Under the Sign of Libra

Facebook’s digital money could empower the underbanked, usher cryptocurrency into the mainstream, and accelerate the arrival of real-time payments. For some, that’s not good enough.

In Roman times, the libra was a unit of weight roughly equivalent to 12 ounces. Ancient Rome also attached the name to a constellation that traces the outlines of a balance against the night sky. This summer, a very weighty player upset the balance of digital money and payments in a move that could reverberate for years to come.

Unlike just about all new forms of digital money, the Libra cryptocurrency arrived in the headlines because it is the blockchain brainchild of Facebook Inc. While all the contours of the social-media giant’s strategy for Libra may take months—or years—to unfold, one thing is certain: Facebook’s backing has cast not just Libra, but a whole slew of related concepts, as well as Facebook itself, into the glare of public scrutiny in ways that no other cryptocurrency startup could approach.

The issues Libra addresses range from empowerment of the underbanked to faster and less costly payments, not just within national boundaries but worldwide. But the potential benefits come shackled to big questions, including the role of the Libra Association, Facebook’s spotty record on privacy and data security, and the commitment the 27 other companies behind Libra are really prepared to make.

‘A Risky Step’

What’s clear is that Facebook, whose unveiling of Libra in June almost instantly encountered withering blowback from politicians and central bankers in the United States and abroad, has much at stake.

Just last month, both France and Germany promised to block Libra from operating in Europe. Earlier, U.S. lawmakers expressed alarm at a currency controlled by private companies and demanded a halt to Libra until all questions could be addressed (box, below).

For Facebook, Libra is “a risky step. It could blow up in their face,” notes Stephen Pair, chief executive of BitPay, an Atlanta-based company that enables consumers to spend Bitcoin and other cryptocurrencies and merchants to accept them.

But Facebook is hardly in this alone. While it spearheaded the development of Libra, it went public with the backing of a consortium of 27 other companies from the worlds of payments and technology, each of which is expected to put up at least $10 million to buy in. These companies make up the Libra Association, a legal entity domiciled in Geneva, Switzerland.

Mastercard Inc. and Visa Inc. are members, as are PayPal Holdings Inc., PayU, and Stripe Inc. Their interest in Libra isn’t hard to see. It boils down to the promise of high-speed, low-cost transactions in corridors with rising demand. For example, “it’s a way of doing cross-border payments with low fraud rates,” points out Krista Tedder, head of payments at Javelin Strategy & Research, Pleasanton, Calif.

That application carries other benefits. “Foreign-exchange costs are significant. If the consumer loads the funds into Calibra, you don’t have to deal with foreign exchange because it’s already handled at the consumer level,” adds Tedder. Calibra is Facebook’s new wallet, the first of what is expected to be a range of competing apps to load and spend Libra.

Mastercard and Visa said they had nothing to add regarding Libra since the public announcement in June. PayPal and Stripe did not respond to requests for comment. Spokespeople for Facebook and PayU were initially responsive but did not reply to inquiries in time for this article.

‘It’s Just Bizarre’

Missing from the roster of association partners are financial institutions. Banks are inherently conservative creatures, and many may be put off by the harsh reaction from regulators here and abroad. But Libra could present banks with an all-too-rare opportunity, argue some observers.

“It’s just bizarre that they’re not participating,” says Richard Crone, principal at Crone Consulting LLC, a payments advisory in San Carlos Calif. “The $10 million is like throwaway money.”

But, in a way, banks will be involved whether they intend to be or not. Libra will be a so-called stablecoin, a form of digital money backed by a basket of bank deposits and short-term government securities. That’s designed to prevent the kind of wild swings in value that have kept older cryptocurrencies like Bitcoin from entering mainstream payments.

Beyond that, Libra is designed to be open-source, which means any entity can build applications on top of its code. To begin with, the currency will run on what’s called a permissioned blockchain. Only authorized entities will be able run nodes on the Libra network. Within five years, however, the developers expect the network to go permissionless.

Observers like Crone see vast possibilities in that for banks. They could go small, with, say, person-to-person payments not controlled by larger competitors, or go big, catering to that huge market of unbanked people.

