“Today,” began a Facebook announcement in June of this year, “we’re sharing plans for Calibra”. Calibra is a financial services company, owned wholly by Facebook, which will “let people access and participate in the Libra network”. At the heart of this network is “a new global currency powered by blockchain technology”, called Libra.
The announcement had the language of a charity appeal: “almost half of the adults in the world don’t have an active bank account,” it read. Its “mission” is to provide “financial infrastructure that empowers billions of people”.
A consortium of 28 private corporations, including Visa, Mastercard, Paypal, Ebay and Uber had joined the Libra Association to “reinvent money” and “transform the global economy”. And not simply to make more money, but “to help advance financial inclusion.”
Rumours of a Facebook cryptocurrency had been circulating for weeks, after CEO Mark Zuckerberg moved David Marcus, Facebook’s vice president of messaging products and the former director of the cryptocurrency exchange Coinbase, to head a new, experimental blockchain division. Libra was quickly nicknamed “the Zuck Buck”.
Facebook, a company with 2.4 billion active monthly users, was joining the cryptocurrency revolution.
It didn’t take long, however, for the project to attract negative attention. Just four months later, seven of the 28 original members of the consortium have pulled out following intense scrutiny from legislators, regulators, economists and central bankers. Earlier this week, Zuckerberg appeared before the US House of Representatives Committee on Financial Services and was grilled by members of Congress for six hours. Chair of the committee, Maxine Waters, clashed repeatedly with the embattled CEO. “Last year Facebook banned all cryptocurrency ads from its platform because ‘they are frequently associated with misleading or deceptive promotional practices’,” she said. “Then, earlier this year, Facebook rolled back the cryptocurrency ad ban, bought a blockchain company and announced its own currency. So what’s changed? How did cryptocurrency go from being misleading and deceptive last year, then become a means for financial inclusion this year?”
“Crypto assets can facilitate criminal behaviour, including the drug trade,” Brad Sherman, a member of Congress from California, told Zuckerberg. “I’m not here to be anti-Facebook. I was anti-cryptocurrency back when you were anti-cryptocurrency.”
Cryptocurrencies emerged on the investor scene in the wake of the 2008 financial crisis. The most famous, Bitcoin, was created by an unknown coder using the pseudonym Satoshi Nakamoto. Discredited governments were struggling to contain the fallout from the collapse of Lehman Brothers, and central banks had been caught unawares by the largest financial shock since the Great Depression. Nakamoto’s radical vision was to use “blockchain” technology to create an alternative currency; independent of governments, regulators and central banks – an open challenge to the world’s flailing financial system. Bitcoin’s anti-statist, free-market libertarian roots are embedded in its code, which contains the text: “The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”.
Without a central bank controlling the money supply and with no state monopoly on minting, Bitcoin would instead be created or “mined” by individuals using their computers’ processing power to complete a series of complex mathematical operations. These operations are what maintain the “blockchain”, a shared database that records details of all Bitcoin transactions, removing the need for centralised administration. Because holding cryptocurrency doesn’t require registering at a bank with proper documentation (coins can be stored in an anonymous online digital wallet), and because many exchanges allow traders to send and receive coins without KYC (Know Your Customer) identification, online purchases made with Bitcoin are difficult to trace. In its infancy, Bitcoin’s user base was a hodgepodge of bedroom-based anarcho-capitalists, who admired the currency’s independence from government (and taxes), coding enthusiasts who admired Nakamoto’s creation, and, crucially, many thousands who saw the anonymity afforded by Bitcoin’s use – as opposed to traditional online credit or debit card transactions – as a safe, anonymous way to purchase drugs, child pornography and firearms on the “dark web”.
In this week’s hearing, Congressman Sherman said he fears Libra, too, will help “drug dealers, terrorists, tax evaders”. Despite assurances that Libra would comply with all relevant US regulations and have strong identity verification, one member of Congress told Zuckerberg she was “concerned that the use of anonymous wallets would make Libra attractive to those who are looking to launder money.”
Bitcoin’s value fluctuated wildly, reaching a peak of almost $20,000 for one Bitcoin at the end of 2017, before collapsing to around $6,200 at the beginning of 2018. Its extreme volatility means it has little use as a store of value (if you’d taken out a mortgage in Bitcoin in 2011, you would now be paying back 2,697,641 per cent.) This volatility also prevents most retailers from accepting Bitcoin as a medium of exchange. The website wheretospendBitcoins.co.uk currently lists just 56 Bitcoin-accepting retailers in London – a city that is home to over a million businesses – including House of Vapes in Hackney, Zen Head Shop in East Ham and SJ Nice Plumbing.
Bitcoin “mining” – the process by which the blockchain record is maintained and new coins are created – is now estimated to use the same amount of electricity per year as Portugal. This process is performed by fewer than 45 million accounts, or “wallets”; the energy demands of a currency used by billions of people would be vast.
A profusion of new currencies has, in fact, already developed from Bitcoin: there’s PotCoin, a crypto designed for buying and selling legalised marijuana; PutinCoin, which was created “to pay tribute to the people and the president of greatest country [sic] in the world: Russia!”; and there is, inevitably, Titcoin, a cryptocurrency that allows users to pay for online pornography without it appearing on their bank statements.
