Facebook has released libra, a cryptocurrency that will allow users to make international payments over Messenger and other group mediums like WhatsApp – perhaps from as soon as 2020. What risks does it create, and how will it use your data?
Here’s how it looks likely to work: a user would purchase libra and maintain a balance of the currency in Facebook’s digital wallet, called Calibra. The user could either transfer currency to another user – say a family member in another country – or buy items or services from a participating online retailer. Other than Calibra, users could purchase and sell libra through third party wallets or local resellers, such as grocery stores, in the same way as mobile phone owners already top up their data.
A key rationale for libra, according to Facebook, is to offer financial inclusion. It would allow millions of users without bank accounts in far-flung parts of the world to transact in ways that formal financial systems have denied them. Because they could send and receive libra on a peer-to-peer basis, without the need for a bank, the transactions would be cheaper and faster, too.
Libra appears designed to overcome a common criticism of existing cryptocurrencies like bitcoin and Ethereum – that they don’t satisfy three essential characteristics of money: a medium of exchange; a store of value and a unit of account. The argument goes that since they are not widely exchangeable, and since their widely fluctuating exchange values make them unattractive for storing wealth or pricing goods and services, they are not really viable as money.
Where the exchange rate of other cryptocurrencies is purely driven by supply and demand, libra will be priced according to a basket of bank deposits and short-term government bonds in reputable currencies such as the dollar, pound and euro. Having said that, the new currency raises a number of issues that need to be seriously considered before it launches:
1. Facebook and Data
Facebook has tried to reassure the world by outsourcing the management of libra to an independent foundation known as the Libra Association Council. Based in Geneva, this group will include representatives from mainstream financial institutions like PayPal, Mastercard and Visa, who have invested massively in this project, as well as the likes of Uber, Spotify and Vodafone. This grouping is clearly developed to maximize participation in the new currency.
Yet Facebook’s recent chequered history of data mishandling is still a cause for concern. Although Facebook assures that it would keep its users’ social and financial data strictly separate, the question still remains: if it has mishandled social data in the recent past, can it be trusted with people’s financial data?
2. Money laundering
Libra has huge implications for the rules around anti-money laundering. Just like any financial intermediary taking on a new customer, Facebook will have to obtain various verification details through an online form for any users hoping to set up a Calibra wallet, including government-issued photo identification.
But since users will be all over the world, how would Facebook authenticate the information provided? It was the same issue faced by Liberty Reserve, a digital currency that operated out of Costa Rica and was used by money launderers to transfer billions of dollars’ worth of criminal proceeds until it was closed down in 2013. Prosecutors later described it as possibly the biggest money-laundering case in US history.
Liberty Reserve operated in a similar way to PayPal, except with its own digital currency. It allowed users to register and transfer money to other users with only a name, email address, and birth date. No efforts were made to verify users’ identities, and it attracted much illegal activity.
Users would wire money from a traditional bank to a third-party exchanger, which was usually unlicensed and not properly regulated. This exchanger would convert money to digital currency, which was untraceable from its original source, and was then deposited into a Liberty Reserve account. No limits were placed on transaction sizes. Liberty charged a 1% service fee on each transfer and offered shopping cart functionality. All transactions were 100% irrevocable. The investigation that resulted in closure of Liberty was also very problematic as prosecutors required the cooperation of numerous jurisdictions with lax rules around anti-money laundering or investigating financial crime. Although libra will be backed by a host of blue chip companies, it looks potentially open to exactly the same kinds of problems.
This is why I will always be a Bitcoin fan, Libra or not.