Experts and Lawmakers call for caution over potential risks of Facebook’s Libra cryptocurrency to the global financial industry.
Facebook’s unveiling of its Libra cryptocurrency has generated a lot of attention in the financial world, as well as in the crypto space. So far, the company has announced that its Libra blockchain network will be launched in 2020 and backed by a separate entity, the Libra Foundation. The cryptocurrency is set to enable users to make faster and cheaper international payments online, using platforms such as WhatsApp or Facebook Messenger.
The Libra currency
Just like any other cryptocurrency, Libra is set to have its own wallet called Calibra. Users would be able to send and receive Libra through this wallet by converting fiat currency from their credit cards into Libra coins. Third-party operators would also be allowed to sell the Libra cryptocurrency to users, and the entire process is set to be as simple as buying data for a mobile phone.
Facebook claims that the Calibra wallet “will have strong protection in place to keep your money and your information safe.” This claim has raised a lot of concern about data privacy and security, considering Facebook’s history of mishandling the data of its users. The company says that it plans to use the same verification and anti-fraud processes that are used by traditional credit card issuers and banks.
Libra is more of a stablecoin than an actual cryptocurrency in that its value will be pegged to several trusted currencies to prevent violent price fluctuations. Furthermore, Facebook plans to cede control of the Libra network to the Libra Association Council. The Libra Association Council is an organization that comprises founding members who operate the nodes of the Libra network.
This is not the first attempt by Facebook to create an in-house currency. In 2010, Facebook made moves to become a player in the digital currency space with Facebook Credits. Some reports believe that Facebook Credits were shut down due to an internal decision even though the company first intended for them to be used to pay for day-to-day activities, such as buying meals.
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As it seems, Facebook is at it again with ambitious claims of using the Libra cryptocurrency to enable financial inclusion, potentially for billions of unbanked users in developing countries. The social media giant has, however, come under scrutiny from people who believe that Libra is a disaster waiting to happen. Furthermore, several countries have issued inquiries and even hearings regarding the regulatory repercussions of the use of Libra in their respective territories.
U.S. lawmakers are skeptical of Libra
On July 2, Maxine Waters, a United States congresswoman and chairwoman of the House Financial Services Committee, wrote a letter to Facebook calling for the immediate cessation of any further development on Libra. According to the open letter, Facebook and its partners should pause any further development on Libra until the Financial Services Committee and affiliated subcommittees determine the possible risks Libra poses to the global financial system. The letter also referenced Facebook’s recent privacy scandals that involved data harvesting of over 50 million Facebook profiles. The letter stated:
“Facebook is already in the hands of over a quarter of the world’s population, it is imperative that Facebook and its partners immediately cease implementation plans until regulators and Congress have an opportunity to examine these issues and take action.”
On July 16, the Senate Banking Committee is planning to hold a hearing that will address the concerns over data privacy and the potential risks of the Libra project. Right after that, the House Financial Services Committee will also have a chance to examine Libra’s case on July 17. When asked whether Libra can actually cause a global financial crisis if left unchecked, Gregory Klumov, the CEO and founder of the euro-backed stablecoin issuer Statsis, told Cointelegraph that Libra cannot cause a financial crisis: “Most of the negativity comes from politicians. They’re afraid of losing their monopoly on financial oversight.” He further explained:
“The balance sheet of the association will not be leveraged. A financial crisis is impossible without excess leverage. Also, Libra’s coin might be recoverable if someone’s password is lost or stolen, similar to e-money like with PayPal or Skrill.”
While offering his response to the matter, Andrew Adcock, the CEO of Crowd for Angels, came out with a different opinion:
“Libra, however, are seeking to utilize multiple assets as coverage, not just one type and are not seeking to be pegged. This could cushion a financial crisis if managed well with transparency and trust.”
Adcock, however, also believes that “the US congressman has shared the concerns and that Libra was launched when the US markets were sleeping probably shows the weight of their potential punch.”
History of Facebook scandals
Several experts recommend caution, considering Facebook’s history of mishandling user data — as was the case with Cambridge Analytica. Now that money is involved, people fear that Facebook could sell user spending and transactional data to banks and other interested third parties. After all, Facebook’s business model is to advertise by routinely allowing researchers to access user data.
According to Forbes contributor Enrique Dans, who is also a senior advisor for digital transformation at IE University, the Libra initiative has the potential to do well. However, he believes that if it were in the wrong hands, it could cause serious damage when it comes to trust. According to Dans, Facebook “has the worst reputation for privacy, along with ethical standards that have seen it involved in accusations of electoral manipulation and even genocide.” Although the company claims to be committed to securing user data, experts believe there is nothing stopping it from monetizing such data.
Facebook started off with a pledge to make the world more open and connected. But like many other experts, Dans believes that the only reason Facebook is planning to launch the Libra coin is to “capitalize on its huge user base.” According to the Libra white paper, Facebook will outsource the management of Libra to the Libra Association Council, an independent nonprofit foundation. However, David Marcus, the Libra head at Facebook and former president of PayPal, explained in a post:
“Facebook will not control the network, the currency, or the reserve backing it. Facebook will only be one among over a hundred members of the Libra Association by launch. We will not have any special rights or privileges.”
He also confirmed that, even though Facebook owns the Calibra wallet company, Calibra’s financial data will be inaccessible to Facebook. But, in response to this move to restore trust, Dans says that Facebook’s “malign philosophy is contagious“ and that it will eventually drag every other partner in the association “down to its murky levels.”
Libra security risks
According to Libra’s white paper, the Libra blockchain is set to be an open-source blockchain initiative that will offer developers a prototype in a prelaunch testnet. This will give developers an enhanced beta bounty program to identify bugs, vulnerabilities and flaws in the system before the official launch of Libra in the first half of 2020.
