“This project contains risks of abuse of dominant position, risks to sovereignty and risks for consumers and for companies” (Bruno Le Maire, French Finance Minister)
In June Facebook announced to much public fanfare that it intends to roll out a new digital currency called Libra for use in 2020, allowing its users across the globe to make online financial transactions.
It has quickly become clear that Facebook faces a significant battle to ensure that the Libra project does not become mired in regulatory and political red tape and, more damagingly still, is not able to launch across key national/regional markets. At the last count, the roll-call of those who have signalled a desire to subject Libra to careful scrutiny (as well as Mr Le Maire whose quote above makes it quite clear what he thinks) includes leaders of the G7 nations, the US Congress, the Committee on Payments and Market Infrastructure comprising representatives of 26 central banks, the European Commission and the Swiss Financial Market Supervisory Authority.
Why is Facebook Libra attracting so much critical scrutiny and what are the key issues that regulators and politicians are likely to focus on now that the project is under the public gaze?
What exactly is Libra?
According to a White Paper issued on 18 June, Libra has been created by Facebook to enable “a simple global currency and financial infrastructure that empowers billions of people.”
In technical terms, Libra will operate via the blockchain – a system on which transactions are processed and verified by independent computers rather than a single central bank or other similar guardian. This is, of course, the same technology underpinning cryptocurrencies such as Bitcoin which have attracted much debate in recent times. Unlike those currencies which are completely decentralised, meaning anyone can technically carry out processing and verification activities (subject to having sufficient computing power), these activities will only be carried out by members of the Libra Association – an “independent” not for profit body registered in Switzerland which will be formed to govern and implement the project. Declared members of the Association to date include Mastercard, Visa, PayPal, Ebay, Uber and Lyft.
Another point of difference to existing cryptocurrencies is that the value of Libra will be tied to a basket of established currencies and low-risk government securities, the value of the basket equating to Libra’s value. This is designed to avoid the wild swings in value caused by speculators in Bitcoin and other existing cryptocurrencies – their volatility means they can only be a medium of exchange in “instantaneous” transactions.
Libra users will need to open a dedicated account and digital wallet (Calibra) which will hold their Libra balance and enable them to convert “cash” (dollars, pounds sterling etc) into Libra. They can then transfer Libra to other users and make payments for goods/services from merchants who are set up to accept Libra payments. Calibra will be built directly into Facebook, as well as the WhatsApp and Instagram platforms (operated by Facebook).
What are the legal issues?
Since the White Paper was issued, commentators have debated how best to characterise Libra. Perhaps the best description of it is as a “mobile money” function. To that extent it is not a first in kind; mobile money offerings have become prevalent in recent times, especially following in the footsteps of the M-Pesa scheme which is widely used across Africa to “bank the un-banked”. What is different about Libra, however, is the vast consumer base immediately available to Facebook through its 2.4 billion+ registered users. Whereas other projects and schemes have generally had to build their own customer base, Facebook has the opportunity to scale immediately.
Whilst the commercial opportunity is therefore straightforward to understand, less easy to unpick are the multitudinous legal and regulatory concerns which accompany the Libra project and which are already exercising global supervisory and governmental bodies. These can best be summarised as follows.
Payment services are carefully regulated across different jurisdictions. In some instances, providers can “passport” licences obtained in one jurisdiction to be able to provide the same services elsewhere – notably the case with the EU. Nevertheless, given its global reach, Libra will potentially be subject to a whole patchwork of licensing and regulatory regimes.
Particularly relevant in this context is the extent to which Libra may be regarded as more than a payment service provider and more akin to a banking provider. For example, users’ ability to deposit and withdraw funds from their Libra “account” suggest the service will operate like a traditional bank account (and indeed much of the fuss around Libra appears to centre on whether Facebook is in effect seeking to circumvent the existing banking model). Banks are, for obvious reasons, traditionally, more heavily regulated and subject to more onerous licensing requirements than payments providers.
