In January 2018, Facebook founder and CEO Mark Zuckerberg used his blog to ponder the concept of cryptocurrency and its socioeconomic implications.
“There are important counter-trends to this — like encryption and cryptocurrency — that take power from centralized systems and put it back into people’s hands,” he wrote. “But they come with the risk of being harder to control. I’m interested to go deeper and study the positive and negative aspects of these technologies and how best to use them in our services.”
Last month, Zuckerberg’s pondering became a reality when Facebook formally announced Libra, which it dubbed a “new decentralized blockchain, a low-volatility cryptocurrency, and a smart contract platform that together aim to create a new opportunity for responsible financial services innovation.”
Almost immediately, the news of Libra’s creation generated a firestorm of angry comment out of Washington, D.C., led by President Donald Trump tweeting that Libra “will have little standing or dependability. If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks.”
Some of the president’s staunchest political rivals echoed his skeptical sentiments. Rep. Maxine Waters (D-CA), chairwoman of the House Financial Services Committee, accused Facebook of creating a project that “raises serious privacy, trading, national security, and monetary policy concerns for consumers, investors, the U.S. economy and the global economy.” And Sen. Sherrod Brown (D-OH), the ranking member of the Senate Banking Committee, declared, “Facebook’s motto is move fast and break things. They’ve moved fast and are helping to undermine our democracy. Now they’re expecting us to trust them with our paychecks.”
Perhaps a clarification is needed.
Libra is not a Facebook subsidiary. Instead, it is being administered by the Libra Association, a Switzerland-based entity consisting of 28 founding members, including Facebook, Mastercard, Visa, eBay, Lyft, Spotify, Uber Technologies, Vodafone Group, Coinbase Inc. and the nonprofit Women’s World Banking.
Facebook will not run Libra, but will have a single vote in its governance along with the other founding members. Facebook said it hoped to expand the founding membership base to 100 before Libra’s planned official launch in 2020.
Ben Ho, an economics professor at Vassar College in Poughkeepsie, observed that the governance of Libra stands in contrast to other entities in the sector.
“Libra isn’t quite the same as most cryptocurrencies on the market since control is centralized,” he said. “This actually makes sense to me. The decentralized nature of most crypto makes it incredibly costly and slow. More centralization does mean we need more trust, but that’s not a big deal. We trust institutions like banks all the time.”
The core of this initiative is a currency unit called the libra. The association’s website stated its aim is to make the libra “as widely accepted and as easy to use as possible to create a currency that people can use with confidence and convenience in their everyday lives.”
But Neil Howe, head of the demography sector at Hedgeye Risk Management in Stamford, was confused when the Libra project was first unveiled.
“I didn’t know what to think of it,” mused Howe. “I didn’t know if it was a cryptocurrency or a Venmo-like thing as a means of funds transfer.”
Most cryptocurrencies are produced through a process called “mining,” which uses special software to solve computationally challenging puzzles. Units are mined in blocks and anyone can participate in building the block chain. Libra, however, is designed to have the backing of what it dubbed a “basket of currencies and assets,” including U.S. securities, which is meant to provide a degree of financial stability that is often absent in the volatile cryptocurrency space.
The Facebook subsidiary Calibra is building a wallet application to enable Libra users to send funds to others or make purchases on Facebook and Instagram via Facebook’s WhatsApp and Messenger. Calibra will also function as a stand-alone app.
“It could make it easier to buy stuff advertised on the Facebook site,” Howe added.
At the moment, there are no plans to expand Libra into traditional retail, e-commerce or banking channels. And speaking of banks, there are none among the founding Libra Association entities.
The Libra Association stressed the strength of its blockchain technology, citing its use of the Move programming language that puts a heavy emphasis on ensuring the security of the financial transactions. The organization’s website claimed that Move is designed to prevent assets from being cloned and can facilitate automatic proofs that transactions satisfy certain properties.
Unlike other cryptocurrencies, Libra will not be introduced as a permissionless blockchain, where access can be granted to anyone to run a validator node. Instead, it will go live as a permissioned blockchain, which means anyone who meets the technical requirements can run a validator node — in this case, the association’s founders.
Daniel Farkas, chairman of the Information Systems Department at Pace University in Pleasantville, believed this approach could mitigate the concerns that many people have about this technology and the financial vehicles it supports.
“It is probably good in the long run for the blockchain and cryptocurrency world,” he said. “This will make more people aware of what the technology is.”
“The attention that Facebook can bring to this industry is potentially unparalleled to any other company,” said Mark DiMichael, partner in the forensic, litigation and valuation services department at Citrin Cooperman, with offices in White Plains and Norwalk. “Virtually everybody has a Facebook account, so this can bring cryptocurrency to the masses.”
But are the masses ready for this type of cryptocurrency, especially in this country?
“It is probably something that I will never use,” said Scott Acheychek, president of Rex Shares LLC in Fairfield, who noted that Libra could find more popularity in the developing world. “There should be some kind of global currency that addresses unbanked people. The World Bank estimated that there are 1.7 billion adults who are unbanked in the world, but two-thirds of them own a mobile phone.”
Hedgeye’s Howe theorized that Libra could be a significant player in the funds remittance market.
“International transfers are now stupidly expensive,” he complained. “Big banks charge absurd amounts to immigrants and expatriates. There is no reason why that is so costly, and this could be an interesting way to get around it.”
But will it be able to circumvent existing systems and the regulations that shape their operations?
“We still have governments and governments are not willing to let their currencies go,” warned Nicholas Coriano, partner at Bridgeport-based Cervitude Inc. “There is going to be a lot of negotiation before it is commercially available.”
Federal Reserve Chairman Jerome Powell is pushing back.
“Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,” he told Congress earlier this month.
Powell is not completely dismissive, admitting Libra “does have potentially systemic scale. It needs a careful look, so I strongly believe we all need to be taking our time with this.”
Citrin Cooperman’s DiMichael was pleasantly surprised by Powell’s attention regarding the subject.
“I’m not sure that the Fed previously talked about cryptocurrency at all,” he said.
“I was happy to hear Chairman Powell say in his testimony to Congress that the Fed will hold Libra to ‘the highest standard,’ ” added Gordon Boronow, assistant professor of business at Nyack College. “I am not sure what that means, but I like the fact that they are watching developments closely.”
Yet there is still the Facebook connection, and the company’s recent scandals involving data sharing, discriminatory practices in its housing advertisements and Russian interference in the 2016 election have not been forgotten, let alone forgiven, by many in Washington. Jaime Urteaga, founder and CEO at Digital Chair Inc. in White Plains, believed this will prevent Libra from being perceived as a stand-alone entity rather than a Facebook tool.
“Everything points to Facebook,” he said. “It is going to be seen as their project.”
Hedgeye’s Howe predicted the Facebook connection could hobble Libra in gaining federal regulatory approval.
“Facebook is beginning to be the company everybody hates,” he quipped. “Democrats hate it because it is big. Republicans hate it because it is California crazy.”