Facebook has a lot of questions to answer about Libra, its new cryptocurrency (FB)

Associated Press

Facebook left lots of questions unanswered about its new Libra cryptocurrency.
The company is aiming for the digital money to be used around the globe.
But each country has its own rules governing financial transactions, and it’s unclear how Facebook will comply with them.
It’s also unclear what kind of consumer protections Facebook and its partners will offer.
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Facebook’s unveiling Tuesday of its long-in-the-planning cryptocurrency may have left more questions than answers.

The social network announced the currency’s name — Libra — and gave some details about how it and the technology that will undergird it will work. But it didn’t provide a whole lot of information about how the currency and the organization that will oversee it will protect consumers or comply with the myriad regulations and regulatory bodies around the world that govern financial transactions.

In the documents Facebook posted that describe its cryptocurrency proposal, the company itself invites regulators and other companies to help it sort through the outstanding issues, noted James Wester, a research director at tech consultancy IDC.

"Good for them for doing that. It’s honest," Wester said. "But there’s going to be a lot that needs to be worked out there."

Facebook representatives did not immediately respond to a request for comment about the outstanding questions surrounding Libra.

Policymakers are already alarmed about Libra

But policymakers in Europe and the United States are already raising concerns about Libra. Maxine Waters, the Democratic chair of the House Financial Services Committee, called on the company to halt development of Libra until Congress and other regulators have had a chance to review it.

Facebook and its partners, which include Visa, Mastercard, and PayPal, have big ambitions for Libra. They’re hoping it will become a global currency that will power cross-border transactions and give access to the financial system to people who don’t currently have bank accounts.

Transactions will be recorded in a kind of blockchain, a digital ledger technology. But unlike bitcoin and many other cryptocurrencies, the value of Libra will be pegged to a collection of existing real-world currencies. When customers sell Libra for dollars, say, Facebook says they should get back about the same amount of the US currency as they previously spent buying the digital money.

But the company didn’t address a lot of issues that could make or break Libra, or even doom it before it gets off the ground. Many of them have to do with how the cryptocurrency will fit into the financial regulatory system.

"Finance is the most regulated industry on the planet," said Gregory La Blanc, a teaching fellow at the Haas School of Business at the University of California, Berkeley. Citing Facebook CEO Mark Zuckerberg’s famous mantra, he continued: "You can’t move fast and break things in this space."

Financial regulations vary from place to place

Indeed, part of the challenge for Facebook will be its global ambitions for Libra, La Blanc and other financial industry experts say. Facebook offers its services in nearly every country around the world, and presumably will want to offer Libra in as many of them as possible. But each of those countries — and in the United States, each state — has its own set of rules that govern banking and other financial services.

"Who knows how many governments are going to want to take a look at it?" said Krista Tedder, the head of payments research at Javelin Strategy, a market research firm.

In some cases, the rules that regulators apply in one jurisdiction may end up conflicting with those regulators apply in another area of the world.

The United States, for example, may require that Facebook and its partners keep on reserve in US banks enough currency to back up all Libra coins, said La Blanc. At the same time, Nigeria could require that the company keep on reserve enough naira — the local currency — to underlie all the Libra held by Nigerian customers. That could leave the Libra consortium with a dilemma over how to comply.

"The regulatory situation is unclear," La Blanc said.

Facebook may or may not know who is using Libra

One of the big questions for Facebook and its partners when it comes to regulations will be whether and how the Libra system will comply with know-your-customer and anti-money-laundering statutes. These laws require financial institutions to monitor transactions for potentially illegal activities.

For many of their users, though, one of the attractions of older cryptocurrencies was the promises of anonymity. Bitcoin and ether users can exchange currency without necessarily revealing their identities. Such anonymity has been abused, though: One of the most popular uses for bitcoin has been as a means of paying ransom to hackers who have hijacked people’s computers.

With Libra, Facebook seems to be trying to find some kind of middle ground between the traditional financial system and the cryptocurrency one. In one of the documents describing the Libra proposal, Facebook says that the system will use pseudonyms for the names of people involved in transactions and those fake names won’t necessarily be tied to users’ actual identities. But the company also suggests that it recognizes the need to balance users’ privacy with "regulatory impact."

At least nominally, Facebook would seem to be in a good position to comply with know-your-customer regulations, because it generally requires its users to use their own names on its core social network. But the company was plagued with accounts created under fake names in the run-up to 2016 US presidential election, and it’s acknowledged that it has an ongoing and massive problem with fake accounts.

"Facebook doesn’t necessarily have the best track record when it comes to that," Tedder said.

Cryptocurrencies don’t work like credit cards

Another big question surrounding Libra is what kinds of consumer protections — if any — Facebook and its partners will build into the system. With bitcoin and other cryptocurrencies, there are often few protections.

Stories abound of people losing thousands or millions of dollars or more because they can’t remember the passcode to their cryptocurrency wallet, or a hacker broke into their wallet or into the cryptocurrency exchange where it was stored. And typically, any transactions conducted using such digital currency are final once they happen. They can’t be reversed because one party made a mistake or a customer didn’t get what he or she ordered.

Customers using the traditional banking system have many more protections. In the US, federal banking insurance covers deposits. Consumers generally have the right to contest charges or have transactions reversed if they didn’t get what they’ve ordered or were defrauded. And they generally won’t be held responsible if someone steals their credit card and uses it to make a bunch of purchases.

It’s unclear what model Facebook and its partners will follow with Libra. But it’s likely that many customers and, perhaps, regulators are going to expect the company to offer similar protections that banks and credit card issuers offer.

"Consumers have to have a level of comfort if they’re going to adopt this," Wester said.

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Source: Business Insider – twolverton@businessinsider.com (Troy Wolverton)