Facebook's Libra turns foes into allies in regulatory face-off

Facebook is focusing the initial discussions around its cryptocurrency project as a preemptive strike against the privacy and legal concerns the public and politicians have about the huge social network.

Perhaps there is no better company than Facebook to wage this war. For years, payments-industry heavyweights like Visa and Mastercard have had their plans challenged by regulators across the globe, such as China's habit of moving the goalposts for their payment processing application and India's demands that they store data locally. Now they and others are joining forces with Facebook to launch an entirely new method of payment.

Facebook's cryptocurrency moves follow years of bad privacy and security news stemming from the social network. As recently as April, Cisco Systems' Talos security unit found that 74 cybercriminal groups had set up shop on Facebook to sell stolen card information and other illegal goods, some for as long as eight years. Facebook in April said the groups have been removed.

Patrick T. Fallon/Bloomberg

Facebook also disclosed an API bug earlier in 2019 that impaired data privacy; and the social network’s ties to Cambridge Analytica and the 2016 U.S. presidential election meddling had Facebook on the defensive, including testimony from CEO Mark Zuckerberg, who was grilled by members of Congress about Facebook’s privacy issues. Zuckerberg has reportedly already met with regulators in the U.K. and the U.S. to discuss how Facebook's cyrptocurrency and compliance issues.

On Tuesday, David Marcus, Facebook’s blockchain chief, stressed to media outlets that the cryptocurrency data and Facebook’s data won’t be commingled. In its Calibra announcement, Facebook also appears to be leaning in to the privacy issue.

“We’ll be using all the same verification and anti-fraud processes that banks and credit cards use, and we’ll have automated systems that will proactively monitor activity to detect and prevent fraudulent behavior,” the statement from Calibra says, adding that there are steps designed with privacy in mind, such as only using data as a risk management tool for compliance or security. “Aside from limited cases, Calibra will not share account information or financial data with Facebook or any third party without consumer consent … for example, Calibra customers’ account information and financial data will not be used to improve ad targeting on the Facebook Inc. family of products.”

And yet Facebook's own involvement — and its collection of huge multinational financial brands — run counter to its message that Libra will be a decentralized distributed ledger-driven cryptocurrency that’s anonymous to its users.

Facebook could learn from its own past efforts to create a digital currency called Facebook Credits, but it seems to be leaning more heavily on the strategy of the crypto pioneer Ripple.

Legal challenges to Ripple's XRP tokens contended that Ripple was creating its own coins and selling them to the public. Ripple's response has been to distance itself from the XPR tokens, with Ripple CEO Brad Garlinghouse stressing that XRP and Ripple are different and that buying XRP does not give an investor rights to Ripple or the company.

Ripple's dispute highlights the larger problem of regulatory clarity and cryptocurrency — Facebook and its partners face a world of different rules and government attitudes over cryptocurrency.

Why Facebook made a payments subsidiary

Facebook's public materials, issued through a subsidiary called Calibra, reveal a wall that’s designed to anticipate questions from regulators over how Facebook uses data that’s tied to cryptocurrency and the security of its broader network.

The Libra network will be powered by blockchain technology, and is scheduled to launch in 2020. Libra is a Geneva-based nonprofit whose members include some of the largest financial services and digital retail technology companies in the world, such as Mastercard, Visa, PayU, PayPal, Stripe, Visa, eBay, Lyft and Uber.

Facebook is joining the Libra Association through Calibra, which will build financial services for Libra, including a digital wallet that will be available in Messenger, WhatsApp and as a stand-alone app.

These details are consistent with what’s leaked to the press over the past year, such as recent word of investments by the card networks and other large payment companies—and the use of WhatsApp as a portal for Facebook’s cryptocurrency payments. Facebook also confirmed the use of a series of global currencies as a stabilizing hedge against cryptocurrency's volatility.

Before Facebook's involvement, cryptocurrency law had been a moving target, with very different rules among U.S. states. It's also still unclear how the SEC will treat cryptocurrency sales, either as a utility or a security, which has huge ramifications for the rules.

And that's just in the U.S.

A global battle

China, arguably the world's most important emerging payments market, has banned most alternative currency. India, another huge market, has taken a similar stance. And both countries have also played regulatory hardball with Visa and Mastercard, two of Libra's participants, by requiring huge investments in local data infrastructure and generally moving the legal goalposts for traditional payment networks from outside corporations. How will these countries react to a Facebook/Visa/Mastercard/PayPal crypto payments system?

"With more major players like Facebook now building in the crypto space, it raises the urgency for regulators to clarify how they are defining this asset class,” said Richard Rosenblum, co-founder and co-head of trading operations for GSR, in an email. There is a lot of uncertainty and a lack of guidance for companies that are trying to act responsibly, he added.

Calibra's wallet, when it is released, could potentially disrupt traditional payment models by bringing a network of huge payment brands that the cryptocurrency industry has not seen to this point — though analysts have said that scale does not necessarily lead to usage.

Calibra's announcement also stressed financial inclusion, viewing blockchain as a way to extend financial services to developing markets. "For many people around the world, even basic financial services are still out of reach: almost half of the adults in the world don’t have an active bank account," the Calibra/Libra announcement said.

“Facebook’s involvement in the space should encourage more regulatory clarity and should greatly increase the exposure of merchants and consumers to cryptocurrency,” Rosenblum said.

The economist Nouriel Roubini has made this contention in CoinDesk, while temtum’s Richard Dennis has made that assertion in PaymentsSource.