Facebook’s big cryptocurrency reveal came with big promises: Libra will make payments more convenient than ever, and help 1.7 billion “unbanked” people access financial services.
But the announcement of Libra has not been greeted with universal acclaim. Regulators and industry observers see a range of reasons to be deeply skeptical about what the new cryptocurrency promises or—depending on one’s standpoint—threatens.
There are certainly reasons to believe Libra could be a success, namely Facebook’s unmatched global reach and its apparent ability to get industry partners on board. But here’s a breakdown of the reasons why Libra may not fly:
1. Digital payments
Facebook’s blog post announcing its planned Colibra digital wallet—essentially an app allowing people to use Libra—promises that “in time, we hope to offer additional services for people and businesses, like paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.”
As former Guardian tech editor Charles Arthur rightly scoffed on Twitter, this may be a function of the U.S., Facebook’s home market, being behind the times when it comes to consumer financial services.
In much of the rest of the world, people are used to tapping their smartphones on a reader to pay for a coffee or a ride on public transit. As for paying bills, there are myriad ways to achieve this online using regular currency, from automated direct debits to banking apps and financial technology services such as the Sweden-based app Klarna.
How about passing money to other users with minimal fuss? Well, there’s already PayPal and its Venmo app for that, among many other alternatives. The problem is not new, and nor are the solutions.
2. The unbanked
As Facebook rightly points out, almost half of the world’s adults lack bank accounts, with figures being worse in developing countries and among women. The solution, it says, could lie in the Colibra wallet.
One problem here is that many of those who lack bank accounts also lack smartphones. “Even if people own a smartphone, the cost of data can be prohibitive,” South African tech industry observer Toby Shapshak told the Daily Maverick. “Unless it is simple to use, simple to get cash in and out of the system and easy to understand, it’s already at a disadvantage.”
Some mobile operators have already been tackling this problem for a long time, notably Kenya’s Vodafone-backed Safaricom, which launched a mobile banking service called M-Pesa a dozen years ago. M-Pesa also targets the unbanked, using even basic phones as a way to access and use financial services—people can deposit and withdraw funds from widespread kiosks, with their SIM card validating their identity.
People can even send money from abroad to an M-Pesa user’s phone, using a variety of services. Facebook is pitching Libra as a way to avoid high international remittance fees, which have traditionally been a problem, but again, people have already been solving this problem for a few years now.
M-Pesa is now used in many countries from India to South Africa, and even in parts of Eastern Europe. Interestingly, Vodafone is one of the members of the Libra Association that will run the new cryptocurrency. “We hope that Libra will provide another route for unbanked people to access financial services in a range of other countries which is the reason we are involved,” said a Vodafone spokesperson.
Also, as the Financial Times has noted in its über-cynical coverage of Libra’s launch, Facebook’s new virtual currency does nothing to address the most common reason people don’t have bank accounts: they don’t have enough money to put in them. And that’s a socio-economic rather than technical problem.
3. Regulatory pushback
The Libra Association pretty much guaranteed the ire of regulators when it said in launch materials that “in the early development of the Libra network, its Founding Members are committed to working with authorities to shape a regulatory environment that encourages technological innovation while maintaining the highest standards of consumer protection.”
That sounds a lot like Mark Zuckerberg’s February pronouncement that he is “open to meaningful regulation” for Facebook in the fields of privacy and disinformation. Regulators and lawmakers tend to see themselves as the givers of rules, not the takers.
And so regulators and lawmakers on both sides of the Atlantic have pounced on the Libra project. In the U.S., House Financial Services Committee Chair Maxine Waters (D–Cali.) has asked Facebook to pause Libra’s development until Congress and regulators have had time to parse the implications. Waters is a Democrat, but the committee’s ranking Republican, Rep. Patrick McHenry of North Carolina, agrees with her, warning of “many open questions as to the scope and scale of the project and how it will conform to our global financial regulatory framework.”
In Europe, French Finance Minister Bruno Le Maire said it “can’t and must not happen” that Libra becomes a replacement for traditional currencies, and has urged G7 central bank governors to urgently look into the system. Bank of England Governor Mark Carney also said organizations such as the G7, the International Monetary Fund and the Bank for International Settlements would have to handle the development in “a coordinated fashion.”
As well they might. As Carney noted, “anything that works in this world will become instantly systemic.” Regulators do not want to find themselves playing catch-up here.
4. The trust issue
Le Maire also warned that Facebook’s Colibra wallet “will allow this company to assemble even more data, which only increases our determination to regulate the Internet giants.” Which brings us to the final problem: trust. Facebook has a dismal record when it comes to keeping its privacy promises, so why would this time be different?
The big promise in this case is that Facebook won’t use financial data from Colibra for ad-targeting purposes without users’ consent. But how will it get that consent, and what will regulators say about that mechanism? Bear in mind that Facebook is already being sued in Europe over the way it gathers consent from users for using their data to target ads at them.
TechCrunch’s Josh Constine has also noted that the Libra Association won’t actively vet the developers who want to build digital wallets that handle Libra. So, while Facebook’s own Colibra wallet will supposedly come with high security, customer support and refunds in the case of theft, a shady cryptocurrency analog to Cambridge Analytica could theoretically build its own wallet that exposes consumers to the loss of their Libra coins.
None of this is to say that Libra definitely won’t be a success—again, Facebook’s scale is unmatched—but it’s no dead cert, and there needs to be a lot more clarity on how the system will achieve its lofty goals.
This article was updated to include Vodafone’s statement.
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