Facebook’s controversial cryptocurrency may not survive the scrutiny, but the debate it has sparked has done much to progress digital asset regulation.
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By GDF Member Henry Burrows, co-founder of Alaco Analytics, a specialist provider of reputational due diligence for the cryptocurrency sector.
Facebook’s controversial cryptocurrency may not survive the scrutiny, but the debate it has sparked has done much to progress digital asset regulation. Since the crypto ‘big bang’ in 2017 regulators have spent plenty of time taking stock — waiting and watching to see what emerges from the frenzy.
The debate on sectoral regulation was at that time very much in its infancy, fragmented and incoherent. Authorities were content to test competing approaches, with little consistency. Crucially, very few efforts were keeping pace with the swiftness of development in the crypto sector.
Yet with the launch of Libra earlier this year — and with the dust barely settled on the events of 2017 — regulators have been forced into action. Facebook’s new digital currency is, even to the untrained eye, a potentially significant game-changer. If launched next year, it would become one of the world’s largest financial entities overnight, with billions of customers across more than 100 countries.
While Bitcoin, the veritable grandfather of cryptocurrency, is unlikely to rival traditional payment systems because its transaction speeds are sub-optimal, Facebook’s more centralised proposition has the potential to revolutionise the global financial system. It has a transaction speed to rival the biggest payment merchants, and an existing customer base to secure market share. Its creation was a direct challenge to traditional financial institutions and regulators were forced to take stock.
Libra is in many ways a noble idea. It has the power to enable Facebook’s 2.7 billion users around the globe, many with little or no access to conventional banking, to use a single digital currency to transfer money, free of intermediaries or costly transaction fees. Possible adoption by millions of migrant workers remitting funds to their families is just one obvious global benefit.
But while the effective removal of intermediaries is a boon for users, the person-to-person nature of payment is a potential nightmare scenario for regulators and central banks. Not unsurprisingly, Libra’s announcement prompted almost immediate concerns over data, privacy and governance, spurred by Facebook’s chequered past in these areas. The hostility from regulators and governments was palpable, and many sector insiders felt (and still feel) that Libra is destined to fail. Yet, regardless of the outcome Facebook has — unwittingly or not — dragged the debate on crypto regulation forward.
Almost immediately after its launch, the United States House Committee on Financial Services called for a halt to Libra’s development citing a lack of regulatory clarity. Federal Reserve chairman Jerome Powell spoke in July 2019 of serious concerns related to potential money laundering risks attached to Libra. All of this gave rise to broader concerns over Libra’s planning and preparedness, not least given an understanding that the Libra Foundation, Libra’s governing body, comprising some of the world’s top tech and finance companies, intended to regulate the payment service itself.
But early criticism has slowly been replaced by more reasoned calls to hear Libra out, and to allow the debate on global regulations to mature. Since May 2019 there has been a noticeable uptick in the speed of regulatory movement in the crypto space. Some of this can certainly be traced to the work of advocacy groups such as Global Digital Finance, which has fostered a more coherent approach among the sector’s larger players. Others can be attributed to the push from US legislators and supranational bodies with what appears to be a genuine effort to get to grips with the crypto landscape and its future regulatory structures.
A month after Libra’s announcement, the Financial Action Task Force issued new guidelines on how digital assets should be regulated – guidelines which were crucially taken up by the G20. Shortly after, Libra’s CEO David Marcus testified to the Senate Committee on Banking, Housing and Urban Affairs. In the same month that Mark Zuckerberg appeared in front of Congress, the FATF published guidelines on the so-called ‘travel rule’ which directs crypto service providers to collect and share personal data during transactions.
Despite continued concerns over privacy, this move is seen in some quarters of the industry as the basis for coherent global AML rules; and more broadly as the precursor for a level worldwide regulatory playing field. Because of its prominence, Libra, for better or for worse, is serving as the guinea pig for these nascent rules.
Even if Libra as we know it does not survive the process, its very presence looks likely to drive the administrative ground rules for the digital currency sector. The collective paranoia over Libra alone has spurred regulators and central banks into coalescing around the broad direction of regulatory travel. This should be welcomed. What may emerge in the coming year could be the long awaited global regulatory framework.
Will Libra be there? It is hard to say. Nonetheless, in its short and turbulent history, it has undoubtedly left its mark.