Facebook’s bid for financial domination
The social media platform’s planned launch of Libra has rattled everyone from central bankers to Donald Trump
What is the point of Libra?
Facebook’s aim is for its new digital currency, which is slated to launch next year, to be routinely used for everyday transactions by its 2.41 billion active users. By far the world’s largest social media network, Facebook – which also owns WhatsApp and Instagram – claims it wants to reach the billions of people who are currently “unbanked” (i.e. don’t have a bank account): in short, it wants Libra to form the basis of a new global financial system. But it’s an ambition that faces sharp opposition from politicians, regulators and central bankers who are dubious about cryptocurrencies and feel Facebook already has too much power.
How will it work?
Libra, named after the basic Roman measurement of weight, is to be powered by a new Facebookcreated version of blockchain – the encrypted technology used by bitcoin and other cryptocurrencies. Unlike many of them, though, it’s a “stablecoin” – meaning it will be backed by established currencies and securities. As a result Libra, in contrast to the notoriously volatile bitcoin, won’t be subject to vast fluctuations in value, thus making it viable as a workable everyday currency. And to manage the reserve assets to which Libra will be pegged, Facebook has lined up a broad group of 27 partners – including Visa, Uber, Mastercard, PayPal and eBay – known collectively as the Libra Association. The Association will operate as a not-forprofit outfit based in Switzerland. Facebook insists that it will be an “independent” organisation and that once Libra is launched, all members will have equal votes in the currency’s governance.
How will users send money to each other?
Via a “digital wallet” called Calibra, which will be available on Facebook Messenger, WhatsApp and as a stand-alone app. The idea, says the company, is for anyone with a smartphone to have easy access to it. To kickstart the Libra “ecosystem”, Facebook could carry out an “air drop” – handing out small amounts of the currency for free. Long term, Libra’s founder members may well offer their employees all or part of their pay in the currency.
And why is Facebook moving into banking?
Partly because its core social media business is plateauing. Cryptopayments are seen as a great way of “monetising” existing messaging services: if Libra takes off, billions of small transaction charges could add up to a major new profit stream that would complement Facebook’s advertising revenues. That excites financial analysts. According to Mark Mahaney of RBC Capital Markets, this is “a potential watershed moment” – both for Facebook, and for the “global adoption of crypto”. Given the size and scale of Facebook’s operations, it could become a huge player in financial services and change the landscape of banking.
Aren’t there privacy concerns?
There certainly are. Facebook says its blockchain is “pseudonymous” and that it will keep Libra users’ financial information separate from their online profiles. In short, the data won’t be used for targeted advertising. Yet given Facebook’s terrible record on privacy, many are sceptical of this claim. Even if it proves scrupulous in safeguarding the personal data of what exactly it is you are buying, it can still make use of data recording, say, where you bought it and who you bought it from – what’s known as the “metadata”. And as one blockchain expert has remarked, the ability to “triangulate” such financial metadata with the information held on every other aspect of users’ lives will potentially give Facebook “unprecedented knowledge of consumer behaviour and spending”.
What are the other fears?
Given the link between cryptocurrencies and crime, there’s a fear that Libra could prove a boon to moneylaunderers, fraudsters and terrorists. Facebook says it will use “the same verification and anti-fraud processes” that banks and credit card companies employ to prevent criminal abuse. But the much touted “pseudonymous” nature of the Libra network would make that hard. The biggest nightmare however, at least for the banks – the old guard of finance – is that Libra’s marriage of “Big Tech” with “Fintech” will destroy them. Nor is the threat limited to the private banking system: Libra could undermine the very notion of sovereignty by scraping away at the status of currencies, undermining central banks and even challenging the dollar as the world’s “reserve currency”. That’s why Donald Trump has openly opposed the idea of Libra, and why the French finance ministry has said that “private enterprises [giving] themselves the attributes of state sovereignty” is a red line that cannot be crossed.
And could Libra soon become a global “shadow bank”?
Not in the short term – the Libra network would take years to establish. And the threat of it ever doing so would recede if, as many regulators recommend, Libra is barred from lending – the key attribute of a banking system. But even then, as has been pointed out, if large numbers of people – especially in developing countries – do opt to hold Libra deposits rather than their local currencies, then their governments will have far less influence over local monetary conditions – they’d find it far harder to alter
interest rates, for example.