Are they done yet? After weeks of hearing every crypto skeptic in town and then some express their unsolicited opinion of Facebook (FB), Project Libra, and, by association, all things crypto, it is time to let the dust settle, take a breather, and assess what valid criticisms lie buried beneath the carnage on the battlefield. Everyone from President Trump to members of Congress to a multitude of government ministers about the globe had their go at Mark Zuckerberg’s social media behemoth and its desire to be a global medium of exchange, based upon its own Libra stablecoin and blockchain technology.
While the level of crypto understanding of the skeptics in the public square could be questioned, there were lessons to be learned, after a bit of sifting through the heaps of abuse. Government officials, and rightly so, are fearful of what an entity like Facebook, which has not been the best at handling private information, might do when handling the money for over two billion plus active customers. No countries, with the exception of China and India, who incidentally have crypto bans, have over a billion inhabitants. The notion that controls, carefully laid over decades, could be circumvented is anathema.
This weekend, global investing platform eToro published a survey on public sentiment toward Facebook’s cryptocurrency project, Libra. While more than half of the respondents expressed doubts about Facebook’s management of their personal data, a surprising 17% indicated they would be willing to trust Facebook with their money the same way they trust their banks. In addition, while 58% of American adult Internet users have heard of Bitcoin, Libra was able to gain 16% recognition since its launch a month ago — surpassing Ethereum (12%) since it went live in July 2015.
Other industry experts were quick to respond to eToro’s survey, as well as what transpired over the past few weeks. One expert with a unique perspective was Michael Ou. He is the CEO and Founder of CoolBitX, a Taiwan-based blockchain security company and creator of the first mobile hardware wallet for digital assets. He was also invited to partake in closed-door FATF meetings in May to help inform their regulatory recommendations around the crypto market. With in-depth industry knowledge, and access to key decision-makers in the business and policy world, Michael is well placed to offer a long-term view of cryptocurrency’s future.
Michael shared these thoughts:
It is hugely encouraging that recognizable companies like Facebook are joining the crypto space. The fact that within just one month of it’s unveiling, 16% of respondents have heard of Libra showcases the power which mainstream companies have to bring knowledge of, and interest in, the merits of blockchain and cryptocurrencies to the masses. If just 16% of Facebook’s users were to enter into the cryptocurrency market, this would represent almost 381 million entries to the industry, an increase of almost 30% of those already active in the market.
He also added that:
While the benefits of increased awareness of cryptocurrencies is certainly a potential boon to the space, we must remain cautious about Libra. Facebook itself has no experience operating as a financial institution and has yet to prove that it has learned from data security failures from past Facebook incidents. Ignoring the clear regulatory hurdles to Libra’s success — the potential privacy problems, should the Facebook servers be victim to an attack, would be catastrophic. Facebook will have to learn from its own past experiences before it is in a position to drive crypto adoption forward.
The point that Michael Ou is making deserves a bit more explanation. Fin Tech companies and the software development teams that drive their successes are often focused on making something work in a digitized environment. Far too often, security and fraud issues are not addressed up front, an ongoing problem with crypto exchanges in today’s world. Social media is one thing, but when money is involved, as with a bank or payment service, issues are compounded exponentially. The moment a financial website is turned on, it is bombarded by all manner of “bad actors”, attempting to break down any firewalls and force an entry. Is Facebook/Libra prepared for this onslaught?
Analysts have also been at work, studying the transcripts of last week’s Congressional hearings for important takeaways. Here are a few “nuggets”:
- Libra is not Bitcoin, nor is it a Cryptocurrency: Misunderstandings have always been rife, whenever a politician spouted off against cryptos in general. Hopefully, the Congressmen were listening intently when CoinShares CSO Meltem Demirors explained the differences: “What [Facebook] is attempting to do is not to create a new payment system. What they’re attempting to do is to pass off this idea as a cryptocurrency, which it is not. They’re attempting to use regulatory cover to get away with doing something that would typically be regulated, which is asset management. It’s fundamentally different [than Bitcoin].” Libra will generate billions in “float” cash flow to be invested on behalf of its owners;
- Libra and Systemic Risk Go Hand-in-Hand: Libra will not be a “bank”, but it and its owners will be “systemically important”. Visa and MasterCard were deemed “systemically important” decades ago and must submit to rigorous compliance audits by the Comptroller of the Currency. Libra will pose amplified risk. Per Demirors, again: “When someone purchases a Libra, they are giving their real-world assets […] to the Libra Association to receive tokens. These assets are placed in banks and depository institutions around the world. This is a core banking function. This presents risk for counterparties; it presents risk for consumers being able to retrieve the principal that they have used to obtain the Libra tokens; and it presents systemic risk in the context of the broader financial system.”
