Why Facebook wants its own currency — and why that scares its critics
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As one scandal after another has chipped away at trust in his company over the past three years, Facebook CEO Mark Zuckerberg has adopted a public pose of penitence, promising to take more responsibility for its power and put users’ privacy at the center of its products.
Anyone who wondered if that humbler tone would result in more modest ambitions got an answer Tuesday, when Facebook unveiled plans for a new “global currency” called Libra. Developed in collaboration with a slew of top players from the realms of technology and finance, including Visa, Mastercard, Uber and Spotify, Libra, depending on whom you ask, could challenge the world’s banking industry, replace the dollar as the international reserve currency of choice, help turn other cryptocurrencies like bitcoin into everyday features of life, or just make it a lot cheaper to send money to your family overseas.
For Facebook, it represents an opportunity to leverage its dominant status in the personal lives and information diets of its 2.38 billion users into a similarly dominant position in their financial lives, insinuating itself into every transaction, even those that take place outside the confines of its apps, which include Instagram, Messenger and WhatsApp.
And that has critics — including advocates of the distributed-ledger technology on which Libra will rely — feeling nervous. After all, among the original goals of that technology’s creators were to decentralize control of currency, removing it from the province of governments and banks, and to enable anonymous or at least pseudonymous electronic payments. The idea of it being wielded by a company being investigated by federal regulators for monopolistic practices and repeated privacy lapses is more than a little dissonant.
Among those who found it intolerably so were Rep. Maxine Waters, chairwoman of the U.S. House Financial Services Committee, who on Tuesday called on Facebook to put the Libra project on pause.
“Given the company’s troubled past, I am requesting that Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action,” Waters said in a statement. She was one of several Congress members to call for hearings into the issue.
Within the anti-establishment crypto subculture, there are many who believe Big Brother can’t be trusted in the blockchain.
“Facebook has proven over and over again as a business that they don’t respect privacy,” said Eric Meltzer, who co-founded a cryptocurrency-focused venture capital firm called Primitive Ventures after years working on cryptocurrencies in China. “Even if Zuckerberg has the best intentions, Facebook’s entire business is predicated on using and selling people’s data.”
Facebook insists that it does not plan on using financial information gleaned from customers’ use of Libra to target ads, and has designed a sophisticated governance and distribution system for the new currency in part to allay such fears. But many details of how the final product will work — including its privacy mechanisms — remain to be decided before Libra launches in 2020.
Facebook’s goal is for Libra to become a ubiquitous medium of exchange across Facebook apps such as WhatsApp and Instagram as well as across the broader internet. Based on blockchain technology, a digital record of activity distributed across a wide network of computers, it enables the secure and rapid transfer of “coins” from user to user, replacing the transaction services currently offered by banks in the process.
Once people buy a chunk of Libra using their country’s currency, the thinking goes, they’ll be able to do business with just a smartphone, no credit card or bank account necessary.
“We view Facebook’s introduction of the Libra currency as a potential watershed moment for the company and global adoption of crypto,” wrote Mark Mahaney, an analyst at RBC Capital Markets, in a research note for investors. “In terms of scale and importance, we believe this new financial infrastructure could be viewed similar to Apple’s introduction of iOS to developers over a decade ago.”
In the wealthier countries where Facebook already earns most of its revenue in the form of advertising dollars, this presents another opportunity for consumers to spend time in the Facebook ecosystem. If buying and selling is more seamless, it could make the company’s targeted ads even more valuable to advertisers, say technology analysts. In the developing world, where Facebook is looking for user growth and advertising is less lucrative, Libra could attract an entirely new segment of users looking for a stable, low-cost and smartphone-native international banking option.
Facebook and its collaborators plan to offer incentives to merchants and customers using the currency to promote adoption, which may include giving new users free Libra when they join the network and subsidizing discounts for participating vendors.
The dream of a frictionless, reliable, online-only medium of exchange has always been at the core of cryptocurrency, from the first time a bitcoin was digitally “mined.” But true cryptocurrencies, controlled only by their users and unlinked to the real world of bank accounts and regulations — and therefore theoretically immune to taxes, borders and seizures by the police — have proved too volatile and confusing for average consumers to use for day-to-day payments.
So Facebook made some tweaks to those basic parameters to make Libra more likely to succeed as a digital cash replacement that can compete with non-blockchain-based services such as WeChat Pay and AliPay, which have become ubiquitous in China, letting people use their smartphones to pay for train tickets or a snack on the street.
First, to keep the price of Libra from fluctuating wildly, the value of the coin will be pegged to an as-yet-undisclosed number of world currencies — though it will probably hover around the price of a dollar — and backed with a giant reserve of cash.
Second, to keep the Libra network reliable and speedy from Day One, it will be run through a series of central nodes operated by the major companies that Facebook has brought on board for the launch, each of which is contributing $10 million to the initial reserve pool. In contrast to a system like bitcoin’s, in which anyone on the network can jump in and validate a new transaction, only those companies’ nodes will be able to validate and process Libra when it first launches.
Despite this concession to centralization, under this system, no one member of the association controls how Libra works, including Facebook. Each member organization has one vote, and the number of voting members and processing nodes is set to increase as Libra grows, with each new user adding cash to the reserve in exchange for Libra.
Eventually, anyone holding a sufficient quantity of Libra will be entitled to some voting power, and the initial documents published Tuesday by Facebook lay out an explicit goal to move toward a totally nodeless blockchain more similar to bitcoin’s.
But dig into the fine print, and it’s clear that exceptions do apply. Calibra reserves the right to share aggregated data with Facebook, and will use Facebook data to meet regulatory requirements and increase account security. And should users opt in, whether in exchange for additional features or financial incentives (easy to come by when a company is minting its own money), then all of their financial data can be shared with Facebook and other third-party vendors. And if customers use the version of Calibra that will be integrated with WhatsApp or Messenger, the people and businesses you’ve transacted with will all be fair game.
Maya Zehavi, a blockchain consultant and entrepreneur, said Facebook appears to be using “magic blockchain buzzwords” to encourage trust around a product with few of the transparency or security guarantees that allowed bitcoin to bloom. “The worst case is this is an opportunity for Facebook to obfuscate the fact that it’s making a grab on everyone’s transaction data,” she said.
If the effort succeeds, concerns about Facebook’s untrammeled power circa 2019 could one day look quaint in retrospect, she said, drawing parallels between Facebook’s creation of a new currency backed by private money and floated on existing currencies and the early days of the U.S. Federal Reserve. “I think it’s a real usurper for banks,” she said, which stand to be cut out of the center of the financial process. “And I think it’s a real threat on the U.S. government.”
But Zehavi’s fellow cryptophiles acknowledge the allure of an offering that could deliver at least some of the technology’s benefits to the masses, and provide an onramp for interest in other cryptocurrencies.
Meltzer said that Libra was “interesting in the sense that Facebook has enormous distribution, bigger than most countries,” which could lead to wider familiarity with digital currencies.
“But it’s still disastrous on privacy,” he added.
Follow me on Twitter: @samaugustdean
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