I actually don't know if
libra is going to work,
but I believe that it's
important to try new
things. When Facebook first
announced it was
getting into the crypto
business with a basically
unregulated currency called
libra, the reaction
from Wall Street and
government bankers was about
as expected. Libra raises
a lot of serious
concerns. I'm not a big
fan of what they're doing
there. I think it's
a big mistake.
It was a neat idea
that'll never happen, and I
have nothing else to
say about it.
Libra is in trouble.
The social media giant had
lined up a long list
of corporate backers
for the initiative,
including major players in
the payment space.
In early October 2019,
PayPal became the first
company to back out
of the libra coalition.
That led to an exodus
of other companies from the
project. MasterCard, Stripe, Visa
and eBay all
followed PayPal and
ditched libra.
So, why are all
these companies ghosting
Facebook's digital currency all
of a sudden?
First, let's explain how
Facebook got into
another mess like this.
I like the libra concept, but
you got to drop it.
It's clearly doing more
harm than good.
Facebook first announced libra
in June 2019.
Introducing Libra, a
new global currency.
It formed the Libra
Association in Switzerland to
run the cryptocurrency project
and lined up 27
companies to oversee it.
Facebook also set up
a subsidiary called Calibra,
designed to host the
financial services and
payment software built on
top of the libra
digital currency. Why did
Facebook get into
crypto in the
first place?
Facebook is big.
It has 2.41
billion monthly
active users.
That's a huge base.
Even if a quarter of
the users ended up using
Libra for payments. That's
600 million people,
about twice the population
of the United States.
Facebook, though, also has
a ton of baggage.
Think 2016 presidential
election and Russian
hacking kind of baggage.
So, when a company that
big and that influential
plans to introduce a
product that could
potentially disrupt the
global financial
community, you can
see why U.S.
lawmakers are paying even
closer attention to the
social media giant.
This is Facebook's currency
chief David Marcus
testifying before the
House Financial Services
Committee back in
July 2019.
The reason we designed libra
in such a way that
Facebook will only be
one among 100 different
members of the Libra
Association and we'll have
no special privilege, means
that you will not
have to trust Facebook.
Well except, Mr.
Marcus, you know
better than that.
You know that only Facebook
has access to 2
billion people and all, all
to say that, that you
are just one of many
is simply, is simply not
true after people's data
and private messages
have been stolen. And this
is Facebook CEO Mark
Zuckerberg testifying before
the House Financial
Services Committee about
the proposed
cryptocurrency in
October 2019.
I want to be clear. Facebook
will not be a part
of launching the libra
payment system anywhere in
the world, even
outside the U.S.,
until the U.S.
regulators approve. Lawmakers
are really, really
nervous about Facebook
getting into digital
currencies. Libra could be
misused by money
launderers and
terrorist financiers.
Cryptocurrency such as
Bitcoin have been
exploited to support billions
of dollars of
illicit activity.
Facebook designed libra to
be a digital global
currency. Like other
digital currencies, libra
will be built on top of
a blockchain or a digital
ledger. Unlike other
cryptocurrencies, libra
would be backed by a
basket of real world
currencies. That would
stabilize its price,
protecting it from wild
swings seen in the
bitcoin market. The libra
reserve will hold bank
deposits and short-term
government securities for
every libra coin
created online.
If all goes according
to Facebook's plan, users
would have a virtual wallet
where they could buy,
sell, send and receive
libra through platforms
like Facebook or
Instagram or WhatsApp.
And, those payments would
move within seconds for
small fees. With bitcoin
transactions, it could
take several minutes to
confirm a transaction.
And in some cases
cost a few dollars.
Bitcoin is known for
its volatility and steep
price swings because it
isn't backed by
government. That means things
like inflation and
monetary policy don't
influence its value.
Instead, cryptocurrencies move
with supply and
demand and basic market
forces, fear and greed.
Bitcoin, for example, has
a fixed supply.
The total number that will
ever be minted is
hard-capped at 21 million,
and experts say that
hard cap won't be reached
for another 120 years.
Facebook says all that
volatility wouldn't happen
with Libra because it will
be backed by a bunch
of currencies, effectively
maintaining a stable
price even when
demand changes.
