Advertisement
Business

Column: You don’t trust Facebook to protect your privacy. Why trust it as a banker?

FILES-US-IT-LIFESTYLE-CURRENCY-FACEBOOK
Oh, sure, let’s give Mark Zuckerberg even more power over our private lives.
(Justin Sullivan / AFP/Getty Images)

Good corporations know that the secret to success is to focus on your best quality and use it to serve your customers.

So Facebook, having noted that users rely on it for trustworthiness and expertise at protecting their privacy, is offering to parlay that into becoming the world’s banker.

Just kidding!

Facebook is rapidly becoming known as one of the least trustworthy enterprises on the planet, with a core business dependent on invading users’ privacy in every conceivable way. Yet for some reason, the firm thinks people should trust it to offer and manage a new global currency, which it has dubbed Libra.

Advertisement

Calibra will do everything in its power to incentivize that consent box is clicked.
Izabella Kaminska, Financial Times

In an announcement this week, Facebook presented Libra as “a simple global currency and financial infrastructure that empowers billions of people.” It said the currency would be based on blockchain technology similar to the system that undergirds bitcoin, which doesn’t sound simple at all. This has led credulous commentators to label Libra a “cryptocurrency.”

But let’s call it what it is: a scheme to open a new path to profit and power for Facebook, dressed up as a global boon to billions of unsuspecting people. There’s a term for people who take the word of Facebook that it aims to be a global financial benefactor: suckers.

Facebook rolled out a governing association made up of itself and 27 other companies, investment firms and nonprofits. This is a curious bunch of “founding members.” Among them are several enterprises that garner no more love from the general public than Facebook does, such as Uber and the credit card firms MasterCard and Visa.

Advertisement

If Facebook had only signed up some cable TV firms and a couple of health insurance companies, it would have had a superfecta of detested industries backing its “simple and empowering” venture. The members supposedly contributed $10 million each, which for some of them is the equivalent of pennies, to be part of the governing council.

Let’s unpack this bid by Facebook to become banker to the world.

The basic idea of Libra is that users will be able to convert their home currencies into Libra anywhere in the world, and withdraw the money anywhere else. Or maybe just leave it in Libra and use it to buy pizza or a new car from an indulgent Libra-taking merchant.

Facebook says the value of Libra will be based on a basket of currencies, presumably including the U.S. dollar, U.K. pound sterling, Swiss franc, etc., etc., so it will be “stable.” But those currencies fluctuate against one another, so there’s nothing to say that if most of your transactions are in any of them, you’d be protected against loss in the conversion process.

la-1561136808-tav61id05r-snap-image
The main reason people are "unbanked" is that they don't have money. What can Libra do to fix that?
(FDIC)

There’s no real evidence in Facebook’s spiel or its white paper describing Libra that it actually is a blockchain-based cryptocurrency. Facebook seems to have used the terminology to persuade people that Libra is something new and magical, in the same way that the term “dot-com” had a magical aura in the late 1990s and “stem cell cure” does today. (In both cases, those terms concealed fakery and fraud, so watch out.)

Facebook seems to be saying that the decentralized operation of blockchain technologies will enhance Libra’s ability to provide cross-border financial services, but there’s no evidence that this feature is necessary or even beneficial in providing those services.

As for the “empowerment” part, Facebook’s white paper makes much of the problem of the “unbanked” and suggests Libra is the answer. This looks like a sop to social activists, but it’s a pretty wet sop.

Advertisement

As the white paper itself acknowledges, one reason that people are “unbanked” — that is, they don’t have access to deposit or credit services — is that they don’t have enough money to put in a bank. In fact, that’s the main reason cited in survey after survey; an FDIC study in 2017 found that it was cited by 52.7% of respondents.

The solution is to force commercial banks to reduce or eliminate fees for the lowest-income potential customers, which is what activists try to do. Unless Libra represents some method of providing low-income people with more money, it’s got nothing to offer them.

One important aspect of this scheme that Facebook treats with a lot of hand-waving is regulation. Facebook says that Libra’s founding members “are committed to working with authorities to shape a regulatory environment that encourages technological innovation while maintaining the highest standards of consumer protection.”

This assertion warrants a hearty “yeah, sure” if not a “thanks but no thanks.” Facebook’s history is one of dodging regulators until it’s got no place left to hide, and flouting the commitments it has made to behave properly. Now, it wants to “shape” its own regulatory environment.

Here’s the thing: We have a regulatory environment that works reasonably well in principle but falls short in practice because it’s underfunded and poorly led. Facebook’s answer to this is to scrap it and replace it with one it finds more palatable. By the way, you shouldn’t expect national regulators to roll over on any of this. Much of what Facebook is proposing is subject to stringent government oversight, and the authorities aren’t likely to give it up.

To its modest credit, Facebook seems to recognize that no sane individuals would trust it with their money. So it has created a subsidiary called Calibra that will function as a digital “wallet” for Facebook users to deposit, hold or withdraw Libra.

Facebook says Calibra will be privacy-protected and won’t share users’ account information or financial data with Facebook or any third party “without customer consent.”

Is this a reliable promise? Perhaps, but watch out for that customer consent part. In the past, Facebook users have discovered that they’ve consented to infringements of their privacy without knowing it. As Isabella Kaminska of the Financial Times observes, it’s quite possible that “Calibra will do everything in its power to incentivize that consent box is clicked.”

Advertisement

So here’s the bottom line. Facebook is proposing an asset transmission system that replicates some features already in existence and claims advantages that are probably nonexistent. It claims to use blockchain technology, but that may not actually be true. Facebook aims to find ways to circumvent current regulations and sees this proposal as a potential profit center.

This is not about empowering people, but further empowering Facebook. And who needs that?

Keep up to date with Michael Hiltzik. Follow @hiltzikm on Twitter, see his Facebook page, or email michael.hiltzik@latimes.com.

Return to Michael Hiltzik’s blog.


Advertisement