However, Facebook’s attempts to outsource Libra’s management and development — by allowing anyone to build products with access to billions of users — put a huge target on Libra that can be exploited by bad actors. Making Libra open-source will introduce security risks. These risks can potentially allow a black-hat developer to easily create a wallet that steals funds from users’ accounts. Even though Facebook claims that it will bear the cost of hacks on Calibra wallets, in the event of significantly large losses, the Libra white paper has not yet stipulated a system to solve such a problem.
The letter from Congress also points out evidence of hacked crypto wallets, which has led to billions of dollars in loses. Therefore, Libra’s Calibra wallet also presents a huge risk to users and investors, who might end up using it. The lawmaker also highlighted how Libra’s white paper provided “scant information” about the project’s security features.
Lack of censorship resistance
In terms of technicality, Libra’s white paper also leaves many questions unanswered, especially when it comes to censorship resistance of the Libra blockchain. In fact, Mustafa Al-Bassam, one of the co-founders of Chainspace — the blockchain startup that was acquired by Facebook to scale research and development for Libra — points out some of the technical loopholes in the Libra white paper.
Al-Bassam is the only researcher on the Chainspace research team who did not join Facebook after the acquisition. According to a tweet thread he shared:
“Libra could end up creating a financial system that is *less* censorship-resistant than our current traditional financial system.”
Libra’s technical philosophy attempts to solve the problem of scalability by first becoming a private blockchain with a select group of entities managing the Libra coin. However, Al-Bassam says that this presents a challenge when it comes to achieving censorship resistance. Most of the companies partnering with Facebook to form the Libra Association Council are U.S.-based companies, which include MasterCard, Paypal, Stripe, Visa and eBay, to mention only a few. According to Libra’s white paper, these entities will control the Libra network through an association-based model. Al-Bassam argues that this model of control on a blockchain network does not provide sufficient levels of censorship resistance.
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A spokesperson for MakerDAO, a blockchain-based company, told Cointelegraph that “Libra is built on a permissioned blockchain, which effectively means Facebook and its investors have a certain amount of centralized control over access, transparency and all data.” Even though Libra promises to switch to a permissionless network down the road, Al-Bassam says that, by the time the switch to a more censorship-resistant and open platform is implemented, the main central banks will have full control of the network. Klumov also agrees with Al-Bassam, arguing that:
“Five years in the crypto industry might as well be an eternity. Both the technology and the market are developing so quickly, that no one can say for sure what will happen in five years. That’s as true of Libra as it is of any other crypto project.”
Libra is not a real blockchain
Despite the hype around Facebook getting into blockchain, the Libra coin has been criticized for not being a “real” blockchain in the true sense of the word. The Libra white paper ignores the decade-old blockchain research that has been achieved by the likes of Ethereum and even Chainspace and payments platform Algorand.
The Libra blockchain does not have any benefits of distributed governance that is common with most blockchain platforms. Instead, Libra promises to be fully permissionless in about five years. Basically, most of the features that make up a blockchain seem to be missing with Libra. At its best, the single data structure that Libra possesses can be compared with Ripple.
Libra may not really help the unbanked
Facebook claims that it will use Libra to help the unbanked, who live in developing countries like Nigeria, Mexico, Bangladesh, China, Indonesia and India. However, Facebook is forbidden in places like China, and even jurisdictions like Indonesia, Bangladesh and Pakistan have previously put temporary bans on Facebook. In addition, developing countries and their governments have been hostile toward cryptocurrencies, with laws that seek to halt the use of cryptocurrencies.
Basically, even as Facebook tries to launch a cryptocurrency that will give the unbanked inclusion in the global financial industry, its biggest threat remains to be the government authorities in those developing countries. Furthermore, individuals without access to bank accounts in developing countries are typically those with bad credit history or those who fail to comply with Know Your Customer (KYC) and other anti-fraud and Anti-Money Laundering (AML) requirements.
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Therefore, if Facebook is looking to be an alternative solution, it must ensure that the unbanked are compliant with KYC and AML procedures, otherwise Libra could be shut down. With a user base made up of billions of people from all over the world, it will be difficult for Facebook to completely verify the authenticity of its users.
In addition, Libra’s white paper does not seem to fully rationalize its claim to help the unbanked. The paper cites the World Bank’s data, which shows two-thirds of people globally do not have access to bank accounts. Conversely, the research also shows that the majority of the unbanked actually do not need bank accounts. In developing countries like Kenya, the so-called unbanked are still able to access the convenience of low transaction fees with instantaneous mobile payments without a cryptocurrency while using mobile payment services like M-Pesa.
It comes down to this…
The big question about Libra is whether people will actually use it once it launches. A spokesperson for MakerDAO also told Cointelegraph that it is too soon to predict whether Libra will cause a revolution: “Libra is in the white paper phase so the decisions about how this manifests — and whether they keep it truly open-sourced — will determine whether this is a transformative stablecoin or just another PayPal.”
There is an argument that Libra can make international payment exchanges in emerging markets much cheaper and quicker. However, with Facebook’s data harvesting incidents in the past, even Marcus admits that convincing people of Facebook’s intentions will be “by far the most difficult, intellectually stimulating and challenging thing.”
While answering a question to lawmakers about how Libra would respond, Marcus admitted that, if regulation is not done right, “it could definitely present systemic risks.” He said:
“This is why we believe in and are committed to a collaborative process with regulators, central banks, and lawmakers to ensure that Libra helps with the kinds of issues that the existing financial system has been fighting, notably around money laundering, terrorism financing, and more.”
All in all, experts in the crypto space are of the opinion that, unless the issues discussed above are addressed in time, Libra could potentially dominate the crypto space and kill competition. Others believe that concerns about Libra are overblown and that Libra’s only real threat is that of digital identity and privacy.
