Facebook-supported virtual currency Libra has faced regulatory scrutiny following its unveiling earlier this week, driven by what blockchain and cryptocurrency market participants believe is a fear over the social media firm’s technological power and potential ability to affect fiat markets.
“The regulatory reaction has been fierce because Facebook is effectively creating a supra-national currency that competes directly with national currencies,” said José Maria Macedo, head of advisory at blockchain firm AmaZix, in an email.
“Rather than pegging its currency to a national currency as most stablecoins have done, Facebook is instead collateralizing its coin with a basket of national currencies, bonds and bank deposits and allowing users to redeem their currency for this collateral at any point. This creates a diversified, exchange-traded fund (ETF)-like instrument … which is truly international and borderless and doesn't suffer from the risks of holding any one national currency.”
According to its whitepaper, Libra is a cryptocurrency minted on the Libra Network, a blockchain developed by a Switzerland-based consortium led by Facebook. The currency is backed by a not-for-profit company called the Libra Association, which oversees the network and manages the reserve with which Libra will operate with.
That reserve comprises a basket of currencies deemed low volatility by Libra. At the time of launch these are US dollar, sterling, euro and yen. Only currencies that are free-floating, backed by central banks and recognised across multiple jurisdictions will be accepted as additions to the basket in the future.
Libra will run on a proof-of-stake blockchain with a two-token system and rely on a Byzantine-Fault-Tolerant (BFT) consensus algorithm, a fault-tolerant system which ensures a network can continue to operate if certain components of it fail. Support for smart contracts is expected in future, following a move from a permissioned to a permissionless chain.
Facebook plans to incorporate Libra into its ecosystem of platforms, including Messenger, WhatsApp and the Facebook social media site. It estimates that within 18 months it will be able to expand Libra to most of its 2.4bn userbase.
Regulatory wake-up call
In an interview with Europe 1 radio French finance minister Bruno Le Maire called on the governors of the G7 central banks to produce a report on Libra. “Facebook has created a transaction instrument,” he said. “Why not?” His concerns centred on Libra approaching anything like a sovereign currency. “It is out of the question,” he said. “It can’t happen.” He said that governments have a right to ask Facebook for guarantees over whether Libra will become a rival to fiat currency.
Mark Carney, governor of the Bank of England, addressed Libra in a speech at the European Central Bank’s annual symposium in Portugal. According to the Financial Times, Carney told the audience that he had an open mind when it came to new digital currency. He added that there would be no open door for its launch, and that it would have to meet the highest standards.
The US Senate Banking Committee has called for a hearing into Facebook’s plans with Libra. Scheduled for 16 July. David Marcus, Facebook’s head of blockchain, is expected to testify. The hearing will analyse Libra and data security considerations.
Democrat senator Sherrod Brown, endorsing the Senate Banking Committee’s actions, wrote: “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
Maxine Waters, chairwoman of the US House Committee on Financial Services, wrote in a statement that she believed Facebook should halt all progress on Libra until it has answered to regulators in the country. “The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy.
“Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks, and trading risks that are posed by cryptocurrencies. Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action. Facebook executives should also come before the Committee to provide testimony on these issues.”
The chairman of Russia’s State Duma Committee on the Financial Market, Anatoly Aksakov, told local radio station Kommersant FM that Libra would be banned before it could be used, and that Russia would not consider adopting legislation which would create space for open platforms or blockchains because they could constitute a threat to the country’s financial system.
Ivan Gowan, CEO of tokenized securities exchange Currency.com, said in an email that Facebook’s size and financial power is adversely affecting regulators’ responses. “Facebook has the audience reach and financial power to make a strong case to get this project launched and make it a success, and with it this brings new challenges and regulatory hurdles that will need to be addressed.
“The speed at which tech companies - in particular those with large reaches and top-level teams - are able to develop new technologies is often not matched by the time needed for legislation to catch up. It will not be a smooth ride with lots of competing interests potentially affected. We will see issues of privacy, control and competition addressed as Facebook forges its way through the fintech world and there will doubtless be many legal and ethical issues that it will need to confront.”
Gowan added that Facebook’s commitment to supporting a digital currency will accelerate the industry and drive innovation. “Its experiences with navigating the issues arising in the social media world have also laid the foundations for dealing with ethical challenges which puts them in an interesting position. I imagine that regulators will vary enormously throughout the world, as they do for the traditional finance and current crypto world.”
For AmaZix’s Mercado, it’s crucial that people divorce Libra from Facebook. “It's important to understand that this isn't ‘Facebook's cryptocurrency’ as many are mentioning. Facebook is simply one node on this network and will have no more power than anyone else. Although presumably Facebook will initially drive the development and expansion of the network, its ultimate aim is to make it permissionless and decentralized, implementing an on-chain governance system as well.”
Participants sit as nodes in the Libra network, with no one participant said to own it. Backers of the Libra project include Visa and Mastercard.
“The fact that Mastercard, Visa, et al are on board as nodes is incredibly interesting. I believe for Visa and Mastercard this is a case of ‘keep your friends close and your enemies closer’; Visa and Mastercard understand that their traditional business is threatened by crypto and want a seat the table to observe and influence the direction of this potential disruptor. This is similar to Middle Eastern oil magnates investing in electric cars and renewable energies.”