In our last newsletter, we shared some of our initial thoughts about Facebook’s Libra cryptocurrency, noting that extensive regulatory scrutiny could be a major stumbling block. We concluded that “Libra may have to fight court battles in dozens of countries across the globe, likely delaying the targeted early 2020 global launch date for the cryptocurrency.” Based Libra co-creator David Marcus’s congressional grilling in July, those concerns were warranted.
Overall, US lawmakers came off as surprisingly well-informed about the benefits and risks of cryptocurrencies, highlighting relevant contrasts between bitcoin and Libra on multiple occasions. Regardless of your view on Libra, the fact that politicians have put in the time to research the project is a bullish catalyst for the cryptoasset space as a whole; after all, regulation is inevitable for any legitimate industry, and all stakeholders benefit from well-informed, balanced regulations.
In the face of this well-informed questioning, David Marcus came off as unprepared and even a touch arrogant. There were three primary areas where Marcus seemed to struggle in particular: Regulatory risks, Libra’s potential for illegal activity, and data privacy.
On regulatory risks, Marcus suggested that the company would essentially “outsource” its Anti-Money Laundering (AML) and Know Your Customer (KYC) responsibilities to the fiat currency on/off ramps. In other words, the Libra Association is trying to “pass the buck” on enforcing the most important restrictions in the eyes of lawmakers. Needless to say, Congress was highly skeptical of this strategy. Even President Trump himself tweeted that Facebook “must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International” in launching Libra.
Libra’s potential use in illegal activity also came under fire. Marcus was unable to provide a coherent answer on whether Libra qualified as an “anonymous bearer instrument,” a key feature of money used in crime. When asked whether Facebook would freeze Libra used finance terrorism or launder funds, Marcus suggested that Calibra (which was consistently portrayed as independent from Facebook) or other wallet providers could do so, seemingly in another effort to offload responsibility.
Not surprisingly, perhaps the biggest area of concern was around Facebook’s usage of the data it gathers from Libra users. Marcus indicated that users would have the ability to utilize third-party wallets or alternative transaction methods (like credit cards), but that the default Calibra wallet in Whatsapp, Instagram, and Facebook Messenger would collect data on in-platform transactions. Given the general public’s preference for simplification and Facebook’s proficiency in user experience design, we expect the vast majority of users would stick with Facebook’s default settings. For a company that’s experienced multiple, high-profile data breaches in the last year, lawmakers were understandably reticent to trust even more valuable personal information to Facebook’s purview.
Since the July hearings, there’s been little movement from either US regulators or Libra to address the concerns raised. Facebook has vowed not to launch Libra in the US until lawmakers are satisfied, a process that may take longer than initially expected; some analysts are skeptical that the project will ever get off the ground in the US!
Libra’s regulatory reception in other regions has been more mixed. Bank of England Govenor Mark Carney recently endorsed the need for a “Synthetic Hegemonic Currency” with features similar to Libra that “could dampen the domineering influence of the US dollar on global trade.” Across the English Channel, the European Union is reportedly conducting its own evaluation of the risks and potential benefits of Facebook’s stablecoin.
One way or another, regulators will have to move fast. Binance, the world’s largest cryptoasset exchange, recently announced its own astrologically-inspired stablecoin project, Venus. According to its press release, Binance will “create new alliances and partnerships with governments, corporations, technology companies, and other cryptocurrency companies and projects involved in the larger blockchain ecosystem, to empower developed and developing countries to spur new currencies.” Unlike Facebook, Binance aims to work with specific countries to develop their own localized digital currencies, which may make it easier to garner regulatory approval, at least in some regions.
There’s no doubt that Libra is an ambitious and revolutionary product that could potentially transform commerce and support billions of “unbanked” people across the globe. Our hope is that open, frank discussions on the benefits and risks of different types of cryptoassets will lead to more coherent, balanced regulations across both developed and emerging markets. Time will tell on that front, but Libra’s impending launch certainly accelerates the conversation – we’ll be keeping a close eye on any new developments in the months to come!