Facebook’s dodgy cryptocurrency

A game-changer for the world’s unbanked, or a Zuckerberg power grab for the global money supply? Inside the Libra wars

there were more than 2 400 cryptocurrencies in circulation by June 2019, with further launches on a daily basis. Most were nearly worthless, had been heard of by virtually no one, and never would be. So when yet another – called Libra – was announced on 18 June, you might’ve expected it to attract no more attention than any of the others.

But from the moment of its launch, Libra received a huge amount of attention. The project made many of the same promises most new digital currencies brag about: it’d work more efficiently than existing payment technologies, and it’d avoid the huge spikes and falls in value that made

Bitcoin, the first and best-known cryptocurrency, such a roulette wheel. What was more eye-catching was its promise to target billions of the world’s unbanked – people with little or no access to the global financial system – to open up huge new business and work possibilities for at least some of the world’s poor, and revolutionise the global financial system.

The main reason people took notice this time was due to one of the main backers: Facebook. Freshly out of a seemingly endless series of data privacy scandals, the social media giant was now appearing as the lead partner in a plan to create a new global currency, alongside a coalition of other major tech, finance and commerce companies, and was promising to roll the whole thing out early this year.

Then after its announcement, Libra was attacked seemingly from all sides. Cryptocurrency fans said Libra wasn’t a real cryptocurrency, as it breaks some of the basic principles promoted by the community’s often technoanarchic fan base – including the important distinction that Libra transactions still rely on trust rather than mathematical proof. Others criticised Libra as a corporate power grab. Economists warned it could challenge countries’ control over their own monetary policy and so undermine democracy. And lawmakers and regulators around the world lined up to say they’d be launching investigations or taking action against the fledgeling currency, before it’d even launched.

In early October, Paypal, one of the 28 founding members of the Libra Association (set up to manage the cryptocurrency) withdrew from the project. A week later, e-commerce platform ebay and payments companies Visa, Mastercard, Stripe and Mercado Pago also backed out, leaving only one payments partner, fintech company Payu.

On 23 October, Facebook CEO Mark Zuckerberg was brought in front of US Congress to answer questions about Libra. In an opening statement, congresswoman Maxine Waters threw down the gauntlet by restating her call for a suspension on Facebook’s development of Libra until Congress could properly consider the issues it raised, and suggesting that Facebook focus on existing problems.

‘I’ve come to the conclusion that it would be beneficial for all if Facebook concentrates on addressing its many existing deficiencies and failures before proceeding any further on the

Libra project,’ she said. Listing various concerns with Facebook, including its poor diversity record and scandals around political advertising, Waters said that Zuckerberg was ‘willing to step on or over anyone, including your competitors, women, people of colour, your own users, and even our democracy to get what you want’.

In his own testimony, Zuckerberg recognised that he wasn’t the ideal messenger for the Libra project, noting: ‘I’m sure there’re lots of people who wish it were anyone but Facebook who was helping to propose this.’

For the user, Libra is a relatively straightforward proposition. »

Like any other cryptocurrency, you could buy up a certain number of Libra coins in exchange for a certain amount of currency, such as US Dollars or British Pounds. You’d exchange currency for Libra through a digital wallet, one of which – the Calibra wallet

– is already being developed by Facebook’s subsidiary. Calibra will have its own associated app and will also be integrated into Facebook’s Messenger and Whatsapp, which the company claims will make it possible to send someone Libra as “easily and instantly as you might send a text message”.

For each Libra coin created, the Libra Association promises to buy up an equivalent amount of one of a basket of existing currencies, stabilising the value of the currency and making it more usable for everyday transactions as opposed to speculation (a single Bitcoin has, in recent years, been worth as little as R45 806 and as much as R179 000). The “crypto” element is in Libra’s distributed ledger – a usage of blockchain – which will verify each person’s stake (the quantity of the currency they keep).

Libra insists that it’s more than just “Facebook’s currency”. The Libra Association, which is based in Switzerland, had 21 members towards the end of 2019 (down from the initial 28 that had signed on). These include Calibra, tech firms such as Uber and Spotify, European telecoms companies Vodafone and Iliad SA, a handful of blockchain companies, several nonprofits, and venture-capital firms like Andreessen Horowitz. The association has said it hopes to grow to 100 members before launch, all of which would have an equal say in decisions over Libra’s future.

