I actually don't know if libra is going to work,
but I believe that it's important to try new
things. When Facebook first announced it was
getting into the crypto business with a basically
unregulated currency called libra, the reaction
from Wall Street and government bankers was about
as expected. Libra raises a lot of serious
concerns. I'm not a big fan of what they're doing
there. I think it's a big mistake.
It was a neat idea that'll never happen, and I
have nothing else to say about it.
Libra is in trouble.
The social media giant had lined up a long list
of corporate backers for the initiative,
including major players in the payment space.
In early October 2019, PayPal became the first
company to back out of the libra coalition.
That led to an exodus of other companies from the
project. MasterCard, Stripe, Visa and eBay all
followed PayPal and ditched libra.
So, why are all these companies ghosting
Facebook's digital currency all of a sudden?
First, let's explain how Facebook got into
another mess like this.
I like the libra concept, but you got to drop it.
It's clearly doing more harm than good.
Facebook first announced libra in June 2019.
Introducing Libra, a new global currency.
It formed the Libra Association in Switzerland to
run the cryptocurrency project and lined up 27
companies to oversee it.
Facebook also set up a subsidiary called Calibra,
designed to host the financial services and
payment software built on top of the libra
digital currency. Why did Facebook get into
crypto in the first place?
Facebook is big. It has 2.41
billion monthly active users.
That's a huge base.
Even if a quarter of the users ended up using
Libra for payments. That's 600 million people,
about twice the population of the United States.
Facebook, though, also has a ton of baggage.
Think 2016 presidential election and Russian
hacking kind of baggage.
So, when a company that big and that influential
plans to introduce a product that could
potentially disrupt the global financial
community, you can see why U.S.
lawmakers are paying even closer attention to the
social media giant.
This is Facebook's currency chief David Marcus
testifying before the House Financial Services
Committee back in July 2019.
The reason we designed libra in such a way that
Facebook will only be one among 100 different
members of the Libra Association and we'll have
no special privilege, means that you will not
have to trust Facebook.
Well except, Mr.
Marcus, you know better than that.
You know that only Facebook has access to 2
billion people and all, all to say that, that you
are just one of many is simply, is simply not
true after people's data and private messages
have been stolen. And this is Facebook CEO Mark
Zuckerberg testifying before the House Financial
Services Committee about the proposed
cryptocurrency in October 2019.
I want to be clear. Facebook will not be a part
of launching the libra payment system anywhere in
the world, even outside the U.S.,
until the U.S.
regulators approve. Lawmakers are really, really
nervous about Facebook getting into digital
currencies. Libra could be misused by money
launderers and terrorist financiers.
Cryptocurrency such as Bitcoin have been
exploited to support billions of dollars of
illicit activity.
Facebook designed libra to be a digital global
currency. Like other digital currencies, libra
will be built on top of a blockchain or a digital
ledger. Unlike other cryptocurrencies, libra
would be backed by a basket of real world
currencies. That would stabilize its price,
protecting it from wild swings seen in the
bitcoin market. The libra reserve will hold bank
deposits and short-term government securities for
every libra coin created online.
If all goes according to Facebook's plan, users
would have a virtual wallet where they could buy,
sell, send and receive libra through platforms
like Facebook or Instagram or WhatsApp.
And, those payments would move within seconds for
small fees. With bitcoin transactions, it could
take several minutes to confirm a transaction.
And in some cases cost a few dollars.
Bitcoin is known for its volatility and steep
price swings because it isn't backed by
government. That means things like inflation and
monetary policy don't influence its value.
Instead, cryptocurrencies move with supply and
demand and basic market forces, fear and greed.
Bitcoin, for example, has a fixed supply.
The total number that will ever be minted is
hard-capped at 21 million, and experts say that
hard cap won't be reached for another 120 years.
Facebook says all that volatility wouldn't happen
with Libra because it will be backed by a bunch
of currencies, effectively maintaining a stable
price even when demand changes.