Many people who don’t have checking accounts nonetheless have accounts with Facebook or its properties, like WhatsApp and Messenger. “This is the single greatest new green-field account-opening opportunity,” Crone says.

WhatsApp and Messenger are a key part of Facebook’s Libra strategy. The company expects users to adopt the Calibra wallet and use it like a bank account. That wallet would then come with protection by what Crone calls a “hard token”—the mobile phone—and a “soft token,” the user name and password.

In his testimony to a Senate committee in July, Calibra head David Marcus said Facebook expects to profit not from these transactions but rather from the incremental advertising all the new activity will attract. Marcus is an old salt on the seas of payments. He came to Facebook in 2014 after a stint as PayPal’s president, and before PayPal was a successful mobile-payments entrepreneur.

That may be what’s in it for Facebook. Crone doesn’t think financial institutions will sit much longer on the sidelines. “It’s foolhardy to think some financial institution of substance won’t participate in this, and once it does a feeding frenzy will occur” among banks in general, he predicts.

BitPay’s Pair, too, expects banks will ultimately adopt Libra, but maybe not with the urgency Crone advises. “Are they missing out? Maybe. Banks tend to be slow to adopt new technology, but if you wait too long, it could be too late,” Pair says. As for BitPay, Pair says the company plans to add the new coin “so our customers can accept Libra.”

A Geyser of Data

But not all observers see Libra as a fountain of cash waiting to be tapped by banks. For one thing, some of the country’s megabanks are looking at crypto coins of their own. JPMorgan Chase & Co., for example, in February announced it is testing JPM Coin, a stablecoin tethered to the U.S. dollar. For the time being, the coin is confined to wholesale payments between institutional clients.

“I disagree banks are missing out,” says Javelin’s Tedder. Instead, she sees opportunity for those merchants BitPay will be taking Libra to.

What Libra may well do, she says, is put stress on card interchange costs, a development that is likely to appeal to large enterprise retailers but work contrary to the interests of banks. “This is a product that fits a unique need—how to reduce foreign-exchange costs, how to reduce interchange,” she says, though she adds she has not seen an interchange model for Libra.

Libra is likely also to generate a geyser of purchase data that could prove quite valuable to those advertisers Facebook hopes to attract. And this is where the social-media kingpin must be careful.

Marcus, for example, took pains during his testimony to assure that his company would protect the confidentiality of such information. But there’s no data like payment data, and Libra has the potential to generate a lot of it.

The reason starts with just how many people use Facebook and its properties regularly. “If they get 2.5 billion people using [Libra], that gives them an enormous amount of data, plus transaction fees for processing off-platform,” observes Eric Grover, principal at Intrepid Ventures, a Minden, Nev.-based financial-services advisory.

‘Thought Change’

But some observers set aside questions about transaction fees, data privacy, and the relative lack of involvement from banks. What the crypto world sees in Libra is a huge opportunity to inject digital money into the mainstream now that huge U.S. corporations are signed up.

“It’s sort of increased the urgency to address thought change on cryptocurrency,” notes Pair. “All of a sudden, this could happen very quickly.”

Pair says BitPay and other crypto players have been following the development of Libra “for probably over a year.” While Facebook’s project was officially kept under wraps until June, the tight-knit cryptocurrency world had some inkling of what was coming.

“People talk in the industry, and [Facebook] is employing people we know,” Pair says. “We suspected they were working on something.” The only big surprise when Libra debuted, he says, was not that the money is a stablecoin, but that it isn’t tied to the dollar.

Now the cryptocurrency business, which has been growing globally since Bitcoin debuted in 2009, has been joined by backers with the wherewithal to make Libra a leading tender just about anywhere in the world.

A critical ingredient will be launching the Calibra app on time in 2020. Libra may populate other wallets over time, but Facebook’s wallet is the product in the spotlight today. “If they don’t have a wallet when they launch [Libra], nobody will be able to use Libra,” Pair says.

