I’m writing more and more about Facebook launching its own cryptocurrency lately:
- Will Facebook become the world’s central bank? (March 2019)
- Will a global platform connect all of our money? (April 2019)
This is because they are getting serious about payments and blockchain, after a variety of reports that they will launch their own stablecoin, available to two billion users for global payments. This is not to say that Amazon, Alibaba and others are getting boring – they are all also invested in payments and lending – but Facebook’s entry is a mixed blessing. On the one hand, as the Western World’s largest social network, it is important; on the other hand, as the Western World’s largest abuser of trust and privacy, it is challenged.
Gen Z kids graduating from university campuses are rejecting Facebook, after the Cambridge Analytica outcry, and my favourite meme always gets a laugh at conferences (because the audience knows it’s true).
However, providing a payments service using blockchain does not need trust in the same way as full-scale banking does, so they may succeed in this venture. Bear in mind, this is also not necessarily in Facebook as it can also be used in Instagram and WhatsApp, both owned by Facebook but seen in a different way as they are separate brands.
Equally, it’s not so new. Facebook has had an EU e-money licence for five years, and has focused upon financial services for longer.
My view is that they’re not offering anything that’s a real threat to banks, as their largest advertisers are banks. Why would you cut the hand that feeds you? (Comment: the same is true with Google and AWS’s biggest users are banks, so same with Amazon) The threat is far more to payments firms like Western Union and foreign exchange firms. After all, if you can make seamless, frictionless, global payments via WhatsApp for free, why would you use someone else?
The media focus on Facebook payments is ramping up after The Wall Street Journal (paywall) reported on May 2 that Facebook is recruiting dozens of financial firms and online merchants to help launch its cryptocurrency network. The WSJ reports that they refer to the developments as Project Libra internally. Facebook is raising $1 billion in capital to launch its stablecoin, and has actively been talking about such plans with Visa, MasterCard and First Data. I’m sure those talks were interesting as their plan includes wiping out interchange fees, which may not be something the card networks appreciate.
Barclays analyst Ross Sandler recently estimated that Facebook’s cryptocurrency project could yield anywhere from $3 billion to $19 billion in additional revenue by 2021, so you can see why this would make sense.
On May 2 Facebook also registered a new company in Switzerland called Libra Networks LLC. It’s a FinTech firm focusing on “investing, payments, financing, identity management, analytics, big data, blockchain and other technologies,” according to Geneva’s commercial register published on May 7.
For the full background and build up to the registration of Libra Networks, Cryptopedic posted an interested summary which shows Zuckerberg’s first statements about his interest in cryptocurrency dates back to January 2018, just as bitcoin peaked at $20,000 a coin.
But there are two spanners in the works.
First, Facebook’s co-founder Chris Hughes has called for Facebook to be broken up:
“‘I’m angry that [Mark’s] focus on growth led him to sacrifice security and civility for clicks”
As has presidential candidates Senators Elizabeth Warren and Bernie Saunders.
Facebook’s COO Sheryl Sandberg rejects the issue:
“You could break us up, you could break other tech companies up, but you actually don’t address the underlying issues people are concerned about. They’re concerned about election security, they’re concerned about content. They’re concerned about privacy and data portability. We know at Facebook that we have a real responsibility to do better, and to earn back people’s trust.”
She recognises Facebook has lost trust, but not that they should lose control. Interesting.
Second, and possibly a bigger issue, is a letter addressed to Mark Zuckerberg on May 9 from the United States Senate's Committee on Banking, Housing, and Urban Affairs and signed by Chairman Mike Crapo and Ranking Member Sherrod Brown.
Dear Mr. Zuckerberg:
This week the Senate Banking Committee held its first hearing on Privacy Rights and Data Collection in a Digital Economy. Earlier this year, the Senate Banking Committee’s Chairman and Ranking Member invited feedback on the collection, use and protection of sensitive information by financial regulators and private companies in light of the immense growth and use of data for a multitude of purposes across the economy. As the Committee moves forward with additional hearings to build the record for legislation, it is important to understand how large social platforms make data available that can be used in ways that have big implications for consumers’ financial lives, including to market or make decisions on financial products or services that impact a consumer’s access to or cost of credit and insurance products, or in ways that impact their employment prospects. It is also important to understand how large social platforms use financial data to profile and target consumers.
The Wall Street Journal recently reported that Facebook is recruiting dozens of financial firms and online merchants to help launch a cryptocurrency-based payments system using its social network. Last year, Facebook asked U.S. banks to share detailed financial information about consumers. In addition, privacy experts have raised questions about Facebook’s extensive data collection practices and whether any of the data collected by Facebook is being used for purposes that do or should subject Facebook to the Fair Credit Reporting Act.
Accordingly, please respond to the following questions.
1) How would this new cryptocurrency-based payment system work, and what outreach has there been to financial regulators to ensure it meets all legal and regulatory requirements?
2) What privacy and consumer protections would users have under the new payment system?
3) What consumer financial information does Facebook have that it has received from a financial company?
4) To the extent Facebook has received consumer financial information from a financial company, what does Facebook do with such information and how does Facebook safeguard the information?
5) Does Facebook share or sell any consumer information (or information derived from consumer information) with any unaffiliated third parties?
6) Does Facebook have any information bearing on an individual’s (or group of individuals’) creditworthiness, credit standing, credit capacity, character, general reputation, personal characteristics or mode of living that is used (either by Facebook or an unaffiliated third party) to establish eligibility for, or marketing of a product or service related to, (1) credit, (2) insurance, (3) employment, or (4) housing?
7) How does Facebook ensure that information bearing on an individual’s (or group of individuals’) creditworthiness, credit standing, credit capacity, character, general reputation, and/or personal characteristics is not used in violation of the Fair Credit Reporting Act?
I have not seen any official response to this letter from Facebook yet, but I guess the bottom-line is that Facebook may have developed a stablecoin using blockchain to enable global payments within Messenger, Instagram and Whatsapp … but the day they press that button into production will be the day when the regulators come down hard.
In fact, it shows the gulf between Alipay and WeChat Pay, where social networks in China work with the government to enable integrated social, commercial and financial superapps. In the USA, the government does not want such integration as the firms are commercial operators working in shareholder rather than government interests.
An interesting space to watch.
There's been a fair bit of debate about whether a US government could do anything about this as Libra Networks is registered in Switzerland. My view is that if any company created a private money transfer systems shifting significant amounts of real value through an unregulated, maverick structure, then the regulators would come down hard. Furthermore, Facebook is a US-registered company and subject to US laws, so the US authorities would move first and co-ordinate an attack with the EU and other allies. Just IMHO.
Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal's Financial News. To learn more click here...