Partner Bambos Tsiattalou discusses Facebook’s plans to introduce its own cryptocurrency, in The Barrister.
Bambos’ article was published in The Barrister, 23 September 2019, and can be found here.
Facebook’s plans to introduce its own cryptocurrency has provoked an increasingly strident reaction from some of the world’s most powerful nations.
Facebook is the driving force behind the Libra Association, which last June announced plans to create a global digital currency. Facebook’s new subsidiary, Calibra, plans to build an app to facilitate the transfer of the Libra currency. Calibra says its app will be “built on blockchain technology to enable people to move Libra, a borderless cryptocurrency, freely, securely and affordably”.
The strength of resistance to Libra has taken Facebook by surprise. The US Congress held two days of hearings into Libra in July. Maxine Waters, Chairperson of the United States House Committee on Financial Services called on Facebook to halt Libra’s launch and development.
President Trump, perhaps inevitably, also tweeted his views, saying “I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity … Similarly, Facebook Libra’s ‘virtual currency’ 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”.
The German cabinet has even adopted a new blockchain strategy in an effort to prevent cryptocurrencies becoming a threat to state currencies. German Finance Minister Olaf Scholz said that “A core element of state sovereignty is the issuing of a currency, we will not leave this task to private companies.”
The French Finance Minister Bruno Le Maire recent said that “The monetary sovereignty of countries is at stake from a possible privatisation of money … by a sole actor with more than 2 billion users on the planet.” Mr Le Marie also suggested that Libra could make money laundering and terror financing easier, before concluding firmly that “we cannot authorise the development of Libra on European soil.” The Governor of the Bank of England, Mark Carney, was more circumspect about Libra saying the it would be approached with “an open mind but not an open door”.
Interestingly, Valerie Khan, of the Digital Equity Association, and Geoffrey Goodell, of University College London’s Centre for Blockchain Technologies suggested in a recent paper that the true value of Libra to Facebook is as a vehicle to secure more personal information. They say that, “By working with financial regulators seeking to address concerns with money laundering and terrorism, Facebook can position itself for privileged access to high-assurance digital identity information.”
Senior data protection officials from the EU, US the UK and other nations have also raised privacy and data protection concerns about Libra. On 2 August, a number of officials issued a joint statement saying that, “Many of us in the regulatory community have had to address previous episodes where Facebook’s handling of people’s information has not met the expectations of regulators, or their own users. Because of this, we are sharing our expectations of the Libra Association, Facebook’s subsidiary Calibra, and any future Libra digital wallet provider”. The statement concluded that, “To date, while Facebook and Calibra have made broad public statements about privacy, they have failed to specifically address the information handling practices that will be in place to secure and protect personal information.”
The weight of resistance to Libra is significant and widespread. Banks are concerned too, but perhaps due to self-interested reasons, since Libra may eat into their business and reduce the profits they make from currency exchange. As well as the concerns set our above, states are also quietly concerned about being unable to prevent capital flight in times of economic turmoil. Governments are reluctant to give up the control they have always had over their currencies. Amongst the many critics of Libra, there are surely many vested interests, who are simply reluctant to give up longstanding positions of privilege.
Cryptocurrencies have come a long way since the introduction of Bitcoin a decade ago. Bitcoin was notoriously volatile, and was not linked to any underlying real assets. Libra, by contrast, is set to be what is known as a “stablecoin” which would be linked to a basket of strong currencies at a 1 to 1 ratio. While financial regulators appear to be as yet unpersuaded as to the benefits of Libra, the cryptocurrency’s backers have said they would welcome regulation to give the public confidence that this 1 to 1 ratio is maintained.
David Marcus, CEO of Calibra, recently entered the fray on social media, attempting to address some of the concerns raised about Libra. He has sought to “debunk” the notion that “Libra could threaten the sovereignty of nations when it comes to money,” by arguing that Libra is not going to be a new currency, but merely a “better payment network and system running on top of existing currencies”. He said the creation of money will “strictly remain the province of sovereign nations”. Mr Marcus stressed that “for any unit of Libra to exist, there must be the equivalent value [of currency] in its reserve.”
Yet if Libra truly is a payment mechanism, and not a new currency, then it may have been wiser not to trumpet it precisely as a new “global currency” at its launch. The launch of a new “global payment network” may not have provoked the ire of some of the world’s most powerful nations in quite the same way.
We live in an era where the internet has no single regulator, and many tech and finance companies are wealthier than whole nations. Facebook is the leading player, but it is not alone in the effort to launch Libra. Other companies involved in the Libra Association include Mastercard, Vodafone, Spotify and Visa.
The reality may prove to be that there is little to stop such companies from launching a digital currency – or a “better payment network” – if that is your preferred term. If Libra is ultimately successfully launched as scheduled in June 2020, in the face of the opposition of many of the world’s leading nations, its launch will also tell us a lot about where the real power now lies in our global digital economy.