Seth Berman

The introduction of Facebook’s Libra cryptocurrency has created more questions than answers.  

The legal landscape surrounding cryptocurrencies has long been complex, with different countries and even different regulators in the same countries taking quite different approaches.  

Cryptocurrencies have also suffered from serious practical problems. The most prominent cryptocurrency, Bitcoin, has failed to date to live up to its promise as a currency for the masses in part because of its violent price swings and slow recording of transactions. It is instead used primarily as a means of speculation and from to time to facilitate anonymous, sometimes illegal, transactions such as ransomware and extortion payments.  

The anonymity of Bitcoin and other cryptocurrencies also makes it impossible to reverse frauds or massive thefts from so-called cryptocurrency exchanges – the closest thing to banks that exist in the cryptocurrency world. As a result, cryptocurrencies have so far failed to make the leap from a promising technology into a generally accepted financial instrument, though the distributed ledger technology on which they are based has found many other uses 

Critics see the lack of success of cryptocurrencies as proof that they (at least as currently designed) are unworkable. Enthusiasts remain certain that wide adoption of cryptocurrencies is only a technical fix or internet trend away.  

Facebook has now stepped into this debate, trying to make itself the center of the promised cryptocurrency revolution by announcing its own currency  Libra. Pitched as more stable than traditional blockchain currencies, Libra will be tied to a group of low-volatility assets, which include international bank deposits and government securities.  

The actual “coins” will come from the Libra Association, a not-for-profit organization created by Facebook to gather payment technologies, ecommerce marketplaces, telecommunications, blockchain, venture capitalists and other nonprofits and to create a Libra Reserve, which is meant to ensure that the currency doesn’t fall below the lower bounds of the currency’s stated value.  

In this way, Facebook claims that Libra will address cryptocurrency’s volatility problem and allow even those without access to international banks to cheaply and efficiently move money around the world. Facebook also claims that Libra will allow for the reversal of fraudulent transactions, though how exactly this will work is not quite clear.  

Privacy Problems 

Although Facebook will need to comply with state money transmission and similar laws, it is also not clear what steps Facebook will take to comply with anti-money laundering laws, currency exchange restrictions or other laws governing the use of unofficial currencies. Thus, it is an open question whether financial regulators will sign off on this plan, a question made far more complex by the fact that Facebook, a company already at odds with consumer advocates, data protection authorities and antitrust regulators here and abroad, is the driving force behind the proposed currency. 

With more than 2.4 billion active users, Facebook certainly has the ability to connect enough people to make a currency useful. However, Facebook’s recent record relating to privacy and data security does not inspire confidence.  

In the last five years, more than half a billion users have been affected by the social media giant’s privacy and security blunders. Its developers stored passwords, personal identifiable information and other data on an unsecured Amazon Web Services servers, leaving 540 million users’ information exposed.  

Additionally, the social media site is currently under investigation in the United States and elsewhere for allowing access to its user data to more than 150 companies. Facebook is also facing numerous lawsuits in Europe for allegedly failing to comply with GDPR, the European privacy regulation. 

Trust Issues 

Given Facebook’s privacy and cybersecurity troubles over the last decade, its foray into cryptocurrencies does not seem timely. How might Facebook’s privacy problems affect Libra?  

First, all of Libra’s potential users must have faith in Facebook, and the Libra Association, to act as a de facto central bank which may also raise significant global financial stability concerns. Without this trust, Libra is unlikely to catch on.  

Second, users (or regulators) may be reluctant to allow Facebook to collect even more data about its user’s financial transactions. Indeed, many suspect that Facebook’s true motivation in creating Libra is to create yet another data set that can be mined for advertising purposes to drive yet more revenue to Facebook.  

This opens up a wealth of regulatory questions, as Rep. Maxine Waters, a Democrat from California who leads the House Financial Services Committee, points out: “The cryptocurrency market currently lacks a clear regulatory framework to provide strong protections for investors, consumers, and the economy. Regulators should see this as a wake-up call to get serious about the privacy and national security concerns, cybersecurity risks and trading risks that are posed by cryptocurrencies.” House Democrats are not the only ones concerned about Libra.  Indeed, a few days after Waters made these comments, Federal Reserve Chairman Jerome Powell expressed “serious concerns” about Libra. 

Indeed, Facebook’s size alone makes it a tempting target for governments as they try to regulate the cryptocurrency markets. In short, before it has even been brought into existence, Facebook’s Libra appears to present a perfect target for regulators who want to test their authority over cryptocurrencies, by investigating a company with a clear corporate address and hugely valuable assets to pursue.  

In its current iteration, Libra is still very much in the ideation stages rather than an active, useable, cryptocurrency. In fact, many details of how the Libra Association will engage with the cryptocurrency is yet to be determined and its code is still actively being reviewed. This buys regulators and Facebook some time to think through how Libra might work and whether Facebook can be the trusted party that charts the path to a workable cryptocurrency.  

Seth P. Berman leads Nutter’s privacy and data security practice group and is a member of the firm’s white collar defense practice group. 

Facebook’s Libra Offers More Questions Than Answers

by Banker & Tradesman time to read: 4 min