Guardians of money bristle at Zuckerberg's new financial order
Guardians of money bristle at Zuckerberg's new financial
order
Alastair Marsh, Bloomberg News June 23, 2019
People don't trust Facebook with their data, how will
they trust them with their money?
Facebook Inc. was hours away from the formal announcement
of its ambitious foray into financial services, but French Finance Minister
Bruno Le Maire was already broadcasting his discontent.
"It’s out of the question’’ that the social-media
giant’s digital money compete with sovereign currencies, Le Maire said.
That was just the first shot in a torrent of criticism
and skepticism from policy makers around the world. U.S. House Financial
Services Committee Chair Maxine Waters promised an aggressive response from
Congress. Former European Central Bank Vice President Vitor Constancio called
the initiative “unreliable and dangerous.”
Led by the social network with more users than the
combined population of China and the U.S., the project represents a potential
challenge that the guardians of money have never faced: a global currency they
neither control nor manage. And while the megabanks and their regulators face
no short-term threat to their command of finance, advocates of cryptocurrency
say the future has arrived and that there’s no turning back.
“It is the beginning of a new financial system where
current gatekeepers are substantially less relevant,’’ said Joey Krug, co-chief
investment officer at Pantera Capital, founded in 2013 as the first U.S.
investment firm focused on Bitcoin.
Would you trust Facebook with your money? What Libra
cryptocurrency means for users
Facebook revealed it will launch a digital currency
similar to Bitcoin, called Libra.
Here's what that move might means for its users.
Called Libra, Facebook’s new currency will launch as soon
as next year. It will initially be used for sending money among friends, family
and businesses through the Messenger and WhatsApp services and then be used for
routine transactions.
Facebook founder Mark Zuckerberg’s ambitions extend
beyond simply minting a new coin. The Libra token would contribute to a fairer
world, where those now excluded from the banking system would have ready access
to cheap and easy payments and financial services, according to a company white
paper.
Libra is the latest example of how tech companies
including Apple Inc and Amazon.com Inc have ventured into the financial
industry, offering everything from payments to money management and lending.
While finance currently makes up a fraction of their business, giant companies
with huge customer bases have the potential to trigger rapid changes in the
industry and introduce new risks, according to a report Sunday by the Bank for
International Settlements.
“Technology is changing the basis of competition,’’ says
Huw van Steenis, senior adviser to Bank of England Governor Mark Carney. “It’s
tearing up walls between businesses. It’s not just Facebook trying to do a
currency.’’
Moving into the heavily regulated financial-services
industry via cryptocurrencies, which are seen by many officials as nothing more
than a conduit for financing illicit activities, Facebook has shown little
reluctance to lessen its confrontation with authorities.
"Facebook is under attack by regulators around the
world for a litany of specific issues and, generally, for being too powerful,’’
said Kevin Werbach, professor of legal studies and business ethics who
specializes in blockchain topics at the University of Pennsylvania’s Wharton
School. “Making a massive move into an entirely new industry, financial
services, which is crucial to the global economy, is not the action of a
humbled company. It looks to many regulators like an aggressive brush-off of
regulatory concerns, whether or not that is actually the case.’’
Sheryl Sandberg, Facebook’s chief operating officer and
Zuckerberg’s No. 2, recognized the tension. Speaking at the Cannes Lions
International Festival of Creativity in France on Wednesday, just 24 hours
after the official announcement, Sandberg said Libra was still some way from
launch.
“Regulators have concerns,” Sandberg said. “We’re already
meeting with them. We know we have a lot of work to do, but this was an
announcement of what we would like to do with a roadmap for people to jump in
and help us do it.”
Indeed, Facebook moved to preempt at least some of the
criticism. The token will be overseen by an association of 28 companies at the
outset -- including Visa Inc. and Uber Technologies Inc. -- that it hopes will
number 100 by launch. It has also said Libra users will be subject to the same
verification and anti-fraud checks they’d expect when signing up for a bank
account or credit card. David Marcus, who heads the project for Facebook, said
the company plans to keep financial data gathered from Libra users separate
from Facebook user data.
The Bank of England’s Carney didn’t dismiss Libra, saying
the full gamut of global regulators must first scrutinize the offering. Not
only that, he said on Thursday he’s starting consultations on allowing new
payment providers such as Libra to hold reserves at the central bank for the
first time.
“The Bank of England approaches Libra with an open mind
but not an open door,” said Carney. “Unlike social media for which standards
and regulations are being debated well after it has been adopted by billions of
users, the terms of engagement for innovations such as Libra must be adopted in
advance of any launch.”
In Libra’s early days, Carney’s embrace has set him apart
from many of his rulemaking counterparts.
France’s Le Maire wants an investigation into the
potential risks of money laundering and terrorism finance. ECB Vice President
Luis de Guindos said Libra will face questions of privacy and money laundering.
Australia’s central-bank governor, Philip Lowe, said there’s a “lot of water
under the bridge before Facebook’s proposal becomes something we’re using all
the time.”
Meanwhile, Waters said Libra is “like starting a bank
without having to go through any steps to do it,” and that it’s seeking to
“compete with the dollar without having any regulatory regime that’s dealing
with them.”
While Libra is designed to be less volatile than
cryptocurrencies like Bitcoin and is backed by a basket of securities and
traditional currencies, some question how a technology company will interact
with the monetary system. “I'm not entirely convinced that a tech company, at
the end of the day, can be held accountable,'' said Vishnu Varathan, head of
economics and strategy at Mizuho Bank in Singapore.
There are still many questions about how it will operate
and its success is far from guaranteed. Yet the endeavor is being taken seriously
by the financial-services industry because of Facebook’s scale and its already
vast impact on the world.
While Facebook is now trying to sign up banks to the
association governing the token, its new system is a challenge to banks that
often act as middlemen in virtually all transactions, according to Charles
McGarraugh, a former Goldman Sachs Group Inc. partner who has moved into the
digital world as head of markets at cryptocurrency-wallet provider
Blockchain.com.
“We are witnessing a re-orientation of financial
services,’’ said McGarraugh. “Having custody of your own assets rather than
depositing them in a bank is a totally different paradigm and a superior system
to the too-big-to-fail construct that dominates the market now.’’
--With assistance from Michelle Jamrisko.
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