Facebook: Pressure Mounts on Libra Cryptocurrency

Libra Blockchain, first announced in June, has been facing a torrent of intense scrutiny from media, markets and policymakers. Facebook Inc. (FB), Libra’s creator, calls it a cryptocurrency (despite its not actually being a true cryptocurrency at all), a fact that has likely added to the scrutiny.

Despite Facebook’s efforts to allay public and private worries, central bankers across the world have expressed heightened concern about Libra's existence and what it would mean to the financial world, as have leaders in the private banking industry. Indeed, Libra faces real threats to its existence.

Central bankers getting nervous

Central banks are essential components of the modern monetary and financial system. Developed economies, with deep capital pools and sophisticated markets, have become increasingly dependent on the infrastructural and regulatory supports these institutions provide. Thus, when central banks express dismay about a subject, it generally earns public attention.

The U.S. Federal Reserve, the most important central bank in the global financial ecosystem, has released a number of warnings about Libra, and has even collated a lengthy list of regulatory hurdles facing the would-be digital currency. But the Fed is not the only central bank concerned about Libra. On Oct. 15, Denis Beau, first deputy governor of the Bank of France, warned that Libra could threaten financial stability:

“If they were to take off, they would raise additional issues in terms of competition, policy, financial stability and monetary policy. It’s really important that this is understood and the risks are addressed before any possible rollout.”

The Swedish central bank added to the pile-on the following day. According to Riksbank Governor Stefan Ingves, digital currency will play a big role in the future of finance, but private currencies may not:

“In this day and age we have to twist things in our heads and do things based on the assumption that nothing is on paper, and then when we talk about money everything is going to be digital in one form or the other. But the old issues — private sector money or public sector money — they are basically identical, and if history gives us any guidance at all then almost all private sector initiatives have collapsed sooner or later.”

The specter of shadow banking

One of the big issues facing Libra is the potential danger of creating a parallel financial system that is not governed by the norms and rules that have arisen over the years in conventional financial markets. According to the minutes of the September meeting of the Federal Advisory Council, several banks have expressed this concern with regard to Libra, warning that it could result in a proliferation of shadow banking:

“Facebook is potentially creating a digital monetary ecosystem outside of sanctioned financial markets – or a ‘shadow banking’ system. As consumers adopt Libra, more deposits could migrate onto the platform, effectively reducing liquidity, and that disintermediation may further expand into loan and investment services.”

The fear that a private, parallel monetary and financial infrastructure could take shape is not unwarranted. Indeed, it is a concern shared by leading policymakers and regulators. As Federal Reserve Chair Jerome Powell told Congress in July, the threat of shadow banking must be addressed before Libra can be allowed to go live:

“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.”

Facebook remains defiant

The regulatory firestorm that has broken out around Libra has spooked many of Facebook’s partners in the project. Indeed, October has marked the departure of a number of key backers, including Mastercard Inc. MA, Visa Inc. V and eBay Inc. EBAY. Yet, while its list of allies has grown increasingly thin, Facebook has remained defiant. On Oct. 15, Libra pushed back against the mounting criticisms via Twitter:

“We've said from the beginning that Libra shouldn’t and wouldn’t launch without the appropriate regulatory oversight and addressing legitimate concerns. Every time someone agrees with us, it doesn’t constitute a ‘blow’ or ‘setback.’ Innovation and regulation can live in harmony.”

Appearing before a Congressional hearing on Oct. 23, Facebook CEO Mark Zuckerberg argued that Libra was essential if the U.S. wants to remain the center of financial market innovation:

“As soon as we put forward the white paper around the Libra project, China immediately announced a public private partnership, working with companies...to extend the work that they’ve already done with AliPay into a digital Renminbi as part of the Belt and Road Initiative that they have, and they’re planning on launching that in the next few months.”

Verdict

Facebook’s faltering steps into digital finance have reaped a regulatory and political whirlwind. While Facebook is attempting to put a brave face on the situation, as well as making a questionable nationalist case for financial innovation, it is quite clear that it did not anticipate the level of political and regulatory pressure that has emerged in recent months. A loss of key allies has further soured Libra’s prospects.

Facebook, already under intense scrutiny for questionable practices in its core business, might be better off ditching this particular fight. Facebook does not need Libra. It needs the added oversight and political pressure even less.

Disclosure: No positions.

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