Facebook is creating its own currency. A global cryptocurrency called Libra.
One which will empower and reach out to the 1.7 billion adults who are unbanked. And one that could change how we pay for things as we know it forever.
What is Libra?
Libra describes itself as a new global currency that will reinvent money and transform the global economy.
Libra will be governed by the not-for-profit Libra Association, which has a growing number of members who have each invested $10 million. Notably, there are currently no US or European banks backing Libra, reportedly because they fear “antagonising regulators and cannibalising their own digital currency projects”.
What’s the fuss?
“Before Facebook announced that it was going to launch Libra, it was hard to find anyone in congress who really cared all that much about cryptocurrencies. Once Facebook said ‘we’re going to do one’ however, all of that changed.”
Paul Vigna, WSJ Cryptocurrency Reporter
The reason for the fuss is that Libra has more potential to disrupt global finance than earlier cryptocurrencies, which failed to gain traction at the retail level. They also experienced huge swings in value, making them unattractive alternatives to government-issued money.
The concern is so great that last month France announced it will block the development of Libra in Europe because it threatens the “monetary sovereignty” of governments.
Why are we at Napier concerned?
As a tech provider and new breed of anti-money laundering (AML) and trade compliance business, we’re big fans of pioneering technology. But that said, we’re not comfortable with Facebook’s Libra. This is why:
1. Facebook is no longer a trusted brand
Facebook is a social media platform that makes a lot money from selling personal data. It’s also a brand smeared with scandals and distrust. Facebook has been in the dock over the last decade with broken promises, data leaks, fake news scandals and confusing statements.
Following the Cambridge Analytica personal data scandal last year, over $119 billion was knocked off Facebook’s market captialisation.
To date, Facebook has not operated with transparency.
Why should any government trust Facebook – a private company – with a cryptocurrency launch that has such a potentially economically significant impact?
2. Libra and due diligence
Libra will make moving money across continents as easy as sending a text message. You’ll just need your phone and a Facebook account.
There’ll be no bureaucratic banking systems getting in your way.
In fact, as things currently stand, if you don’t want to be identified on Facebook, you can form a veil of anonymity by creating a false profile. (You won’t be alone if you did this – Facebook removed 2.2 billion fake profiles in the first quarter of 2019 alone).
And while it would be wrong to assume Facebook would be so naïve to create such a money laundering haven (or that the regulators would permit it, for that matter), Libra is currently alarmingly vague about how it will prevent illicit flows of money.
Unlike banks who jump through hoops to know their customers to prevent financial crime, currently no one at Facebook asks to see your passport, driving licence or utility bill when you create a profile.
Can we really trust Facebook to know who’s lurking behind each and every Facebook profile?
3. Libra creates new financial crime opportunities
The direct exchange of cryptocurrencies for goods and services is still somewhat limited. And while this is the case, crypto can be seen as a normal investable asset class for speculators.
However, if Libra can be exchanged for fiat currency as well as goods and services, it opens a whole new world of financial crime opportunities.
With the responsibility of creating a new global currency comes the responsibility to police it. And yet, as shown by the startling financial crime statistics, policing a fiat currency has never been done successfully on a global scale.
Entry for money launderers in any financial system is always the weakest point of that system. And in a global market, the entry points can be numerous.
How would Libra ever be able to police the crime opportunities it creates?
4. The impact could be massive
Other cryptocurrencies have failed to gain traction. Facebook however has 1.59 billion active users. It also owns Instagram which has 1 billion users and WhatsApp, which has 1.5 billion users.
On top of this, members of the Libra Association include some of the world’s biggest brands, like PayPal, Mastercard and Visa. Libra’s potential to tap into all of these markets and achieve rapid global adoption is absolutely huge.
And with global adoption comes an even greater risk of money laundering and other forms of financial crime. There’s also the risk of considerable financial disruption should the functioning of the currency breakdown.
Do we feel comfortable with the idea that one business, backed by some of the world’s biggest brands, could potentially dominate a market in this way?
What’s going to happen?
The digital currency race is on. Since Facebook introduced Libra in June, for example, China’s central bank has been in the news for accelerating its push to digital money.
What sets Facebook apart is its all-important global user numbers – this in itself can conquer supreme adoption. And ultimately, affect other currencies and even national economies.
Facebook has said Libra won’t launch until the regulators are happy, but the regulators are still grappling with what sort of financial instrument Libra is. There are also hundreds of financial regulators worldwide. Is Facebook really going to gain approval from each and every one?
The situation is complex.
Jose Manuel Campa, chair of the European Banking Authority (EBA) has said that Libra falls into a ‘big gap’ in EU rules, while Switzerland has said that Libra could face strict rules that typically apply to banks, as well as tough anti-money laundering laws.
There are far more questions than answers, and no-one really knows how Libra will be regulated.
Facebook plans to launch Libra in 2020 but only time will tell if, when and in what form it will launch.
The challenge most certainly rests in regulating this potentially world engulfing currency.
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