I think Libra is being designed right now to be
spent because it's a stable coin and it's pegged
to a basket of currencies, and so most people
today are going to assume that people will be
buying burgers or coffee.
That's Tom Lee.
He's head of research at FundStrat Global
Advisors, an independent research firm.
He says Facebook entry into cryptocurrencies is a
huge positive. It brings a lot of credibility to
space, but also with its 2 billion users, it's a
massive increase in the addressable market, and
arguably one of the biggest headwinds for crypto
adoption has been the user interface or the ease
of sort of finding on ramps.
Libra would use blockchain technology, which is
what all cryptocurrencies run on.
The blockchain is a secure, digital collection of
financial accounts.
So, it's basically a decentralized bank ledger.
There's no middleman. The currency is exchanged
person to person and recorded on the blockchain
so you can see who owns what.
Traditionally in crypto, anyone could access that
blockchain, but not with Libra.
This is David Yermack.
He chairs the finance department at New York
University's Stern School of Business and he
teaches courses on cryptocurrencies.
It's very different than cryptocurrency like
bitcoin or ether, which is decentralized, has no
leadership and relies on a community of people
who compete to build the blocks that update the
transactions. Because of the design of something
like bitcoin, it really can only accommodate a
small amount of traffic, but something with
central management like libra could really grow
to almost any size that you wished.
Libra would be permissioned, which means
transactions can only be added to it by a group
of trusted parties.
That's where the Libra Association comes in.
It's the Swiss-based consortium of nonprofits and
companies like Lyft, Uber and Spotify.
Each partner of the Libra Association invested a
minimum of $10 million into the project.
David Marcus is the Facebook executive leading
the blockchain initiative, who also once served
as the president of PayPal, previously testified
to Congress that libra would work more like a
traditional currency than a cryptocurrency.
The intent of libra is not to compete with other
cryptocurrencies. It's to compete with the real
currencies issued by the central banks.
That raised a red flag among government
regulators. And that's a big reason why libra's
corporate backers began fleeing.
Zuckerberg took heat from lawmakers looking for
clarity. Given the company's size and reach, it
should be clear why we have serious concerns
about your plans to establish a global digital
currency that would challenge the U.S.
dollar. For the richest man in the world to come
here and hide behind the poorest people in the
world and say that's who you're really trying to
help. You're trying to help those for whom the
dollar is not a good currency.
Drug dealers, terrorists, tax evaders.
He acknowledged the risk of digital currency like
libra poses, but also argued it could ensure the
U.S. position as an innovative financial world
leader. I just think that we can't sit here and
assume that because America is today the leader,
that it will always get to be the leader if we
don't innovate. And innovation means doing new
things. And that does mean new things have risks.
And we need to address the risks and we need to
be careful in doing that.
But when pushed to explain why corporate backers
exited the libra project, Zuckerberg put the
blame on risk. Why have they departed?
Scores of stable partners have dropped out.
Why? Well, Congresswoman, I think you'd have to
ask them specifically for-
Why do you think they dropped out?
I think because it's a it's a risky project and
there's been a lot of scrutiny.
Yes, it's a risky project.
And when asked about potential privacy concerns,
he told Congress there are millions who trust
Facebook. Billions of people come to our services
because they trust that they can share content,
messages, photos, comments with the people they
care about. And more than 100 billion times a
day, people do that.
They share something with a set of people because
they know that that content is just going to
reach the people that they want it to.
So I think that if we're able to move forward
with this project, there may be some people who
who don't want to use it because they don't trust
us or don't like us.
And that's one of the values of having an
independent association where there will be other
competitor wallets and other approaches, too.
Zuckerberg spent most of the hearing reassuring
lawmakers libra wouldn't launch without approval
from U.S. regulators.
Facebook's push into digital currency served as a
big wakeup call for lawmakers and central
bankers. It's pitting Facebook against the U.S.
and other governments.
And Facebook is losing so far.