Thousands of blockchain-based “cryptos” are currently being traded on online exchanges. Most are worth a tiny fraction of a Bitcoin. Some are not even real cryptocurrencies. OneCoin, a huge Ponzi scheme, has no blockchain, a price that is arbitrarily set by its creators, and is effectively impossible to spend or sell.
“This industry of crypto is what?” asked Nouriel Roubini, a professor at New York’s Stern School of Business, when he was asked to speak at the recent Asia Blockchain Summit. “Not even this conference,” Roubini pointed out, “allows you to pay in Bitcoin, because the price has fallen 30 per cent in a week – so you guys would be bankrupt if you had accepted Bitcoin. It’s not used for any real transactions. So what is it? It’s a business of one shit coin being traded against another shit coin, and the middleman makes money.”
Facebook says Libra is different. Zuckerberg told Congress that he planned “to build a safe and secure and regulated alternative” to Bitcoin. Libra is a “stablecoin”, meaning it has attempted to bypass the price volatility associated with other cryptos, and its value is instead pegged to a “basket” of real currencies – the US dollar, the euro, the pound, the yen and the Singapore dollar. As the aggregated value of these currencies rises or falls, the price of Libra will change.
This means the Libra will be a more reliable store of value than some cryptos, but it will achieve this by not being a true cryptocurrency with a value that is independent of central banks and governments. Libra’s blockchain also doesn’t appear to be decentralised or distributed. Instead, Facebooks white paper on Libra refers to a “single data structure”, held by Facebook and its partner organisations. Facebook appears to be using the hype around blockchain technology to market a product that has few real benefits. It wouldn’t be the first company to do so.
The blockchain buzz has made its way into a range of sectors. The Blockchain Art Exchange offers “crypto collectibles” and “unique digital prints” to buyers prepared to spend real money on screen-based art. CryptoKitties is a blockchain game that allows players to breed, raise, buy and sell digital cats. In May of this year, Forbes reported that the “World’s First Digital Only Blockchain Clothing” had been sold for $9,500. “As a blockchain digital asset,” the article claimed, “the unique existence of the garment makes it both clothing and (crypto) currency”. For those who see blockchain as the emperor’s new clothes, there could hardly be a more perfect illustration than a $9,000 dress that does not physically exist.
But this is not why Mastercard, Visa, Ebay, Stripe and others have left the Libra Association. It is more likely that these businesses have been put off by the months of scrutiny from regulators, governments and central bankers that Facebook’s proposals have attracted. Writing in the Financial Times, Bruno Le Maire, the French minister of economy and finance, called Libra “a threat to national sovereignty” and said he would block its development in Europe. For Le Maire, control over the money supply, interest rates and capital flows is the sole preserve of nation states and central banks, not transnational corporations with questionable tax strategies.
When national economies falter, governments and central banks use the economic levers at their disposal to mitigate financial crises. When the credit crunch hit in 2008, the Bank of England slashed interest rates and created billions through quantitative easing to keep the financial system moving. If large numbers of citizens switch from using traditional currencies to using Libra, the ability of governments and central banks to manage economic shocks, recessions and crises will be seriously diminished. “Countries may end up surrendering their monetary sovereignty and control over the economy,” says Le Maire.
Germany’s finance minister has also poured cold water on Facebook’s proposals, while central banks in the US and the UK have warned that Libra will face stringent regulatory tests and have to meet the exacting standards met by banks and financial institutions before the official launch. Last week, a G7 report into digital “stablecoins” warned that widespread use of Libra-type technologies “could entail a capital flow out the country” as citizens withdraw from domestic bank accounts to online wallets.
In response, Zuckerberg has sought to frame the debate on its future by pitting it as the Western rival to a proposed digital renminbi being developed in China (where Facebook has been banned since 2009). The argument plays well with Republicans, but Facebook and the Libra Association still have huge questions to answer. Its record on privacy and data stewardship, its anticompetitive behaviour, the controversies it has created around political advertising and severe ethical issues such as its use as a means for inciting violence against Rohingya people in Myanmar, have led many to question the company’s suitability as a guardian of people’s finances.
Facebook has promised that people’s financial data, held by the Calibra subsidiary, will not be shared with Facebook or connected to their social media profiles. But since buying the privacy-focused messaging service WhatsApp in 2014, Facebook has gradually been implementing plans to share data between the two platforms.
“Facebook has a long track record of abusing users’ trust,” Senator Sherrod Brown told Facebook’s David Marcus. “Until recently you had Facebook’s messaging team allowing other companies like Netflix and Spotify and the Royal Bank of Canada access to users’ private messages… Facebook told the Federal Trade Commission in 2012 that they would stop abusing our data, and then last week got a $5bn fine for violating that agreement… You’ve even run psychological experiments on users… You’ve let Russian bots try to throw the 2016 election with no contrition. You’ve abetted genocide in foreign countries. Do you really think people should trust you with their bank accounts in our economy?”
If Libra is to succeed, Facebook has a long way to go before it can answer that question positively.