In Focus: The Libra Fallout
Updated: Oct 19, 2019
Libra could topple the entire financial system. Everything, global trade, banking and finance, money transfers, the entire thing. Everything that bitcoin enthusiasts hoped for with bitcoin, could be pulled off by Libra. A new system of money, digital money, that could upend everything we're used to. But there's a problem, if Libra does what bitcoin was supposed to do, the control of the monetary system moves from one set of billionaires to another. The legacy financial system won't be upended, it will be transferred from strong hands to stronger hands.
Since the establishment of the Bretton Woods Agreement the U.S. dollar has been the de facto currency of the world. 90% of foreign exchange trading involves the U.S. Dollar. Over 80 countries keep their currency in a trading range relative to the U.S. Dollar. According to the International Monetary Fund the U.S. Dollar makes up 61% of all known foreign exchange reserves. Seven countries outside of the U.S. have adopted the U.S. Dollar as their own national currency, almost 40% of the world's debt is issued in U.S. dollars, and most international trade is settled in U.S. Dollars.
The U.S. Dollar is everywhere, and many people and institutions benefit from it being everywhere. If you're one of those people, business, or entities that benefits, you would do all that you could to protect its standing, and question anything that came close to disrupting the system.
Since Facebook (FB) announced it's plans for Libra in June 2019 it's received a fair amount of criticism, which it - Facebook - deserved. Facebook was still dealing with the public fallout from failing to identify foreign agents using the Facebook platform as a weapon to sway elections, and the Cambridge Analytica scandal, which compromised millions of Facebook user's data. As the company attempted to move past issues, it announced its entrance into the finance arena. An arena that requires security, safety, and trust between the institution and the user. The company that couldn't protect its platform or its user's information, wanted to be a steward of finance for its users. The critics came hard for Facebook and its Libra coin, and rightfully so.
But Facebook, wisely decided not to go it alone on its Libra coin, it partnered with over 25 different companies. Companies like Visa (V), Mastercard (MA), PayPal (PYPL), Stripe, Uber (UBER), Lyft (LYFT), Spotify (SPOT), Coinbase, and Vodafone to name a few. These companies collectively named the Libra Association, were to be a non-profit organization headquartered in Geneva, that facilitated the creation, implementation, and distribution of the Libra coin.
Facebook also developed a separate company named Calibra, that would handle it's crypto dealings, and keep Libra user's data separate from Facebook user's data. By assembling the Libra Association Facebook found adults to run the show, which was smart considering the issues Facebook was dealing with.
But it hasn't been smooth sailing since the Libra announcement, there has been strong push back from regulators. Even President Trump gave his opinion, stating that Facebook should seek a banking charter if they want to operate like a bank, which would open Facebook up to be governed by banking regulations. And other regulators around the world have stepped in to voice their opinions and concerns, killing any momentum surrounding Libra coin.
The standoff off with regulators has taken its toll on some of the original Libra Association partners. Partners are now abandoning the project. Two weeks ago PayPal decided to withdraw from the project. Last week, Visa, Mastercard, Stripe, and Ebay all decided to walk away from the Libra project. The reasons being given for partners dropping out are related to the regulatory hurdles that stand in the way of Libra.
During the week U.S. Senators Sherrod Brown of Ohio and Brian Schatz of Hawaii cautioned Visa, Mastercard, and Stripe in a letter that Libra poses risks not only to global financial systems, but also to the companies' broader payments business.
It was puzzling to find out Visa, Mastercard, PayPal, Stripe, and even Ebay were involved with the Libra Coin project. These are payment companies that benefit from the legacy financial system. Ebay, which I've been buying since the 2nd half of 2018 was working on its own internal payment system. PayPal, which made our recommendation list twice in the past 18 months, did explore incorporating cryptocurrencies into their payment ecosystem before they joined the Libra association.
Was joining of the Libra Association a know thy enemy play by Visa, Mastercard, PayPal, and Stripe or did they see it as a better way to incorporate cryptocurrency into their systems? As beneficiaries of the current monetary system it makes sense that Visa, Mastercard, PayPal and Stripe would pull out and watch from the sidelines to see how things play out.
The warnings from the senators above aren't without merit. Facebook holds a tremendous amount of influence, and has been far from the ideal role model on how to manage that influence. Yet, after several serious issues and a #deleteFacebook campaign the company was still able to grow it's monthly active users. There is something about the family of Facebook apps that keeps people connected and keep coming back. Facebook's family of apps has 2.4 billion monthly active users between Facebook, Messenger, Instagram, and WhatsApp. If users adopt that same kind of attachment to the Libra coin, a shakeup in the financial industry could be catastrophic for the financial industry.