‘A Big Deal’

The timing of Libra’s introduction, though, is complicated by the regulatory roadblocks it’s already running into. The association has said Libra will not launch until everyone is satisfied, but skepticism runs deep among central bankers that a transnational currency should be operated by a consortium of private companies.

Last month, regulators from around the world met in Basel to question Libra representatives about the potential for the new currency to disrupt Europe’s financial stability.

The previous week, the association filed a request with the Swiss Financial Market Supervisory Authority (FINMA) seeking a clear statement of the status of the association and that of the Libra coin. In conjunction with that request, the association also announced it is seeking a license from FINMA to operate as a payment system.

“We are engaging in constructive dialogue with FINMA and we see a feasible pathway for an open-source blockchain network to become a regulated, low-friction, high-security payment system,” Dante Disparte, the association’s head of policy and communications, said at the time in a press release.

That development followed news in August that at least three of the association members were having second thoughts about the venture in the face of the hostile reception on Capitol Hill (box). As of mid-September, nobody had pulled out.

If the association can hang tough through this gauntlet, the world may yet find out just how threatening Libra is to the world’s financial system—and just how much it can do to put electronic money for the first time in the hands of people who never saw a bank.

And the financial-services business may yet have a chance not only to greet a potent new crypto coin, but also a player whose outsized assets may just match its ambitions in payments. Observes Intrepid Ventures’ Grover: “There’s never been a challenger come in with 2.5 billion users. That’s a big deal.”

 

Facebook’s Calibra Runs the Gauntlet on Capitol Hill

Facebook Inc. hasn’t set a specific date for introducing its Calibra wallet, and the frosty reception its top executive for the initiative received this summer on Capitol Hill may be a big reason why. But at least that confrontation cast some light on the business case behind Calibra.

In July, David Marcus, head of Calibra, said in prepared remarks that the new wallet will lead to more transactions on Facebook properties and ultimately more advertising revenue for Facebook. Calibra is an arms-length Facebook unit intended to allow consumers and businesses to trade in the Libra cryptocurrency.

“We expect that the Calibra wallet will be immediately beneficial to Facebook more broadly because it will allow many of the 90 million small- and medium-sized businesses that use the Facebook platform to transact more directly with Facebook’s many users, which we hope will result in consumers and businesses using Facebook more. That increased usage is likely to yield greater advertising revenue for Facebook,” Marcus told the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

But under questioning from committee member Mark Warner, D-Va., Marcus assured the panel Facebook will not bar competing wallets. The app, intended to be used for commerce with the Facebook-developed Libra digital currency, will be “one of many wallets” operating within the Libra network, Marcus said.

Almost as soon as Facebook introduced Libra and the Libra Association in June, the company faced negative feedback from regulators, lawmakers, and consumer groups concerned about what they see as the social network’s questionable record on such matters as privacy, data security, and competition.

The association is made up of Facebook and 27 other companies, including major payments networks like Mastercard Inc., PayPal Holdings Inc., Stripe Inc., and Visa Inc. The association will take over management of the blockchain-based Libra currency from the social network.

Facebook has repeatedly said the currency won’t launch until it has satisfied regulators, a point Marcus repeated in his Senate testimony. “We are determined to meet the regulatory bar before we proceed,” he said.

He added Facebook is working to comply with rules from a slew 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.

Despite his assurances, Marcus encountered considerable skepticism from Democrats on the committee regarding not only regulatory concerns but also Facebook’s professed willingness to let Libra remain open to wallet apps that could compete with Calibra.

“We will have to compete with a number of other wallets that will operate on top of Libra,” Marcus said in response. “We will have to have the highest standards when it comes to privacy. No data will be shared with Facebook.”

But the session wasn’t entirely hostile. Sen. Pat Toomey, R-Pa., pointed to benefits the Libra currency and Calibra wallet could introduce and cautioned against acting prematurely to stymie the project. “To strangle this baby in the crib seems wildly premature,” he noted.

Facebook Fast Facts

Number of small and medium-size businesses transacting: 90 million

Number of monthly active WhatsApp Users: 1.5 billion (68 million in

the United States)

Number of monthly active Messenger Users: 1.6 billion (an estimated 126 million in the United States)

Source: Facebook