Such a reception is hardly unsurprising given that Libra’s (modest) mission statement “is to enable a simple global currency and financial infrastructure that empowers billions of people”. However, whilst it may be easy to mock the scale of Facebook’s ambition, it would be wrong to overlook the disruption Libra could cause to governments, regulators and financial markets.
What makes Libra different?
Firstly, unlike other cryptocurrencies, which tend to have volatile and fluctuating prices, Libra is designed to have price stability. It is backed by a reserve of low volatility assets, such as bank deposits and short-term government securities in currencies from stable central banks. This price stability is necessary in order for Libra to gain the trust it requires to achieve its aim of gaining widespread adoption as a global, accessible and cheap medium of exchange.
Secondly, Libra will operate, at least initially, via a private blockchain, meaning that only the Libra Association (a group including companies such as Mastercard, Visa, Vodafone and Uber) can input transactions and data. This differs from cryptocurrencies such as Bitcoin and Ethereum, which are supported by permissionless, public blockchains on which anyone can read or write. Although the Libra network eventually wants to become permissionless, only private blockchains currently offer the scalability, stability and security which is required if Libra is to become a global, decentralised currency.
In the UK, cryptocurrencies are not subject to regulation, partly because they are not yet considered systemically important. Governor of the Bank of England Mark Carney made it clear, however, that if Libra is successful in attracting users, “it would instantly become systemic and will have to be subject to the highest standards of regulation”. Libra’s white paper appears to accept that if it wants to achieve its aims, it will have to work with regulatory authorities in different jurisdictions if it is to become a sustainable and trusted framework.
Nevertheless, there are a number of issues that are as yet unresolved. For instance, how will regulators define Libra? It is far from clear whether regulators will seek to shoehorn Libra into definitions of existing categories of financial instruments or whether a new category will need to be created to accommodate it. If, for example, it were treated as a security, it could well be subject to additional onerous requirements such as those included in the MIFID II, which may be a considerable obstacle for Libra to address.
Regulators will no doubt be troubled by the sentence in Libra’s White paper stating that “The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity”. This would appear to open the door to perpetrators of economic crime seeking to launder money. Banks and lenders are obliged to carry out strict background checks on companies and individuals seeking to open accounts and a key issue for Facebook is whether its proposed system is capable of complying the anti-money laundering regulations that are currently in place.
The issue of data protection will be thrown into sharp relief given Libra’s ambition and Facebook’s record on data protection. Facebook has sought to assuage these concerns by suggesting that it will not have access to any of the data on the Libra Blockchain because (i) Libra transactions will operate by an App called Calibra, which is entirely separate from Facebook (ii) it cannot use information from transactions to target advertising and (iii) the Libra Association (which includes companies with better protection records than Facebook) creates a form of checks and balances.
Nevertheless, as blockchains are by their very design permanent and immutable ledgers of transactions and data, it is difficult to envisage how Libra is capable of complying with existing data protection laws, and in particular the right to be forgotten under the GDPR.
Whilst it is clear that there are multiple unresolved issues surrounding Libra, the financial firepower behind the project means that it will most likely come to fruition in one form or another. A protracted wrangling undoubtedly lies in wait between Facebook and regulatory authorities and it remains to be seen whether these conversations will succeed in identifying appropriate solutions.
Peter Stewart is an associate at Cooke, Young and Keidan