Why (Almost) Everybody Hates Facebook’s Cryptocurrency Libra

(Bloomberg) -- Facebook Inc. says its mission is to “bring the world closer together.” Its plans to launch a digital currency called Libra have succeeded in uniting central bankers and financial regulators from around the globe, along with U.S. President Donald Trump and his Democratic opponents in Congress. They’re dubious about the idea, at best. But Facebook isn’t alone in pursuing what is known as a “stable coin,” a form of cryptocurrency that so far has proved far more boring than, say Bitcoin. While some regulators are reacting to the idea that Facebook could leverage its 2 billion users to create a de facto global currency, other industry analysts wonder whether stable coins like Libra will find any widespread use at all.

1. What are stable coins?

Digital currencies designed to avoid one of the biggest problems facing cryptocurrencies: their volatility. Bitcoin once dropped from nearly $20,000 to around $6,000 in four months -- a range of price swings that makes it nearly unusable for real-life transactions. Many stable coins peg their value to that of another asset with far lower volatility, like the U.S. dollar or a basket of national currencies or commodities. Their issuers back up the value of their coin by holding on to that asset. The most popular stable coin to date, Tether, says it maintains a reserve of dollars; its price has varied only by a few cents.

2. What’s the plan for Libra?

Facebook says Libra would be tied to a basket of low-risk securities and traditional, government-issued currencies, such as the dollar, euro, pound and yen. Expected to be launched in 2020, Libra is described as a blockchain-based digital coin that will let Facebook users send and receive money or to pay for services. The goal is for Libra to be used outside of the social network as well: Consumers may eventually be able to use it to pay for a cab or a cup of morning coffee.

3. What’s the appeal?

Stable coins in general can be a bridge between two worlds that weren’t designed with mixing in mind -- cryptocurrencies and traditional finance. They make it easier to transfer funds between people and companies. JPMorgan Chase & Co. has developed a stable coin (called JPM Coin) and Goldman Sachs Group Inc. is exploring digital coins as well. Facebook says Libra will pave a way for the world’s 1.7 billion unbanked adults to pay for goods and services and to send money to others for low fees.

4. Are there other reasons?

Probably so. Facebook’s revenue growth has slowed in recent years, and it’s looking for new ways to make money outside of advertising. Libra could potentially unlock new revenue opportunities in payments and commerce. Facebook’s partners in the Libra project, such as Visa Inc. and Uber Technologies Inc., have their own motivations as well: If Libra disrupts its payments business, Visa, for instance, likely wants to at least be a part of the disruption.

5. How would Libra work?

Facebook says it will turn over control of the cryptocurrency to the Libra Association, made up of its partners. Together they will operate a version of a blockchain, the digital online ledger used to verify and record transactions. Unlike the blockchains for Bitcoin or Ether or other popular cryptocurrencies, Libra’s will be under control of association members, at least initially, a more centralized approach that some crypto enthusiasts consider counter to the spirit of blockchain.

6. What are people upset about?

Plenty of things, starting with other trouble Facebook has gotten into -- and its sheer size. Members of the U.S. Congress from both political parties have raised questions about Facebook’s security and practices, including missteps that led the Federal Trade Commission to fine the company $5 billion. Facebook officials will face House and Senate panels this week. Meanwhile, President Donald Trump tweeted that he’s "not a fan" of digital coins in general, and asserted that Libra "will have little standing or dependability. Federal Reserve Chairman Jerome Powell told lawmakers he has “serious concerns’’ about the token and Treasury Secretary Steven Mnuchin described Libra as "a national security issue" because of the opportunities for money laundering and other illicit activities. The European Central Bank, the Bank of England and France’s finance minister all weighed in with worries.

7. Will this opposition kill Libra?

Despite all of this, David Marcus, who heads the project at Facebook, believes he can address the concerns of regulators and politicians, and continues to plow on. In a statement released before his Senate testimony, he pledged that the currency won’t be put into use until all issues have been resolved. If Facebook succeeds, it could potentially create a new world currency, one on par with the yen and the dollar -- and one that’s not regulated by central banks. That’s what the regulators and the politicians fear most.

8. What other risks does Libra face?

All the normal online ones, like security and privacy issues. But the biggest challenge may be in getting people to actually use it. Cryptocurrencies like Bitcoin have tried and failed to gain acceptance in payments. Even the more stable Tether is used primarily by traders to park their assets at times of market volatility. And there’s already no shortage of competition well out ahead of Libra: The service described by Facebook, namely sending money “as you might send a text message,” is already offered by plenty of other companies such as Alphabet Inc.’s Google, Apple Cash, PayPal Holdings Inc.’s Venmo and Circle, a peer-to-peer payments provider that lets you transfer traditional fiat currencies. Similar services are also already available in developing countries, which Libra is primarily intended for. Libra may end up being used differently than intended -- or not at all.

The Reference Shelf

• Facebook’s white paper outlined its Libra plan.
• A report on the State of Stablecoins by Blockchain.com.
• Bloomberg News reveals Tether bank statements.
• QuickTake primers on cryptocurrencies, stable coins and Tether.
• The Bloomberg terminal’s cryptocurrency monitor.

To contact the reporter on this story: Olga Kharif in Portland at okharif@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net, John O'Neil

©2019 Bloomberg L.P.