global innovation hubs that will help governments around the world start building sovereign digital currencies, and to better understand the technology behind them. Hubs will be open in Basel, Hong Kong, and Singapore.
Two things that come to mind whenever Facebook is mentioned in public discourse is data privacy and data protection. Following the Cambridge Analityica revelations, Facebook received a lot of scrutiny from regulators worldwide. Calibra CEO David Marcus stated that the Calibra digital wallet will not mix any personal data from the Facebook social network with the financial data recorded on the Libra blockchain.
None of Facebook’s 2.6 billion users will have immediate access to Libra. All users will have to create a separate Calibra account and upload their personal government ID in order to comply with global Know Your Customer (KYC) procedures.
Marcus testified that the Libra Association is working with the Financial Stability Board (the G20 financial organisation FST), and Swiss and US regulators (FINMA and FICEN) to introduce strict KYC and Anti Money-Laundering (AML) procedures for all technology solutions that can be built on top of the Libra technology. This is in accordance with the global AML rules proposed by the FATF in June 2019.
The Libra Association proposed that the Swiss Federal Data Protection Information Commissioner (FDPIC) should be their privacy regulator. Calibra’s database of financial transactions will present a great target for cyber criminals.
Aware of its reputation, Facebook claims that the system Libra is created upon takes into account privacy concerns. In addition to providing ‘simple, understandable, and accessible data management controls’ to its users, Facebook’s subsidiary Calibra ‘will not share account information or financial data with Facebook or any third party without customer consent’. In fact, Marcus even promised that such information will not be used to improve ad targeting on Facebook. It remains to be seen what all this will mean in practice, as it is not the first time that Facebook has promised to pay more attention to user privacy.
In a most recent statement ‘The Regulatory Regime for Stablecoins’, the Libra Association explains, ‘The Libra Association members, acting as node validators, will not be able to access, use, or share personal data regarding end-users of the Libra Blockchain’. Libra will also impose strong cybersecurity rules for node operators in order to preserve payment network robustness.
Anti money laundering (AML) and the fight against financing terrorism were at the focus of security issues surrounding the future issuance of Libra. As stated earlier, in July 2019 the FATF agreed on a global response to the threats that crypto-assets pose for solicitation activities and money-laundering. FATF proposed a global overview of all crypto-asset issuers, and rules for all online users to be identified when using these services.
The Libra Association issued a statement regarding the concerns voiced from the G20 Financial Stability Board on global stablecoins. The Libra Association, addressed emerging issues thought to be vital for the future the Financial Stability Board report. In a letter, the association said that future cryptocurrency will be designed to preserve national sovereignty over financial and monetary policy, and will not undermine it. Libra will comply with the global AML, and KYC regulations. Members of the Libra Associations added that innovation in a field of global stablecoins as a fast, secure payment channels across Internet platforms, are worth exploring and stated that, ‘Libra coins can comfortably coexist alongside central bank-issued digital currencies. China has been successfully innovating in this area with private mobile networks’.
In a recent interview, Apple’s CEO Tim Cook stated in reaction to the Libra proposal, that Apple will not pursue the issuance of its own cryptocurrency, and also added, ‘I deeply believe that money must remain in the hands of states. I am not comfortable with the idea that a private group creates a competing currency. A private company does not have to seek to gain power in this way’.
On 23 October, Facebook’s CEO Mark Zuckerberg testified before the US House of Representatives Financial Services Committee on issues surrounding the Libra cryptocurrency. During the six-hour-long hearing, Zuckerberg repeated multiple times that Libra is intended to be a payment system and not a currency. In his opinion, Libra should not be regulated as a bank. Later in the hearing he referred to Libra as a ‘stablecoin’. Zuckerberg pledged not to release Libra until there is full compliance with the regulations of the US and global financial institutions. ‘Libra will not launch anywhere in the world if not complied to the US law.’ he added. It will comply with the Anti Money-Laundering and Countering the Financing of Terrorism (AML/CFT) financial regulations posed by the Financial Action Task Force (FATF). Answering what the driving force behind Libra is, Zuckerberg said that the ‘Biggest question for the future is competitiveness’.
In response to why the Libra Association (independent, non-profit body which will control the work of Libra cryptocurrency) chose Switzerland as its headquarters, he said that when developing a global payment system, Geneva is an easy choice, as its a place with many international organisations. In response to whether he would reconsider moving the Libra Association to the USA, he said that that is not his decision to make.
On the question of data privacy, Zuckerberg testified that Facebook will impose strict control of data access via Calibra, Facebook's subsidiary company in the Libra.
Facebook CEO Mark Zuckerberg testifies before Financial Services Committee – 10/23/2019
Facebook's David Marcus testifies on Libra cryptocurrency – 07/17/2019