- Capitol Hill is More Worried about “Big Tech”: Large Fin Tech entities today resemble massive oligopolies, where ownership power and wealth are concentrated among a few individuals. Congress had separately queried the likes of Amazon, Facebook, Google, and Apple at antitrust hearings about over-concentration. Amazingly enough, Bitcoin and other cryptos were viewed favorably under this light. Per one observer: “Congress’ ambivalence towards non-Libra cryptocurrencies indicates that their oversight is more intensely trained on “Big Tech” than on the emerging cryptocurrency sector. It also shows that US legislators are still learning about distributed technologies and formulating their policy positions towards digital assets.”
- Libra Will Comply with Regulations, if and When Issued: Members of Congress were still skeptical as to whether Facebook would ever handle privacy issues correctly and protect user data from being leveraged for ad purposes. David Marcus, the CEO of Calibra, has assured everyone that FB would never access Libra data, and, when quizzed extensively, he promised that every effort would be made to comply with all regulations. When asked if FB would halt the project until new regulations were promulgated, Marcus hedged, perhaps because Libra’s operating entity is chartered in Switzerland, which already has adopted user-friendly crypto legislation. His commitment to the hearing attendees: “We will take the time to get this right.”
- Libra’s Stablecoin Might Cause Instability: David Marcus had noted that the Libra Coin would be backed by a basket of currencies, i.e., 50% USD and 50% other fiat currencies. Congressman Andy Barr (R-Ky.) reminded everyone of one concern expressed by Gary Gensler, the former CFTC chairman: “[Libra] would definitely disrupt the central banking and monetary policy in these developing countries, if they ‘Libra-lize’ instead of ‘Dollar-ize.’ And if it got very significant, it could start to influence the four or five or six currencies they have underneath it.”
- Can Libra Really Help the Un-banked?: The Libra Whitepaper made a big deal that it would make best efforts to assist the world’s un-banked population, some 1.7 billion people by last estimate. David Scott (D-Ga.) suggested that this goal could become a Libra “Achilles’ heel”. He noted: “One of the big reasons why many consumers are unable to access financial services is due explicitly to a lack of identifiable proof of identification.” If Libra was to comply with all KYC/AML legislation, which requires proof of identification via some acceptable form, then it is unclear at this time as to how Libra would achieve this goal.
- If Not Facebook and Libra, then Who, What, Where and When?: In David Marcus’s prepared remarks, he spoke to the inevitability of a global service patterned after the Libra model. He said: “I believe that if America does not lead innovation in the digital currency and payments area, others will. If we fail to act, we could soon see a digital currency controlled by others whose values are dramatically different.” Could there be a “payment innovation war” that could create more global tensions across the planet? China has wanted to supplant the U.S. Dollar as the world’s reserve currency for decades, after accumulating enormous capital reserves, primarily denominated in USD. Could blockchain technology suddenly provide them with an acceptable solution?
We do live in interesting times, indeed, where disruptive technologies have the power to change every aspect of life, as we know it. Distributed ledger technology is deliberately decentralized, a difficult concept for the “world order” to abide by easily, since it has so much invested in today’s centralized institutions. For the past fifty years, globalization has redistributed wealth across the planet like never before, increasing the average well being of all humankind, while dropping poverty levels, as well, the power of technology.
Cryptocurrencies and blockchain technology may well have the ability to wreak similar massive changes across institutions and cultures in ways we do not yet fathom today, but such changes will encounter significant hurdles from those that benefit from the “status quo”. During these past few weeks, we have seen how quickly these “hurdles” can appear, when fear and doubt creep into the equation. Facebook and Libra will carry on, perhaps, not as quickly as they would like, and Bitcoin and all things crypto, an emerging sector of the economy, will continue to emerge.