But many of the project’s key architects are Facebook employees – all of the authors on the press release introducing Libra’s blockchain are listed as working for Calibra – and the cryptocurrency’s early days began within Facebook, which built an in-house unit to work on blockchain before forming the coalition that became the Libra Association. Facebook began quietly staffing up its blockchain division under David Marcus, its vice president overseeing Facebook Messenger, who now runs Calibra and is one of the Libra Association’s five board members.

In February 2019, Marcus’s division quietly bought up blockchain startup Chainspace, essentially as an acqui-hire – a means by which large companies like Facebook buy start-ups not for their business, but primarily as a way to hire their staff (even if very expensively). Of the five authors of Chainspace’s press release, only Mustafa Al-bassam (who came to public attention with the notorious computer-hacking group, Lulzsec) is the only one who didn’t move across to Facebook. ‘I think, fundamentally, the people who started the Libra project did it because they believed they were doing something good, from an ethical perspective,’ he says of his former colleagues. ‘They were brought in by the whole cypherpunk version of blockchains. They want to create something that’s censorship-resistant and that’ll give people power. I genuinely believe that their main motivation is that, rather than to make money.’

But the project is, in his view, now in Facebook’s hands.

In practise, he notes, many of the researchers building the currency work from Facebook’s headquarters in California: ‘From the eyes of the world, it’s still a Facebook project.’

Furthermore, Libra’s ambitions to become a global currency rely largely on Facebook’s reach. Across Facebook, Whatsapp and Instagram, the company has close to 2.5 billion active users, many of whom – thanks to its

Free Basics and Facebook Zero projects to spread internet access in the developing world, which together have an estimated 100 million or more users – are outside of the banking system. As a result, the social network is integral to the project, even if it’s also the biggest driver of its backlash. Will the fledgeling currency be able to overcome the reputation of its corporate parent?

Dante Disparte, an entrepreneur and cryptocurrency advocate, was drafted as the Libra Association’s head of policy and communications just weeks before the project’s public launch last June and was elected deputy chairperson of the Libra Council, which governs the Association, in a meeting on 14 October. Speaking shortly after that meeting, he insisted that there was still “a pathway” for Libra to be ready for launch this year, and said there were 1 500 companies keen to join the Association. He attempted to put a positive spin on the companies dropping out, arguing that ‘if there was any doubt or any lack of institutional courage… better to find out early if you’re not in it for the long haul’.

Disparte sounds like a true believer when he talks about

Libra’s potential. ‘We have a global payment network that looks more like the telephone networks of our grandfathers’ era than it looks to be fit for purpose for the 21st century,’ he says.

‘A world in which you have 1.7 billion people without a bank, you have a billion [of those] roughly with access to low-cost mobile telephony and broadband – and when you start to think of the social economics and growth implications of beginning to connect those »

‘Economists have warned countries that Libra could challenge thier control over their monetary policy and undermine democracy’

dots in a secure, stable way, it’s a game-changer.’

He says that something with the scale and backing of Libra is vital if the challenge of banking the unbanked is ever going to be met. ‘The UN talks about a multi-trillion-us-dollar funding shortfall for the world to achieve the sustainable development goals, of which many specifically highlight financial inclusion and innovation, and these types of opportunities,’ he says. ‘Short of a project like Libra succeeding, it’s hard to envision how you extend the basic perimeter of finance to include those people.’ Why would Facebook, a social media company, be so interested in developing a global currency? The Libra Association insists that access to payments data will be tightly controlled, and that Libra users’ data won’t be shared with Facebook or other third parties without consent.

That said, Facebook clearly has a lot to gain from integrating payments into its platforms in terms of keeping users inside its ecosystem.

Daniel Tischer, a global finance researcher, says Libra also has the potential to make the companies behind it vast profits, with little public accountability. ‘Outside the guardrails of government, effectively, they’re the controllers of their own fortune,’ he says. ‘If this currency is scaled up sufficiently, it could actually produce billions and billions of profit.’

