Friday , September 20, 2019

Despite Lawmakers’ Hostility, Patience Could Pay off for Facebook And Libra

Facebook Inc. and its proposed Libra cryptocurrency took a beating this week on Capitol Hill, but the outlook for the new coin—and its Calibra wallet—may be more nuanced than that reception would seem to indicate.

The skepticism toward Libra was bipartisan, with Senators and Representatives of both major parties raking Calibra chief David Marcus over the coals in separate hearings Tuesday and Wednesday. Politicians in both hearings pointed to Facebook’s questionable record regarding privacy and security, while House Financial Services Committee chairwoman Maxine Waters and other Committee Democrats have already prepared legislation to stop Libra development until all questions are answered.

“It will take years” for Libra to get up and running, says Mercator’s Sloane.

But regardless of Marcus’s defense of Libra in both forums, and the heated rhetoric it drew from Senators and Congressmen, some observers say Facebook could be playing a long game with Libra and its wallet app. One key to this view lies with the Libra Association, the international consortium of 28 companies that is expected to take over governance of Libra after this year, basing its operations in Geneva, Switzerland. Facebook will be one of the 28, along with payments companies Mastercard Inc., PayPal Holdings Inc., PayU, and Visa Inc.

This means there aren’t likely to be any moves any time soon to establish Libra or its wallet as a commercial proposition, these observers say. “It will take years to establish the Association’s governance documents and more years to identify the initial payment use cases the platform will support and the regulatory constraints that the platform must address specific to those use cases,” points out Tim Sloane, vice president of payments innovation at Maynard, Mass.-based Mercator Advisory Group. Sloane has been closely following Facebook’s crypto strategy.

Furthermore, there will likely be an even longer wait for the wallet. “Calibra can’t enter the market until Libra is up and running,” Sloane says. “When it is, then Calibra needs to align with all of the [regulatory] agencies. This still leaves significant wiggle room as few of these agencies have regulations in place that recognize the unique nature of crypto.”

Other payments analysts point out that such patience could pay off. When Libra finally delivers on its promise, it could have a powerful—and immediate—impact because of its backers’ plan to tie its value to existing fiat currencies. “Tying it to a hard asset like gold would have been bolder, but also more threatening to central banks,” notes Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based financial-services consultancy. “In contrast, Bitcoin is backed by nothing more than the hope there’s a greater fool willing to buy it for more.”

Indeed, Grover argues a heavy regulatory hand could defeat one outcome the currency’s designers may or may not intend. “Libra threatens and stresses existing systems. No bad thing,” he argues. “A credible, lightly regulated, new global currency and payment system would force existing currencies and payment systems to perform better.”

Light regulation, though, isn’t likely. Calibra has filed for state money-transmitter licenses, according to Mercator. And Marcus told the Senate Committee on Banking, Housing, and Urban Affairs Tuesday that Facebook is working to comply with a wide swath of agencies, including the U.S. Treasury Department’s Financial Crimes Enforcement Network and Office of Foreign Assets Control, as well as the Federal Trade Commission.

And even if Facebook is patient, it will continue to draw skepticism about its venture into cryptocurrency. Sloane, for example, points to the simple matter of the Association’s intended headquarters city. “How a Geneva-based operation squares with the statement, ‘I believe that if America does not lead innovation in the digital currency and payments area, others will’ is beyond me,” he says, noting a sentence in Marcus’s prepared statement for the House committee he faced Wednesday.

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