Saturday , September 21, 2019

As Facebook’s Libra Provokes A Slew of Questions, An Expert Struggles With the Coin’s ‘Justification’

Facebook Inc. is expected to release details this week, perhaps as early as Tuesday, on its Libra cryptocurrency initiative, but for now what’s known about the project has at least some experts shaking their heads. “Why a cryptocurrency, and why Facebook?” asks Tim Sloane, who follows digital currencies as vice president for payments innovation at Mercator Advisory Group, Maynard Mass. “It would be easier to understand if Facebook did a private currency, like WeChatPay, utilizing existing payment rails. It is hard to understand what cryptocurrency adds in this context.”

Sloane adds that Facebook’s direction of the project, which includes involvement by Mastercard Inc., PayPal Holdings Inc., Stripe Inc., Visa Inc., and at least eight other companies, could prove to be a liability rather than an asset. While the huge social-networking company brings a base of 2.4 billion users worldwide, it has attracted negative attention in recent months for questionable privacy practices. “They also have an extraordinary level of regulatory scrutiny that makes the regulatory risk much worse,” Sloane notes in an email message.

“Why a cryptocurrency, and why Facebook?” asks Tim Sloane, who follows digital currencies as vice president for payments innovation at Mercator Advisory Group.

The Libra consortium’s white paper this week should detail how its currency will work when it launches next year. Libra is expected to be a so-called stablecoin tied to a basket of fiat currencies, which might make it more suitable for online and physical commerce with merchants. Cryptocurrencies like Bitcoin have been criticized for exaggerated swings in value that make them less appealing to merchants.

But until the white paper appears, observers struggle to understand the role Libra will play. “We don’t understand what the justification for Libra is, other than [public relations],” says Sloane.

Crucial questions abound, he adds, including: whether the consortium partners will each operate an exchange; what the revenue model will be; how ties to regulatory bodies in various countries will be managed; and in what way the consortium will perform know-your-customer and anti-money-laundering procedures. Indeed, how the exchanges will be secured against fraud and theft will be critical, according to Sloane. “Exchanges are the single largest source of criminal activity for all digital currencies,” he says.

Libra’s global character, while at first glance an asset, could also prove to be a huge cost burden. “Rolling this out simultaneously in multiple countries will drive legal/regulatory costs to an astronomical level, and I wonder if that cost and risk has been properly considered by those Libra consortium members that are likely to be held accountable by regulators,” Sloane says. “Building out a cryptocurrency, if done properly, is similar to introducing a new payment network. Doing this on a global basis from inception has, to my knowledge, never been attempted before and there is a good reason for that.”

Still, Sloane concedes what is known so far about the new digital currency offers three indicators that the project “may be on the right track.” The first is that it will be a stablecoin. Secondly, its management by consortium “is at least a step in the right direction,” Sloane says.

Sloane concedes his third reason has not been explicitly stated by the partners but is, rather, derived from what is known so far. This is what appears to be Libra’s “limited acceptance across consortium members,” he says, making it more like a closed-loop currency like JPMorgan Chase & Co.’s JPM Coin, a dollar-tethered token the big bank announced in February.

“This [limited acceptance] would play a key role in defining what regulations the [Libra] coin falls under and may somewhat simplify the regulatory process,” Sloane argues. “So, for example, if it is constructed appropriately, it could fall under U.S. prepaid rules, which lay out specific requirements which, if met, would enable a U.S. deployment.”

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