Since Facebook announced plans last month for its own cryptocurrency called Libra, it has ruffled feathers and sparked fears among governments all over the globe.
Facebook has framed the digital coin as an alternative to traditional financial services for the billions of people worldwide who lack access to banking. But lawmakers say Libra would threaten government-backed currencies and consumer privacy, while giving Facebook reign over an unprecedented global financial system.
Earlier this month, Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, and other congressional leaders, sent a letter to Facebook founder and chief executive Mark Zuckerberg, asking that the social media giant delay Libra until lawmakers have had time to interrogate it.
“Because Facebook is already in the hands of over a quarter of the world’s population, it is imperative that Facebook and its partners immediately cease implementation plans until regulators and Congress have an opportunity to examine these issues and take action,” lawmakers wrote.
Here’s a rundown of Facebook’s plans for its digital currency and the issues lawmakers want to see addressed before Libra comes to fruition.
What is Libra?
Libra is a digital coin, anchored in the same blockchain technology that underlies cryptocurrencies like bitcoin and Ethereum. The virtual currency will be backed by 28 companies and nonprofits, including finance and tech giants like Mastercard, Visa and Uber. It is not, however, backed by any banks.
Facebook created a subsidiary, Calibra, to oversee the virtual currency and the digital wallet that will house it. The wallet will be built into Facebook Messenger and WhatsApp, but will also be available as a stand-alone app. Through it, Facebook’s 2.4 billion users around the world will be able to spend, transfer or save money with almost no fees. Users’ real identities will not be tied to their public transactions; they will be conducted under pseudonyms for privacy’s sake.
The currency and digital wallet will be governed by the Libra Association, a not-for-profit organization of businesses, nonprofits and academic institutions, which will be based in Geneva. Facebook aims to have 100 members of the Libra Association by the time Libra goes live.
How much control will Facebook have over it?
Once the currency launches — which Facebook expects to be in the first half of 2020 — Facebook will “not control the network, the currency, or the reserve backing it,” Calibra head David Marcus wrote in a blog post. The social media giant will have the same amount of power over Libra as the other members of the Libra Association, which have all invested at least $10 million in the project.
Facebook and other founding members of the Libra Association will earn interest from the Libra Reserve, which will contain the money users put into Libra, and the assets through which the currency derives its value.
A new global financial system
Because of the breadth of Facebook’s reach, if Libra were to catch on, it could potentially create a widely-used, global financial system that could compete with government-backed currencies like the dollar and the euro.
“The size of Facebook’s network means it could be essentially, immediately and systemically important,” Fed Chair Jerome H. Powell said Wednesday in testimony before the House Financial Services Committee.
Fears around widespread adoption of Libra have been shared by leaders around the globe. In a speech before the French Senate on Thursday, French Finance Minister Bruno Le Maire said he was resolutely against Libra becoming a “sovereign currency” that could compete with state currencies. Benoît Coeuré, an executive with the European Central Bank, warned this week that Libra cannot be allowed to operate in a regulatory “void.” And Britain’s Financial Conduct Authority has said Libra’s proposal had “insufficient detail,” and it is working with the Bank of England and England’s finance minister on plans to address it.
India has already said it may ban Libra. Last April, India outlawed banks from dealing with digital currency, which effectively shut down most cryptocurrency exchanges operating there.
“Design of the Facebook currency has not been fully explained,” India‘s Economic Affairs Secretary Subhash Garg told Bloomberg News. “But whatever it is, it would be a private cryptocurrency, and that’s not something we have been comfortable with.”
As it stands, Libra would not be overseen by any single regulatory authority. It falls outside the purview of the Federal Reserve, which oversees banks, and no other body exists — in the United States or elsewhere — that could provide central regulation over a private financial network like Libra.
While Marcus has said Libra plans to collaborate with lawmakers, central banks and lawmakers, concerns persist that Libra’s power would be more or less unchecked. In tweets Thursday, President Trump attacked cryptocurrencies and said Libra would have to be subject to banking regulations.
“Facebook Libra’s “virtual currency” will have little standing or dependability,” Trump tweeted. “If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks.”
While declining to respond directly to Trump’s tweets, a Facebook spokesperson told TechCrunch that “the Libra association won’t interact with consumers or operate as a bank, and that Libra is meant to be a complement to the existing financial system.”
Trump and other leaders have expressed concerns about the ways Libra could be harnessed for illegal purposes, by providing a financial platform for terrorists, drug dealers and other criminals looking to operate outside traditional systems.
“If there were problems there associated with money laundering, terrorist financing, any of the things that we’re all focused on, including the company, they would arise to systemically important levels just because of the mere size of the Facebook network,” Powell said during his testimony.
Research suggests that these fears are not unwarranted. A 2018 study from the University of Technology Sydney found that about a quarter of bitcoin users, and nearly half of all bitcoin transactions, are involved in illicit activity. The study estimated that roughly $76 billion of illegal activity each year involves bitcoin — close to the scale of the markets for illegal drugs in Europe and the United States.
Cryptocurrencies are also frequently targeted by hackers. In the first eight months of 2018, hackers stole nearly $1 billion from cryptocurrency exchanges, according to a report from Ciphertrace.
However, Facebook argues that Libra could cut down on illicit activity by cutting into the amount of cash transactions, which are also favored by criminal enterprises. Calibra has said it will employ safeguards, including traditional know-your-customer practices and making Libra activity accessible to law enforcement and regulators. The company also confirmed to TechCrunch that it is working with convenience stores and money exchanges to ensure anti-laundering checks are used when Libra is cashed in or cashed out for traditional currency.
Facebook’s spotty track record with privacy, thanks to the Cambridge Analytica scandal and other debacles, has also spawned concerns about consumer protections and privacy with Libra.
“Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data,” Waters said in a statement after the Libra announcement. “With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users.”
Facebook promises that, because Libra activity will be conducted through Calibra, it will not be mixed with Facebook data that is used for ad targeting and that it will not see users’ financial data. Users will also be able to use third-party wallets for Libra, not just the Facebook-owned Calibra wallet.
“Bottom line: you won’t have to trust Facebook to get the benefit of Libra,” Marcus wrote in his blog post. “We’ve been clear about our approach to financial data separation and we will live up to our commitments.”
All these issues, and further concerns, will be examined next week, as Libra is scrutinized in hearings with the House Financial Services Committee and the Senate Banking Committee.