Facebook’s Libra digital currency project was announced in June this year, with an aim to become the digital currency of the world. The project was intended to serve as the default digital currency for masses, especially the unbanked. However, the project was not well received by the regulators around the globe, as many questioned the working model of Libra. The project was intended to be a stable coin backed by a basket of fiat currencies like the US Dollar, Euro, and Yen. Regulators objected to this saying Libra was merely trying to use different fiat to avoid falling under the jurisdiction of any one regulatory body.
Facebook also announced a consortium of companies that would overlook the operations of Libra mutually called Libra Association. A total of 27 companies which included the likes of Visa, MasterCard and Paypal were part of the association which was intended to reach 100. Facebook said that Libra association would mutually take decisions on the project without the intervention of Facebook. However, the three major organizations pulled out of the project amid growing scrutiny.
Facebook has a combined reach of over 2 billion users, and one of the critical concerns for regulators is the scale at which Libra will be launched. Given the past record of Facebook in safeguarding user’s privacy and personal data, regulators believe libra would create similar problems. The other issue is the government does not want to give up their financial sovereignty and consider the worldwide launch could develop issues for central and commercial banks.
Libra Needs to First Win Confidence in the US
Facebook registered the Libra project in Switzerland given favourable and consumer-friendly crypto regulations in the country. During the congressional hearing legislators back in the US were not amused by this move and wanted to know why Facebook is in such hurry. If they wanted to enter into the financial sector, they could have applied for banking license instead. Mark Zuckerberg had assured the legislators that Libra would only launch, once it has cleared all regulatory woes.
As a last resort, Zukerberg did warn legislators that if his Libra project is not given the go-ahead someone else would go ahead and launch something similar. Zukerberg was hinting at China given the ongoing trade war and struggle to become the world superpower. Facebook was too optimistic about overlooking the concerns of the US regulators and must focus on winning them first before dreaming of world domination in the decentralized space.
The US regulatory bodies had come a long way from the days when many crypto service providers had to leave the States amid regulatory uncertainty. In the past couple of years, these regulators have realized that banning crypto is not an option, and thus they have regulated trading and other crypto services in the country. Libra must focus on the US market first before any plans of world domination since major European countries like Germany and France have already announced that they would not allow any further developments of the Libra project.
Tether’s USDT is currently the king of stablecoins with over 90% market dominance, however, at the same time, the parent company issuing the stablecoin has been marred into a number of lawsuits, a few of which also accuses them of manipulating Bitcoin market and not having enough reserve to back their market issuance. Libra can focus on taking on USDT first in the US, if successful, it can then think about becoming a universal digital currency.
Facebook Must Separate Itself From the Libra Project
Regulators who have reviewed the libra project has clearly said that it does not bear any resemblance to cryptocurrencies, and merely trying to piggy ride the existing monetary system for which banks and financial institutions pay billion in compliance. Facebook would not be able to launch its Libra project worldwide as they thought initially.
Facebook’s reputation is also not helping the Libra project, especially since it requires managing billions of users financial data. Given the recent Cambridge Analytica episode, trust in Facebook for safeguarding data is at an all-time low. The social media giant needs to understand that Libra won’t be successful if it is associated with Facebook in any way. While they had promised that Facebook would not interfere with the Libra’s day-to-day operations, however, the legislators at Capitol hill were not convinced since Facebook failed to assure the Calibra wallet won’t use Facebook data or vice versa.
Facebook also did not clarify about the Libra Investment Token aimed at early investors who would be rewarded for their investment in the form of a dividend. This created a conflict of interest as Libra is a stable coin which would be backed by fiat reserves comprising of US Dollar, Euro and Yen, and the dividends that would be paid to these investors had to come from the profit made from Libra. Facebook did make changes to their white paper recently excluding any mention of dividends. Many saw this move as a way for Libra to disassociate itself being tagged as security.
Libra was earlier scheduled to launch in the first quarter of 2020, but looking at the current line of events and obstacles in its path, the delay is imminent. To be able to launch the project, Facebook clearly needs to do more than just assuring regulators. A recent report suggested another breach in FB’s database leaking millions of user phone numbers and sensitive information. In order to have any chance of launching, Facebook must realize that the US is their best bet, and they need to make fundamental changes to the working model of Libra to address all regulatory woes.