Don’t buy what Zuckerberg’s selling on Libra

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When Facebook CEO Mark Zuckerberg testifies before Congress this week, he'll likely try to justify the launch of the Libra cryptocurrency in the face of regulatory attempts to block it. But make no mistake: This project is an effort to mint a global supercurrency — and harness power beyond government reach.

One can expect Zuckerberg to follow project lead and Facebook vice president, David Marcus, in minimizing Facebook’s role within Libra’s enterprise and blaming recent upheavals on unwarranted regulatory pressure. Yet beneath the cloak of ambiguity, Facebook’s Libra project endangers the public interest, as creators pretend to heed warnings, while preparing for regulatory evasion.

The recent departure of a quarter of Libra Association’s members, including PayPal, Visa and Mastercard, yields Facebook even more power. With fewer external players as members, Facebook’s subsidiary, Calibra, will enjoy further sway over the council, which will vote on most significant matters.

Although Facebook’s direct voting power is capped, a majority of the members are tied to the company directly or in somewhat direct ways, according to a media report. And nothing prevents Facebook from pressuring members to lock steps since they can delegate their votes.

Further, Libra is markedly different from any other stablecoin system. For instance, when users want Libra coins, they must transfer their fiat currency to an “authorized reseller” (likely a bank or cryptocurrency exchange).

The authorized reseller then transfers that currency to the Libra Reserve Fund in exchange for Libra coins, which they transmit to users’ digital wallets, most likely the Facebook-Calibra phone app. Despite the rhetoric about decentralization, this process is ostensibly the only way in which coins are “minted” or, in reverse, “burned.”

The reserve fund itself is merely a distributed network of deposit and securities accounts. However, in order to maintain the “intrinsic value” of the coins, the reserve fund will keep bank deposits in several countries and invest in bonds issued by several governments.

Libra representatives insist interest on the reserve fund’s assets will only cover costs and fees; and provide a lucrative return to early investors. Yet the Council’s structure allows it to decide otherwise. That is, Facebook and its allies can choose to further pad their own profits, even by lending Libra worldwide.

The project is difficult to classify. Critics claim Libra could be anything from an exchange traded fund, to a money market mutual fund, commodity pool or just a shadow bank in general.

Recently, a second instrument, the “Libra investment token” vanished from the white paper’s reserve supplement. Any mention of this token, which would have provided returns to early investors, has been replaced by vague language about “incentives.” It is possible Facebook did this to evade oversight by the U.S. Securities and Exchange Commission, indicating a deeper desire for arbitrage.

During the upcoming hearing, Zuckerberg might repeat the association’s invitation to regulators to help “shape a regulatory environment” around Libra, rather than enforce existing laws.

Facebook has been especially cavalier with respect to privacy laws. The company recently paid a record $5 billion settlement for a data privacy violation that was allegedly tied to the 2016 U.S. presidential election.

Similarly, ambiguity regarding data security and surveillance plagues Libra. For instance, Calibra claims it will follow the same fraud prevention measures as banks, but lacks further details. Calibra also claims it will not share data with Facebook, but that Facebook could share certain data with Calibra given customer consent.

What does consent even entail for Facebook? Libra promises to “bank the unbanked,” but those populations struggle with Know Your Customer rules the most, leaving increased surveillance as perhaps the only route to compliance.

The devil is not merely in the details, but the design. Libra can scale extremely quickly by subverting weaker currencies. And Facebook can easily push Libra to developers, advertisers and content producers that depend on Facebook as a platform. At the consumer level, a company that already has such an intimate relationship with its users can do dystopian things to coerce inclusion.

Zuckerberg has previously decreed that Facebook is “more like a government than a traditional company.” With that in mind, everything makes sense.

Currency is a tool of conquest: Libra will trample competitors, consumers and entire countries — not save them. It does not provide net value to the public.

This article originally appeared in American Banker.
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Law and regulation Cryptocurrencies Fintech Data security Data privacy rules Data privacy Facebook PayPal Visa Mastercard House Financial Services Committee