I think Libra is being
designed right now to be
spent because it's a stable
coin and it's pegged
to a basket of currencies,
and so most people
today are going to assume
that people will be
buying burgers or coffee.
That's Tom Lee.
He's head of research
at FundStrat Global
Advisors, an independent
research firm.
He says Facebook entry
into cryptocurrencies is a
huge positive. It brings a
lot of credibility to
space, but also with its
2 billion users, it's a
massive increase in the
addressable market, and
arguably one of the
biggest headwinds for crypto
adoption has been the user
interface or the ease
of sort of
finding on ramps.
Libra would use blockchain
technology, which is
what all cryptocurrencies
run on.
The blockchain is a
secure, digital collection of
financial accounts.
So, it's basically a
decentralized bank ledger.
There's no middleman. The
currency is exchanged
person to person and
recorded on the blockchain
so you can see
who owns what.
Traditionally in crypto, anyone
could access that
blockchain, but not
with Libra.
This is David Yermack.
He chairs the finance
department at New York
University's Stern School of
Business and he
teaches courses
on cryptocurrencies.
It's very different
than cryptocurrency like
bitcoin or ether, which
is decentralized, has no
leadership and relies on
a community of people
who compete to build the
blocks that update the
transactions. Because of the
design of something
like bitcoin, it really
can only accommodate a
small amount of traffic,
but something with
central management like libra
could really grow
to almost any size
that you wished.
Libra would be
permissioned, which means
transactions can only be added
to it by a group
of trusted parties.
That's where the Libra
Association comes in.
It's the Swiss-based consortium
of nonprofits and
companies like Lyft,
Uber and Spotify.
Each partner of the
Libra Association invested a
minimum of $10 million
into the project.
David Marcus is the
Facebook executive leading
the blockchain initiative, who
also once served
as the president of
PayPal, previously testified
to Congress that libra would
work more like a
traditional currency than
a cryptocurrency.
The intent of libra is
not to compete with other
cryptocurrencies. It's to compete
with the real
currencies issued by
the central banks.
That raised a red
flag among government
regulators. And that's a
big reason why libra's
corporate backers
began fleeing.
Zuckerberg took heat from
lawmakers looking for
clarity. Given the company's
size and reach, it
should be clear why
we have serious concerns
about your plans to
establish a global digital
currency that would
challenge the U.S.
dollar. For the richest man
in the world to come
here and hide behind the
poorest people in the
world and say that's who
you're really trying to
help. You're trying to help
those for whom the
dollar is not
a good currency.
Drug dealers, terrorists,
tax evaders.
He acknowledged the risk
of digital currency like
libra poses, but also argued
it could ensure the
U.S. position as an
innovative financial world
leader. I just think that
we can't sit here and
assume that because America
is today the leader,
that it will always get to
be the leader if we
don't innovate. And innovation
means doing new
things. And that does mean
new things have risks.
And we need to address the
risks and we need to
be careful in doing that.
But when pushed to
explain why corporate backers
exited the libra project,
Zuckerberg put the
blame on risk. Why
have they departed?
Scores of stable partners
have dropped out.
Why? Well, Congresswoman, I
think you'd have to
ask them
specifically for-
Why do you think
they dropped out?
I think because it's a
it's a risky project and
there's been a
lot of scrutiny.
Yes, it's a
risky project.
And when asked about
potential privacy concerns,
he told Congress there
are millions who trust
Facebook. Billions of people
come to our services
because they trust that
they can share content,
messages, photos, comments with
the people they
care about. And more than
100 billion times a
day, people do that.
They share something with a
set of people because
they know that that content
is just going to
reach the people that
they want it to.
So I think that if
we're able to move forward
with this project, there may
be some people who
who don't want to use
it because they don't trust
us or don't like us.
And that's one of the
values of having an
independent association where there
will be other
competitor wallets and
other approaches, too.
Zuckerberg spent most of
the hearing reassuring
lawmakers libra wouldn't
launch without approval
from U.S. regulators.
Facebook's push into digital
currency served as a
big wakeup call for
lawmakers and central
bankers. It's pitting Facebook
against the U.S.
and other governments.
And Facebook is
losing so far.