In September 2019, France and Germany both agreed
to block libra. The government said, "no private
entity can claim monetary policy, which is
inherent to the sovereignty of nations."
A few weeks later, libra began to lose its
corporate backers. PayPal was the first company
to leave in early October 2019.
Days later, two senators on the Senate Banking
Committee sent letters to the CEOs of Visa,
MasterCard and Stripe to express concerns over
their involvement in the Libra Association.
Senator Sherrod Brown of Ohio and Brian Schatz of
Hawaii told companies "to proceed with caution"
until Facebook provides more details on the risks
posed by libra, like financing terrorism and
disrupting the global financial system.
A few days after the senator sent the letters,
eBay, MasterCard, Visa and Stripe announced they
would leave the Libra Project.
The U.S. Treasury Department had also been
privately pressuring libra's corporate backers,
according to the Wall Street Journal.
The opposition to libra is coming from countries
with established financial and payment systems,
where a majority of the population already has
bank accounts. That's not really the kind of user
Facebook has in mind with libra.
It's going after the world's unbanked population.
You know, that unbanked world is a lot larger
than we all appreciate because anyone living in
the U.S., you know, has pretty simple access and
low-cost access to banks.
Facebook points to statistics that show 31
percent of adults in the world don't have a bank
account. That's about 1.7
billion people globally.
And those numbers are worse in developing
countries and even worse for women.
Turns out, the unbanked community of 1.7
billion people can be leveraged through reliable
internet infrastructure and mobile phones.
Those two things alone have given rise to a new
generation of financial services without
requiring fancy tech.
1.1 billion of those 1.7
unbanked people have a mobile phone.
For example, in sub-Saharan Africa, simple,
text-based phones have popularized mobile money
accounts. So, Facebook has a lot to gain from
winning over the unbanked with a global payment
service based on its own digital currency.
It's not just Facebook making waves in the
digital currency market.
China's government also wants a piece of the
action. China's central bank has made some very
public announcements that they're going to
compete with the private digital currencies in
their economy by having a crypto version of the
renminbi, their own currency.
And there have been a lot of central banks around
the world researching this over the last five or
six years. The People's Bank of China announced
in August 2019 that it's close to launching its
own digital currency, saying the rationale behind
the move is to protect its foreign exchange
sovereignty. Some say the move would encourage
the worldwide use of the yuan, the Chinese
currency and the deputy director of the People's
Bank of China's Payments Department said this
currency will have similarities to libra and
would be as safe as the central bank-issued paper
notes Libra is really trying to mimic what has
already occurred in China, where two social media
companies, Tencent and AliBaba, have launched
payment services.
They've run very, very quickly and have begun to
push aside the regular banks as sources of
payments for people.
And if you look at how quickly the Chinese social
media companies have grown and the fact that
they're now going abroad into other countries,
there seems to be an opportunity for companies
like Facebook, Google, Amazon to create a very
similar service.
China's central bank plans to launch this digital
token through a two-tier system, where both the
People's Bank of China and commercial banks would
be legitimate issuers.
All this means that Facebook doesn't just have to
contend with the opposition, with regulators and
politicians. It means the social media giant is
also in a race against time with governments that
want to build their own digital currencies.
While libra still may be in deep trouble, despite
Zuckerberg's performance on Capitol Hill, the
promise of digital currency should live on,
according to Tom Lee.
I mean, I think the future is really bright for
digital assets.
one, because I think it is reducing a lot of
friction in traditional financial architecture.
The average person spends almost a month of every
year paying for the right to use banks.
So, I think that that's a level of value capture
that's high, and so digital assets are going to
help sort of create productivity around that.
No one knows when the federal government will
enact regulation that would impact how the libra
coin operates or what that regulation would look
like. All they do know is it's coming at some
point. Some even speculate Facebook won't be the
first public tech company in the U.S.
to issue a currency.
I don't think other majors Silicon Valley
technology companies are far behind, so I think
Facebook is the first, but I think we'll see many
other versions.