UPDATED: The European Union has tabled a series of urgent questions to Facebook about its proposed Libra coin project.
Regulators are concerned that cryptocurrencies, digital currencies and tokens pose potential risks to financial stability, fiscal probity, and anti-money-laundering (AML) initiatives by enabling cross-border payments that may be hard to track. This has left the EU uncertain about whether new regulations may be required, or even if a coin such as Libra should be banned from the bloc.
The move coincided with news that PayPal, one of the founding coalition of companies backing the coin, has pulled out of the programme, citing concerns over Facebook’s apparent lack of action over AML demands.
PayPal may also have recognised a potential existential threat to its business – concerns that ought to be shared by some of the currency’s 27 other backers, which include Visa, MasterCard, and Stripe. The Geneva-based Libra Association has also lost its Head of Product, Simon Morris.
To place European regulators’ questionnaire in context, Facebook claims to have 2.4 billion users – roughly one-third of the world’s population, equivalent to the populations of China and India combined. By comparison, the Eurozone has a population of just 343 million people and the US 327 million, though the US dollar is an official currency in several other countries.
In 2017, the US dollar accounted for nearly 40 percent of the world’s cross-border payments. It is also the standard unit of currency in major commodities markets, the world’s foremost reserve currency, and the peg against which most other currencies are measured.
Were Facebook, hypothetically, to give each, or some, of its users a tranche of the Libra digital coin – perhaps in recompense for its past data protection failures – the global financial system could face the shock of a new global currency coming into play almost overnight, one controlled by a US corporation and used by up to 2.4 billion people worldwide to transfer money across borders.
There are also overwhelming Know Your Customer (KYC) concerns. According to a report on CNN, Facebook pulled down 2.2 billion fake accounts in the first quarter of 2019 alone – nearly as many as the total number of active accounts. While the social network might claim this as evidence of effective policing, its own estimates suggest that five percent of monthly active accounts are fake.
The EU wants Facebook to explain how the Libra Association, the Europe-based wing of an American corporation, will handle AML, tax evasion, and counter-terrorist financing rules in a world in which the EU and US are frequently at loggerheads over the right approach to regulation. Policymakers are also concerned about the data privacy and protection implications of an advertising-based business effectively operating its own currency.
According to the FT, Europe’s finance ministers have expressed “strong concerns” that Libra and other digital currencies could destabilise the financial system and undermine governments and central banks. France has suggested that Libra should not be allowed to operate in the EU.
In the US, Bloomberg reports that two Senators have written to some of Libra’s corporate backers, saying: “Facebook is currently struggling to tackle massive issues, such as privacy violations, disinformation, election interference, discrimination, and fraud, and it has not demonstrated an ability to bring those failures under control.
“You should be concerned that any weaknesses in Facebook’s risk management systems will become weaknesses in your systems that you may not be able to effectively mitigate.”
On 9 October, the Bank of England’s Financial Policy Committee added its voice to the debate about Libra. “The FPC judges that such a system would need to meet the highest standards of resilience and be subject to appropriate supervisory oversight,” it said.
The announcement explained that, for the time being, the Bank planned to apply existing regulations to the digital coin, which it described as having the potential to become “systemically important”.
The latter comment revealed just how quickly things can change in a financial sector that is being disrupted at its core by digital innovations. In March 2018, Bank of England Governor Mark Carney slammed digital coins in an aggressive defence of traditional banking which claimed that cryptocurrencies were failing as money.
“The long, charitable answer is that cryptocurrencies act as money, at best, only for some people and to a limited extent, and even then only in parallel with the traditional currencies of the users. The short answer is they are failing,” he said. “Cryptocurrencies have neither intrinsic value nor any external backing.”
But in Facebook’s case, of course, they are backed by the real gold: data. To policymakers in the finance industry that represents a troubling shift of power – and one that may undermine global AML initiatives.
From value-free tokens backed by nothing more than hope to “systemically important” in just 18 months: a lesson in the speed of transformation sweeping through the sector.
However, Carney’s underlying point was sound: the challenge with all cryptocurrencies is establishing a fair value for them – one that includes the cost per watt of mining. In recent years and in volatile markets, some crypto miners have found that the cost of purchasing and running expensive GPU-based mining rigs has been greater than the market value of the resulting tokens. In some cases, investors would have done much better for themselves by buying shares in hardware companies such as NVIDIA.
Who pays the energy bills remains an important question, and the answer is invariably a network’s members rather than its owners, something that those members are frequently unaware of.
Either way, here we are. And in a networked, platform-enabled world, the emergence of a global digital coin, such as Libra, was inevitable. Whether a leaky, inept, poorly designed, badly policed, advertising-based social network that regards its customers as product should be trusted with founding such a coin is another question. But perhaps that, too, was inevitable.