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John Engle
John Engle
Articles (598) 

Facebook Faces Real Political Risk From Libra Cryptocurrency

The digital payment system has potential, but it may cause trouble for the social media giant

September 30, 2019 | About:

Facebook Inc. (NASDAQ:FB) made a big public splash in June when it unveiled Libra Blockchain, its self-described cryptocurrency. Yet, as we explained in a research note at the time, Libra is not really a cryptocurrency by the conventional definition of the term. Regardless, it is being treated as such by most of the media, the public, policymakers and the social media giant itself.

Unsurprisingly, Libra has attracted a great deal of attention from politicians and central banks. That could spell trouble for Facebook, which is already facing an array of political and regulatory challenges.

The Fed sees opportunity and trouble ahead

Jerome Powell, the chair of the Federal Reserve, appeared before the Senate Banking Committee on July 11. While he discussed a range of issues related to the economy and monetary policy, he gave a great deal of attention to Facebook’s latest venture. Powell presented a veritable laundry list of potential issues and concerns with the new cryptocurrency:

“I think we agree that Libra raises a lot of serious concerns, and those would include around privacy, money laundering, consumer protection, financial stability. Those are going to need to be thoroughly and publicly assessed and evaluated before this proceeds ...The idea that this would be going into implementation within 12 months, I think, is not going to be proven right. I think we’re going to take more time than that ...The size of Facebook’s network means it could be, essentially, immediately systemically important. This should be subject to the highest level, the highest expectations in terms of privacy but also prudential regulation.”

Facebook hopes to have Libra’s underlying technical architecture up and running within months, and hopes to implement the full rollout of the payments system by next summer. As Powell pointed out in his July testimony, this sounds like exceptionally ambitious timing.

Powell’s concerns are certainly not without merit. Cryptocurrencies have become notorious for the use in illicit transactions and facilitation of a widespread black market online economy. While Facebook aims to prevent such abuses with Libra, there is ample reason to worry.

Facebook fails to warm lawmakers’ cold should

In a public post published on July 15, Facebook executive David Marcus promised to work closely with central banks and governments to ensure that Libra would be as safe as possible:

“We believe in and are committed to a collaborative process with regulators, central banks, and lawmakers to ensure that Libra helps with the kinds of issues that the existing financial system has been fighting, notably around money laundering, terrorism financing, and more. Libra should improve detection and enforcement, not set these back.”

Despite his optimistic tone, Marcus received an extremely frosty welcome from the Senate Banking Committee on July 16.

Facebook’s subsequent efforts have thus far failed to melt political sentiments in the months since Marcus’ congressional appearance, with few significant leaders showing much love for Libra. Indeed, a “Keep Big Tech Out of Finance Act” has already appeared in draft form, and could potentially kill Libra before it ever gets off the ground. While it is currently a Democratic bill, Republicans’ increasing coolness toward big tech firms -- and Facebook in particular -- could leave the social media giant with few allies in this fight.

Policymakers express profound anxiety

Libra has sparked a rare display of bipartisanship in an otherwise polarized Washington. During his July 11 congressional appearance, the Fed’s Powell was peppered with anxious questions from politicians on both sides of the aisle. The event caused Barron’s to observe that Congress appears to be more concerned about Libra than it is inflation.

Given its vast economic and social influence, political questions were bound to arise about Facebook’s foray into the crypto ecosystem. The company’s particular status as a key platform of both private and public discourse, as well as its history as a vehicle for alleged electoral meddling in 2016, makes the move an obvious political lightning rod.

During a congressional appearance on July 16, Facebook’s Marcus found himself inundated with questions from concerned senators, with Democrats and Republicans showing nigh equal levels of distrust and concern.

The concerns spread far beyond America’s shores. In fact, few major central banks and international institutions have failed to question the wisdom, or even the legitimacy, of Libra. As Bloombergt reported on Sep. 18, the condemnation and concern has been so universal and widespread that there is now serious reason to doubt that Libra will live to see the light of day:

“Mark Zuckerberg’s cryptocurrency project, Libra, has become the regulatory equivalent of a pinata: Everyone is lining up to hit it with a stick. France’s finance minister Bruno Le Maire calls it an assault on sovereignty and a risk to financial stability, an attack backed up by his German counterpart Olaf Scholz who dubbed it a ‘parallel currency.’ You can see their point. Across the Atlantic, U.S. Democrats and Republicans — including President Donald Trump — have called for tough scrutiny of the Facebook Inc. payments system, whose potential 2-billion strong user base could threaten the U.S. dollar’s supremacy.”

Verdict

Facebook faces a litany of political and regulatory challenges, including antitrust investigations in both the U.S. and Europe. The company managed to settle an action by the Federal Trade Commission for $5 billion, but it is likely to pay a far steeper price as further actions emerge. Adding crypto concerns to the mix only endangers the social media juggernaut further.

Investors must pay close attention to this developing story. Facebook hopes to start a grand new chapter with its digital payments platform. It may end up courting serious danger instead.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital Merchant Bankers and chief investment officer of the Cannabis Capital Group. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin, a diploma in finance from the London School of Economics and an MBA from the University of Oxford.

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