Libra was unveiled on Tuesday. It’s a new cryptocurrency spearheaded by Facebook and also backed by top tech giants and payment companies including Visa (V), MasterCard (MA), PayPal (PYPL), and eBay (EBAY).
Libra will launch next year and aims to be a global currency at the heart of a new economy on the internet. Facebook co-announced its own wallet app to store and send Libra, called Calibra.
Lawmakers and government groups don’t like it
Libra’s unveiling faced immediate blowback from politicians and regulators around the world:
The G7 nations launched a joint inquiry into the risks of new cryptocurrencies like Libra. The IMF and central banks will participate, the Financial Times reported.
France’s finance minister Bruno Le Maire said Libra “can not and must not” become a “sovereign currency,” according to Bloomberg.
A German member of Parliament expressed fears that Facebook could become a “shadow bank,” according to the same report.
Rep. Maxine Waters, chair of Congress’ financial services committee, called for an immediate pause to Facebook’s development efforts “until Congress and regulators have the opportunity to examine these issues.”
Sen. Josh Hawley (R-MO) told Yahoo Finance Facebook is “expanding their monopoly” with Libra and said: “I'm very concerned about Facebook's behaviour on a range of fronts.”
Bank of England governor Mark Carney said regulators would approach Libra with “an open mind” but not “an open door.”
The responses highlight the significant hurdles Facebook and its allies will face in even getting Libra off the ground, let alone breaking into the mainstream.
“We worry that regulatory pushback and consumer reticence may limit the appeal and acceptance,” Macquarie Capital analysts Benjamin Schachter, Ed Alter, and Angela Newell said in a note on Libra sent to clients sent on Tuesday.
Why are lawmakers worried?
Facebook CEO Mark Zuckerberg famously coined the motto “move fast and break things” for his company, but regulators will worry that this philosophy could cause financial crises and inadvertently enable money laundering when applied to financial services.
Here are the key areas that regulators and politicians will likely worry about with Libra:
Money laundering: Regulators around the world have long worried that cryptocurrencies can be used for money laundering and criminal activities. The G7 working group looking at libra highlighted money laundering controls as a key issue to look into, according to a letter reported by the Financial Times.
Facebook’s Calibra, the new subsidiary building products for Libra, will be fully compliant and “use all the same verification and anti-fraud processes that banks and credit cards use,” according to Tuesday’s announcement. However, it’s not entirely clear if people will need to verify their identities to buy Libra elsewhere. Regulators will want clarity.
Financial stability: Central banks around the world have explored the idea of launching their own digital currencies but have so far stayed away from the idea due to lingering questions about the affect on economies. “It could have wide-ranging implications for monetary policy and financial stability,” the Bank of England has noted.
Our financial system currently runs on fractional reserve banking — banks lend out the money that people deposit with them to fuel economic growth. If everyone holds their money personally in a mobile wallet, this system could collapse.
There are also fears that a global cryptocurrency could create a liquidity crises. If people can pull money out of banks and hold it on their phones, bank runs could become far more common. Similarly, if people can seamlessly move their money internationally, central banks could face problems. In a worst case scenario, a bank — or even a central bank — could find itself bust overnight.
Monetary policy: Closely tied to financial stability are worries about monetary policy.
Central banks currently manage inflation and economic growth by changing interest rates to encourage either saving or spending. They can also print money to try and boost growth. How will these mechanisms be affected if there is a new widely available currency in use that central banks can’t control?
It gets particularly complicated because Libra will be backed by, and valued based on, a basket of global currencies. For example, the Bank of Japan will have to think about what changing interest rates do to not just the yen but also the libra.
The ultimate fear is that a new global cryptocurrency will take away central banks power to influence local economies (which is arguably what the original creators of bitcoin intended).
Oversight: Libra is intended to be borderless: it will be equally accepted in Arkansas as Azerbaijan.
But this creates a problem: how do regulators and politicians keep it in check? Libra will be governed by the non-profit Libra Association based in Switzerland. But if it affects economies around the world, then governments and regulators around the world will want a way of exerting influence.
Governments are already struggling to get to grips with how to regulate social media and tech giants that span the globe. They will want reassurances that there will be a way to hold libra and its backers to account.
Power: Ultimately, all the issues boil down to the question of power.
Facebook insists that it plans on stepping back from a steering role in charge of libra once it gets off the ground. The Libra Association is made up of a consortium of tech and payment companies. Facebook is just one among them.
But the project still represents a shift of power from the public sector to the private sector. Monetary policy and financial stability could become the remit of Uber and PayPal, not the Fed and the Bank of England.
“It would be like handing the keys to the Federal Reserve to the NASDAQ,” said Ido Sadeh Man, who heads up the Saga Foundation overseeing rival cryptocurrency Saga.
Regulators and governments will want to make sure that they don’t lose power and control over their own economies.
Facebook reportedly held discussions with representatives from the Bank of England and the UK’s Financial Conduct Authority prior to the launch. David Marcus, the Facebook executive in charge of the project, told Bloomberg he has spoken to other regulators around the world.
The Libra Association said on Tuesday it will “continue engaging with regulators, policymakers, and experts to solicit feedback and ensure that this global financial infrastructure is governed in a way that is reflective of the people it serves.”
The immediate response to the announcement shows that it has some serious convincing to do. As eToro analyst Mati Greenspan puts it, despite the “seemingly good intentions from Facebook, there's even a fair chance this project never gets off the ground.”
Oscar Williams-Grut covers banking, fintech, and finance for Yahoo Finance UK. Follow him on Twitter at @OscarWGrut.