In September 2019, France
and Germany both agreed
to block libra. The
government said, "no private
entity can claim monetary
policy, which is
inherent to the
sovereignty of nations."
A few weeks later, libra
began to lose its
corporate backers. PayPal was
the first company
to leave in
early October 2019.
Days later, two senators
on the Senate Banking
Committee sent letters to
the CEOs of Visa,
MasterCard and Stripe to
express concerns over
their involvement in
the Libra Association.
Senator Sherrod Brown of Ohio
and Brian Schatz of
Hawaii told companies "to
proceed with caution"
until Facebook provides more
details on the risks
posed by libra, like
financing terrorism and
disrupting the global
financial system.
A few days after the
senator sent the letters,
eBay, MasterCard, Visa and
Stripe announced they
would leave the
Libra Project.
The U.S. Treasury Department
had also been
privately pressuring libra's
corporate backers,
according to the
Wall Street Journal.
The opposition to libra
is coming from countries
with established financial
and payment systems,
where a majority of
the population already has
bank accounts. That's not really
the kind of user
Facebook has in
mind with libra.
It's going after the
world's unbanked population.
You know, that unbanked world
is a lot larger
than we all appreciate
because anyone living in
the U.S., you know, has
pretty simple access and
low-cost access to banks.
Facebook points to statistics
that show 31
percent of adults in the
world don't have a bank
account. That's about 1.7
billion people globally.
And those numbers are
worse in developing
countries and even
worse for women.
Turns out, the unbanked
community of 1.7
billion people can be
leveraged through reliable
internet infrastructure and
mobile phones.
Those two things alone have
given rise to a new
generation of financial
services without
requiring fancy tech.
1.1 billion of those 1.7
unbanked people have
a mobile phone.
For example, in
sub-Saharan Africa, simple,
text-based phones have
popularized mobile money
accounts. So, Facebook has a
lot to gain from
winning over the unbanked
with a global payment
service based on its
own digital currency.
It's not just Facebook
making waves in the
digital currency market.
China's government also wants
a piece of the
action. China's central bank
has made some very
public announcements that
they're going to
compete with the private
digital currencies in
their economy by having a
crypto version of the
renminbi, their
own currency.
And there have been a
lot of central banks around
the world researching this over
the last five or
six years. The People's
Bank of China announced
in August 2019 that it's
close to launching its
own digital currency, saying
the rationale behind
the move is to
protect its foreign exchange
sovereignty. Some say the
move would encourage
the worldwide use of
the yuan, the Chinese
currency and the deputy
director of the People's
Bank of China's Payments
Department said this
currency will have similarities
to libra and
would be as safe as
the central bank-issued paper
notes Libra is really trying
to mimic what has
already occurred in China,
where two social media
companies, Tencent and
AliBaba, have launched
payment services.
They've run very, very quickly
and have begun to
push aside the regular
banks as sources of
payments for people.
And if you look at
how quickly the Chinese social
media companies have grown
and the fact that
they're now going abroad
into other countries,
there seems to be
an opportunity for companies
like Facebook, Google, Amazon
to create a very
similar service.
China's central bank plans
to launch this digital
token through a two-tier
system, where both the
People's Bank of China
and commercial banks would
be legitimate issuers.
All this means that Facebook
doesn't just have to
contend with the opposition,
with regulators and
politicians. It means the
social media giant is
also in a race against
time with governments that
want to build their
own digital currencies.
While libra still may be
in deep trouble, despite
Zuckerberg's performance on
Capitol Hill, the
promise of digital currency
should live on,
according to Tom Lee.
I mean, I think the
future is really bright for
digital assets.
one, because I think it
is reducing a lot of
friction in traditional
financial architecture.
The average person spends almost
a month of every
year paying for the
right to use banks.
So, I think that that's
a level of value capture
that's high, and so digital
assets are going to
help sort of create
productivity around that.
No one knows when
the federal government will
enact regulation that would
impact how the libra
coin operates or what
that regulation would look
like. All they do know
is it's coming at some
point. Some even speculate
Facebook won't be the
first public tech company
in the U.S.
to issue a currency.
I don't think other
majors Silicon Valley
technology companies are far
behind, so I think
Facebook is the first, but
I think we'll see many
other versions.