It is instructive in this regard that a recent guidance note from the Swiss Financial Markets Supervisory Authority (FINMA), ostensibly dealing with the regulation of Initial Coin Offerings (ICOs), reported on FINMA’s preliminary assessment of the regulatory position regarding the Libra Association. In particular, FINMA observed that, as well as requiring a payment system licence, additional prudential requirements are expected to apply as it will provide more than just a pure payment service. Notably, FINMA declared that it would adopt a “same risk, same rules” approach to ensure that, should the Libra model give rise to typical banking risks, it will apply banking regulations to the project. Specific mention was made of the intended Libra reserve (ie the mechanism by which the currency’s value will be pegged) and the need to ensure that any risks arising from the management of that reserve are borne entirely by the currency issuer, not the currency holders.
Facebook has (understandably) sought to create a clear distinction between Libra and existing cryptocurrencies which have attracted much negative press given the difficulty in tracing those who trade in them and the systematic risks involved in any global trade of crypto.
In many ways, Facebook’s ability to readily create a digital identity for users of Libra (who likely will already be users of existing Facebook services) is therefore a major positive when compared with other decentralised/blockchain based services. However, Facebook’s aspirations appear to go further than simply cross-selling another service to its existing user-base in developed economies. The White Paper talks, for example, about targeting the “unbanked” in developing economies – how to ensure those users can be readily identified and checked is less obvious, given they likely will not have identity documentation traditionally used for due diligence purposes.
Some commentators have already posited the theory that, if it achieves its ambitions in terms of traction and usage, Facebook will become more powerful than central banks in developing countries in its ability to control monetary policy. This in turn raises important questions about whether a private consortium is better placed than the banks to manage money flows in such countries.
As ever with “big tech” and particularly Facebook, data protection concerns are never far from the surface.
It is self-evident that Facebook intends to leverage its existing client base to “sell-in” the Libra service. Given previous misdemeanours with regards to customer data (including the Cambridge Analytica scandal for one), close attention will be paid to how Facebook intends to deal with customer data as part of this project.
With such concerns in mind, Facebook has already emphasised that Calibra (ie the operator of users digital wallets) will operate as a standalone regulated subsidiary so as to ensure a separation of social and financial data. However, one would expect that regulators will want to get more concrete assurances that any “mixing” of data will only take place with consumers’ prior consent and subject to appropriate safeguards as to storage etc.
A final, battlefront for Facebook in its pursuit of the Libra project is the scrutiny which it has attracted from competition law/antitrust regulators. To that end, the EU Commission recently announced a formal investigation under its competition law powers into Libra, issuing a questionnaire to interested parties which cited “possible competition restrictions” on information exchanged as between participants in the Libra Association and their use of consumer data, indicating that there are concerns in particular as to Facebook’s ability to drive out competitors who may wish to offer similar services.
The EU Commission’s investigation feeds into a broader debate, already raging across the pond in the US, as to Facebook’s market position and ability to leverage the market power it exercises in social media and digital advertising to the detriment of consumers. It was confirmed by Facebook in July of this year that the US Federal Trade Commission had opened a probe into the company’s prior acquisitions and their impact on competition in social media, digital advertising and mobile applications. It seems likely that, as part of their investigations, the FTC will consider how the Libra project might further impact on the competitive dynamic of those markets.
The Libra project itself is fascinating on many levels. From a regulatory perspective it undoubtedly poses questions which are without any obvious precedent given that, to date, most regulators have tended to keep more of a watching brief on the burgeoning market for cryptocurrency. Arguably, the fact Facebook with its global reach and user base has become involved will now hasten those regulators’ need to clarify their thinking.
For its part, Facebook has already confirmed it intends to engage closely with appropriate regulatory authorities, effectively throwing down the gauntlet to them to set out precisely what they expect the company to do to remain compliant. Likely once it gets a sense of those requirements, Facebook will need to decide whether it is willing to bear the burden of meeting regulators’ varying requests.
In the meantime, one can expect other interested parties to try to take advantage of the regulatory uncertainty to which Facebook is currently subject. Just last month, it was revealed that China is close to unveiling its own cryptocurrency through the People’s Bank of China which will be fully compliant with all local laws on money laundering and fraud.
Image cc by BTC Keychain on Flickr.