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Facebook’s Libra too hot to handle as pals ‘unfriend’ project

Read time 5min 50sec

Facebook’s proposed Libra crypto-currency has become too hot to handle for associates.

So say industry players after online payments company PayPal last week became the first member to leave the Libra Association, the entity managing the Facebook-led effort to build a global digital currency.

In June, Facebook shared plans for Calibra, a newly-formed Facebook subsidiary, whose goal is to provide financial services that will let people access and participate in the Libra network.

The first product Calibra will introduce is a digital wallet for Libra, a new global currency powered by blockchain technology. The wallet will be available in Messenger, WhatsApp and as a standalone app, and Facebook expects to launch it next year.

The group behind the crypto-currency is the Libra Association, which has 29 founding members, including some big names like Visa, MasterCard, Uber, Lyft, eBay and Spotify.

In a blow to the Libra Association on Friday, one of the key members, PayPal, said it would forgo any further participation in the group and would instead focus on its own core businesses.

“We remain supportive of Libra’s aspirations and look forward to continued dialogue on ways to work together in the future,” PayPal said.

According to The Wall Street Journal, Visa, MasterCard and other financial partners are also reconsidering their involvement in Libra, as cracks start emerging in the coalition.

Usurping power

Farzam Ehsani, co-founder of local crypto exchange VALR, says the withdrawal of PayPal from the Libra Association is a big blow to Facebook’s attempts to launch its crypto-currency.

He explains that ever since announcing the Libra project, the initiative has been under intense scrutiny from regulators all around the world, with France and Germany declaring they will block the project in Europe.

“This regulatory heat has become too hot for some of the Libra Association members such as PayPal who perceive their association with the project as risking a beneficial relationship with regulators across the globe,” says Ehsani.

“Many regulators have perceived Facebook’s Libra project as an attempt to usurp monetary power which they say is inherent to the sovereignty of the nation state and no private corporate entity should be allowed to enter the space.”

After Facebook announced its Libra crypto-currency project, US federal lawmakers issued warnings to the social media platform, requesting the project be put on ice until lawmakers have had a chance to review it.

In July, US president Donald Trump slammed digital currencies like Libra and Bitcoin, saying he wasn’t a fan.

Untested, risky

Marius Reitz, general manager for Africa at Luno, comments that Libra won’t be without its challenges and it’s important to be pragmatic when it comes to new and untested technologies.

According to Reitz, the safety and security of Libra’s blockchain has not been tested at scale, compared to Bitcoin and others that have been around for many years.

Thus, he notes, this is an existential risk to the system.

“There will also continue to be regulatory challenges, for example, with capital controls which are a reality of life in most developing economies,” says Reitz.

“To enable many of the most important use cases, they will still likely require locally licensed players to support them, and most certainly access to local crypto-to-fiat liquidity pools, and at a scale and level of reliability that many of these are not equipped to deal with.”

However, Reitz is of the view that Libra is a game-changer not just for the crypto-currency industry, but also the broader financial system.

“Libra is linked to a basket of currencies people already trust and understand. It will also help to reduce volatility with a more balanced and smart issuing mechanism, but ultimately create more stability. It also solves the distribution problem in two big ways.

“First, if Facebook adds Libra to all Facebook products, it will instantly bring billions of people closer to the crypto realm. Second, it will indirectly solve distribution issues by instilling broader acceptance. Which merchant or company would not want to add a currency that will be available to billions of people all over the world already using all these social networks? It is this combination that, in our view, makes Libra arguably one of the biggest innovations in modern financial history.”

Shutting it down

Ehsani says Libra would make payments across the world much quicker and cheaper compared to the current financial system, which is “clunky and outdated and full of frictions that cost the end-user in terms of time and money”.

However, he points out Libra is a centralised crypto-currency unlike Bitcoin which is decentralised and has no headquarters, CEO or company running it.

“This is a critical difference. If Facebook proceeds with the project despite opposition from regulators, it risks being penalised and forced by the state to comply with their decision.

“Bitcoin, on the other hand, is just a protocol that is run by hundreds of thousands of participants across the globe and is nearly impossible to shut down. There is a very good chance that the Libra project won't take off at all given the regulatory headwinds,” says Ehsani.

Meanwhile, Alan Robertson, YOU# co-founder, notes PayPal’s “unfriending” Facebook’s Libra on the face of it sounds like it’s not a big deal given that there were 28 founding members of the Libra Association.

“But, in fact, it is a huge deal as it breaks the inertia of not being first. Expect more of the founding members to reconsider their positions and now that PayPal has made the first move, it is likely that more will follow.

“PayPal’s leaving a prestigious group bringing what should be massive changes confirms the obvious – they don’t see a future for Libra and their continued participation would result in value destruction for PayPal.”

Robertson explains there is an enormous amount of regulatory obstacles, and governments are simply not going to make it easy for Libra to get established.

“These issues relate to control over financial data and the prospect of merging that with behavioural data – something which Facebook has plenty of and also a chequered history of protecting. Secondly, those who see a future in crypto-currencies are at odds with Libra not being decentralised and, therefore, accountable to users,” he concludes.

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