As Libra would keep a reserve of real-world currency of equivalent value to the amount of Libra in circulation, and invest that reserve in relatively safe assets, it would generate some return. This would be used to cover the cost of the project – but any leftover could be taken as profit. And if Libra became a major world currency, that profit could become very significant.

Facebook and its Libra partners aren’t the only people moving into this space. On top of the existing cryptocurrencies (of which there are around USD$200 billion-worth in circulation, with Bitcoin worth more than all the others combined), larger and more established players are determined to move in. While Libra represents the biggest effort of western business to launch a cryptocurrency, China is well into the development of its own digital currency, backed by its state bank and due to roll out to some of the country’s largest online companies, such as Alibaba and Tencent. It’s expected to make only minimal use of blockchain, and virtually no one expects extensive privacy protections to be built in.

At this stage, according to Enrique Dans from IE Business School, a major new digital currency is an inevitability; the question is who will be behind it.

‘It’s something that we know will happen; it’s going to happen no matter what,’ he says. ‘The Chinese initiative and Libra, they’re not strictly cryptocurrencies as the crypto nerds would like to think, but they’re definitely a step forward in redefining what is money. This is going to happen, for sure.’

‘Libra could present a threat to economies and this is a risk in places where people don’t trust governments or currencies much’

Dans thinks that Libra or the Chinese initiative – or some other new effort – are far more likely to win the contest than existing currencies such as Bitcoin, because they’ll be more accessible to a mass audience and don’t require large amounts of energy to “mine”. (A study from last year in the journal Joule estimated that Bitcoin is responsible for more than 20 million tonnes of carbon dioxide emissions – about the same as Bolivia.)

‘It feels weird because first of all, it’s the privatisation of money,’ he says. ‘Thinking about private money is something that makes many people say that something is wrong. Why should money be private or emitted and managed by a private company?’

This raises practical as well as philosophical problems, says Dr

Iwa Salami, a senior lecturer in commercial law and financial law regulation. Libra could become a currency working across multiple countries and continents with very different circumstances, and could very quickly become, in essence, a global bank – and so a source of global risk. ‘The implication of this [is] if things go wrong,’ she says.

‘It’s the systemic risk potential here that has really aroused attention. Therefore, although they’re saying they aren’t a bank, they’re engaging in bank-like transactions for which there really should be a requirement that they fulfil.’

Beyond the usual regulatory concerns on issues such as antimoney laundering and fraud prevention, Libra could present a threat to local economies. This is especially a risk in places where people don’t trust their governments or currencies much – where many of the world’s under-banked live. Salami says that people could prefer using Libra over national currencies. ‘For those countries, it’ll then become very difficult to conduct monetary policy and use monetary policy as a tool to either stimulate their economies or not. If that happens, then those countries have a serious problem.’

It’s no surprise that banking regulators across the world have taken a strong interest in the development of Libra – last September, representatives from 26 central banks across the world met to question Libra executives. The Bank of England has warned that Libra must be held to the same standards as traditional payments providers, and France and Germany have said they’ll block the currency from operating in Europe as long as concerns persist. In his testimony to Congress, Zuckerberg promised that Facebook ‘won’t be part of launching the Libra payments system anywhere in the world until US regulators approve’.

The departure of its main payments partners, however, means Libra no longer has their experience of the extensive regulatory requirements of moving money – a significant challenge that makes the possibility Libra’s launch this year seem increasingly unlikely.

As the controversy rages on, Bill Maurer, the dean of social sciences from the University of California, sees a missed opportunity to have necessary discussions about important issues with the world’s financial systems and their impact. ‘In a way, I think, unfortunately, because it’s Facebook, it’s just,

“get them in front of us on the TV cameras, and let’s yell and scream at them about privacy and security”,’ he says.

Libra’s Dante Disparte, who’s never even met Mark Zuckerberg, shares this frustration. ‘The drama candidly is in part because the size of some of the organisations involved scares people,’ he says. ‘There’s also an educational requirement here because you’re leveraging things like blockchain and cryptocurrencies, and you’re touching a very heavily regulated space of the financial system. Every one of these domains has raised very fair and very reasonable questions.’

Disparte insists that, for him, Libra is all about the mission: increasing access to the financial system for those outside it. He’s scared of what happens if Libra fails. Many are terrified of what happens if it succeeds.