Facebook’s plans to launch a new digital currency, Libra, have drawn immediate scrutiny from regulators. The Group of Seven nations (G7) is to set up a forum to examine the potential impact of digital currencies on the world financial system, with representation from the International Monetary Fund and national banks.

Bank of England governor Mark Carney said the Bank would look at the social network’s financial ambitions with “an open mind” but not “an open door”.

Carney has long been an outspoken critic of cryptocurrencies, suggesting in a speech in February last year that they were “failing as money” and represent a threat to a trusted banking system.

But trust in that system is low among consumers in the wake of the 2008-09 financial crash and multiple banking scandals, including the rigging of foreign exchange rates, large-scale fraud, sanctions busting, money-laundering, and the mis-selling of financial schemes.

In June 2018, the Bank of International Settlements (BIS), the umbrella organisation for the world’s central banks, added its voice to mounting concerns over digital tokens. It said that cryptocurrencies are “not scalable and are more likely to suffer a breakdown in trust” as they grow.

Whether Libra will prove to be a cure for what some see as a sick financial system or merely a symptom of it remains to be seen, given that it is far from clear how Facebook would prevent the new currency from becoming a money-launderer’s dream, in which funds could be transferred instantly across the globe or from phone to phone, buried among billions of obscure transactions.

Unlike many cryptocurrencies, however, Libra will be a ‘stable coin’, backed by assets and a basket of currencies, distinguishing it from fiat currencies – currencies that are backed by government regulation and mutually agreed value – and cryptocurrencies such as Bitcoin, which are backed by little more than hope and distributed processing power.

The proposed digital currency is also supported by an alliance of companies and organisations, including Vodafone, Uber, Lyft, Stripe, PayPal, eBay, Spotify, and – in a blow to those who wish to challenge the financial status quo – Visa and MasterCard. In this sense, Libra will be woven into many aspects of the traditional financial system, rather than exist as a discrete and largely theoretical entity. As such, it could pose an existential threat to many banking functions.

With Facebook’s billions of users worldwide all potentially grist to the mill, and ripe for being pushed or coerced into using the currency, Libra could become systemic before it is understood: is it a cryptocurrency, a payment platform, or a global operating system for financial services? A situation not helped by Facebook whipping up publicity for the launch before regulators have even looked at it.

Of the new scheme, Facebook said, “The success of this venture depends on its trusted and safe integration with the existing financial system. The world’s governments, specifically regulatory and law-enforcement authorities, are essential partners in this endeavour.”

The big challenge for Facebook, however, is that ‘trusted and safe’ are not words that many people now associate with the brand, given the widespread unease over the inadequate data privacy culture of a business that regards users as its core product.

In the US, Chair of the House Financial Services Committee, Maxine Waters, said, “Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data. 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.”

The company is setting up a subsidiary, Calibra, which, reportedly, will use separate servers and won’t share users’ financial data with Facebook – which also owns WhatsApp and the newly retail-focused Instagram.

However, the company is creating wallets for those apps and it is hard to believe that Facebook won’t track users’ transactions, purchases, memberships, affiliations, and more, with its partners. The result could be the creation of an integrated banking, retail, and advertising system in which it is impossible to separate publicly identified users from what they do with their money.

Meanwhile, some have observed that replacing an imperfect banking system with an alliance of acquisitive American corporations and making them custodians of citizens’ cash is hardly fulfilling crypto’s purpose of creating a peer-to-peer financial system for the people. According to Bloomberg, Nouriel Roubini, a professor of economics and international business at New York University Stern School of Business, called Libra “a Monopoly scam”.

Facebook has stated that it does not provide banking services – in much the same way that it (along with Google and others) claims that it is not a publisher. In reality, such claims are bunkum, and are generally designed to sidestep liability, rights, and regulation issues until the law catches up.

But there is a further problem with the potential rise of a global, de facto cryptocurrency: its environmental impact and cost. One of the big challenges with all cryptocurrencies is the cost per watt of mining them, in terms of energy, heat, and cash (aka who pays the energy bills). David Marcus, who heads the Libra project for Facebook, said the network will eventually become distributed, which means those costs will be passed onto consumers.

If this problem (the inescapable laws of thermodynamics and mass/energy equivalence) didn’t exist, cryptojacking wouldn’t exist as a crime – miners’ covert use of other people’s processing power to avoid paying the energy bills. In many cases, the cost of mining for cryptocurrencies is significantly higher than the value of those tokens in real terms, as explained in this report last year.

All financial services work on the principle of the greater fool. By launching Libra, Facebook may be making fools of all of us – one way or another.

  • In other FinTech news this week, digital bank Monzo has raised £113 million of new funding, doubling its valuation to over £2 billion.

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