Facebook's Libra needs to answer three questions
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On June 18th, Facebook officially launched its "Libra" cryptocurrency project, which aims to leverage blockchain technologies to create a new stable cryptocurrency backed by a basket of fiat currencies. Facebook says its aim is to enable accessible and affordable digital payments for billions of people, including un/underbanked people across the world. It aims to make sending payment as easy as sending a message across its digital platforms for its 2.7 billion global users.
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The Libra vision is a bold and ambitious one. Yet Facebook's decision to introduce Libra as a cryptocurrency, rather than just a new payment system, sets up a series of massively complex challenges. These are some of the most important questions Facebook will have to address before Libra becomes a reality:
- How to bring governments and regulators onboard? A cryptocurrency being used by 2.7 billion people across the globe would be a threat to national sovereignty and disruption of their ability to coin money. China, Indonesia, and Pakistan have already banned Bitcoin and other cryptocurrencies due to similar threats. The US, France and Russia have now all expressed concerns regarding the threat that Libra would represent. In addition, the fiat currency backed nature of Libra means that it will have to collaborate with regulators either directly or indirectly (through the regulator licensed financial institutions), thus the support from regulators is a paramount. Lack of regulatory support could significantly reduce the capabilities of Libra or make it illegal.
- How to re-build consumer trust around data privacy? Though cryptocurrency itself is characterized by anonymity, the digital platforms that consumers use to make payments will be based on WhatsApp, Instagram, and Facebook. The Cambridge Analytica scandal exposed egregious missteps by Facebook -- and users haven't yet forgotten that breach of trust. Libra's documentation indicates that it has strengthened its data privacy protection mechanisms, but this will unlikely be enough to assuage deep concerns when it comes to Facebook's ability to govern such a system and currency. Meanwhile, too much privacy will increase regulatory concerns about money laundering and tax avoidance.
- Is Facebook a powermonger or social enterprise? Not surprisingly, Libra's consensus algorithm uses Byzantine Fault Tolerance (BFT), which trades decentralization for scale and efficiency. BFT consensus requires several validators on the chain that have stronger power to decide and approve each transaction. Such voting power is determined by the economic contribution to the chain/tokens, which means that larger or richer companies will potentially have more rights on the network. Libra's financial inclusion vision is a compelling one. But let's be clear about the real intent: with this initiative, Facebook is essentially looking to go beyond social behavior data and get its hands on consumer financial data. The power wielder in this chain is likely to be Facebook and the large company members in the Libra association.
Just weeks ago, the media was awash with calls to break up Facebook and reduce its influence. Considering this background, the launch of the Libra project seems brazen. But what is even more strange, is Facebook's decision to launch a cryptocurrency as part of this project. Launching a traditional payment system to better compete with the likes of Alipay and WeChat Pay would have not attracted such ire from governments and would have probably had a better chance of success.
This post was written by Analyst Meng Liu, Vice President and Research Directors Benjamin Ensor and Frederic Giron. This originally appeared here.