Facebook’s announcement of Libra, its blockchain and cryptocurrency to bank the unbanked, has generated a storm of opinions and responses. Perhaps, the most important among those are the ones that pertain to regulation. Unlike social media and technology, the financial services industry is a heavily-regulated one with detailed rules that govern each transaction. Facebook’s expansive plans for its cryptocurrency could fall apart, if regulators do not play ball.
The initial reaction to Facebook’s announcement has ranged from lukewarm to critical. Most have adopted a wait-and-watch attitude to the cryptocurrency. Regulator concerns about Libra are mostly centered around the possibility that it could end up undermining national currencies. The company’s track record of disregarding rules does not help matters.
Complicating matters further is the fact that there are multiple moving parts to Facebook’s initiative. In keeping with Facebook’s gargantuan size, the operations and scope for Libra span several jurisdictions and countries. Facebook itself is based in the United States while the nonprofit foundation governing its blockchain is in Switzerland. The social media behemoth’s target markets for its token are in Africa, South Asia, and Southeast Asia – regions with the fastest growing Facebook population.
Here is a brief recap of regulatory responses to Facebook.
Regulators in the European Union were the first ones off the block in responding to Facebook’s Libra announcement. France’s finance minister Bruno Le Maire warned against Libra becoming a “sovereign currency” and called on the Group of Seven (G-7) to examine it. (The same minister had earlier praised Tezos – another blockchain – because it overcame the “deficits of public blockchains.”)
The Bank of England governor, Mark Carney, sounded a more cautious note and said he would keep an “open mind” about it but not an “open door.” Success for Libra, according to Carney, would make it a systemic part of the existing economic system and make it “subject to the highest standards of regulation.”
Meanwhile, the G-7 has already announced a high-level forum to examine risks associated with digital currencies. The forum includes officials from the G-7 participant countries and IMF. It will examine challenges ranging from monetary transmission of cryptocurrencies to the impact of stablecoins, or cryptocurrencies that maintain parity with a fiat currency of basket of goods, on the financial services market.
According to estimates, two-fifths of Facebook’s audience of unbanked population is in Asia. India and China, two countries that have staked out a hostile position to cryptocurrencies, account for almost a quarter of the total share. Facebook is banned in China but India is the top Facebook country. It could potentially become a massive market for Facebook, given its large population of unbanked users and high economic growth rate.
A source with the Indian government told The Economic Times that the Libra token will not be available in India. The company reportedly also has not filed an application with India’s central bank, the Reserve Bank of India, for a cryptocurrency. India’s central bank has banned banks under its control from dealing with cryptocurrencies. But peer-to-peer transactions for cryptocurrencies are allowed.
But a loophole within existing regulations could allow Facebook to operate Libra within the country. If Facebook’s cryptocurrency functions within a closed system, meaning only within its network, then it will be allowed to operate. An open system in which the cryptocurrency is convertible to fiat currency and has a direct interface with the economy may make the coin illegal.
“We expect Calibra to work on Whatsapp (Facebook’s messaging app) and be available globally,” Facebook told ET. Calibra is Facebook’s cryptocurrency wallet which is integrated into Whatsapp. With 200 million users, India already has the world’s biggest user base on Whatsapp.
While other countries have user numbers, the United States is arguably the most important market for Facebook in terms of regulation. The country is home base for Facebook. Any business that interacts with an American entity is subject to SEC regulations. Facebook seems to have covered its bases before making the Libra announcement. It consulted with the CFTC and the Federal Reserve before making its announcement. Members of the US House of Representatives and Senate have called on Facebook to divulge more information relating to the project.
Appearing on CNBC, US Rep. Patrick Henry (D-NC) said there are “tons of questions” that Facebook’s cryptocurrency venture has raised. As examples, he wanted to know how Facebook intended to follow AML and KYC laws and why it chose to headquarter its nonprofit foundation in Switzerland. Rep. Maxine Waters (D-CA) said Facebook should put a “moratorium” on the Libra project until Congress has finished evaluating it. Meanwhile, the Senate Banking Committee has already organized a hearing regarding Facebook’s cryptocurrency on July 16th. Witnesses haven’t been called yet.
Still, entrepreneurs in the crypto ecosystem are sanguine about Congress’ response to Libra. “I think the response from Congress does clearly demonstrate that governments are going to care about these projects,” said Hunter Horsley, CEO of Bitwise, a crypto asset management firm. He said it was a reminder of the “massive impact” that cryptocurrency will have on the financial services ecosystem.