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.
Bitcoin has shown as all that money is whatever a large number of people says it is. During bitcoin's rise, we saw the world go crypto-crazy. Cars and houses were being sold for bitcoin. Small businesses started accepting bitcoin as payment. All of this took place while Wall Street execs and others spoke against the validity and usefulness of bitcoin. The people had determine that bitcoin was valid and useful.
The thought of Libra should scare regulators and anyone who benefits from the current financial system. Libra won't have the same enthusiastic rise that bitcoin did in 2017, because Libra is tied to basket of fiat currencies. But Libra could see much more acceptance and use than bitcoin did.
Facebook's and the Libra Association have discussed the benefits that the Libra coin could have on people and communities who aren't apart of the banking system, (the unbanked). With 1.7 billion people still not a part of the banking system according to the World Bank, a centralized digital currency could help to bring these people into the financial system. But there are financial benefits for Facebook as well.
The play for Facebook will be incorporating payments within their family of apps, with hopes of driving commerce on the apps, payments with the Libra coin, and more money spent by advertisers to drive business.
Facebook isn't the only side with more than one motive. Senator Sherrod Brown is a senior Democratic member of the Banking Committee, and Senator Brian Schatz is a panel member of the committee, which may explain their interests in Libra and it's potential to disrupt the system.
Regulators and defenders of the legacy financial system have shown that they are going to make it extremely difficult for the Libra Association to get Libra coin up and running. But the push back actually caught me by surprise. During the great bitcoin rise of 2017, many regulators had issues with bitcoin being accepted as currency because of its decentralized nature. I thought a centralized cryptocurrency, backed by 20 plus organizations, with a few fortune 500 companies thrown in would be everything regulators wanted, but I was wrong.
The senators and their letter I've referred to believe that Libra coin poses a risk to the global financial system, and this could be true. It could be the currency of the unbanked, or it could be more widely accepted than the U.S. dollar a decade from now. But are any of those bad things?
I think many of the regulatory hurdles associated with Libra have to do with Facebook leading the charge. If Libra were a Mastercard initiative, with Facebook as a partner, I suspect it wouldn't have received the opposition it has. The ideal that a company that has been so reckless when it comes to the security and safety of it's users information, now wants to handle its user's finances warrants criticism. But that is just speculation on my part, Libra could easily have the same issues if led by Mastercard or Visa.
I imagine this is why bitcoin was rolled out the way it was over a decade ago, to avoid the bureaucratic bullshit that comes with trying to push a legacy system forward, especially the world economic system. Libra, while very different from bitcoin, it could succeed in areas where bitcoin failed, such as acceptance and use by more people.
I have no clue how the Libra coin will play out. I am in favor of it as long as the Libra Association is on board and growing. I think the financial system needs a little shaking up, and it will be interesting to see if Libra can do it.