Could Facebook’s digital currency dominate global finance?

London, United Kingdom – Say what you like about Mark Zuckerberg, but the tee-shirted boy wonder doesn’t do things by halves.

Not content with dominating how two billion of us communicate with friends and access information on global political affairs and news – or harvesting the digital manifestations of our egos to sell advertising – Facebook is now trying to muscle in on the territory of big banks.

The announcement of Facebook’s proposed “cryptocurrency”, to be named Libra, has already raised eyebrows and sparked a thousand thinkpieces – and it’s not even due to launch for at least another year.

Yet already, regulators are concerned not only that the “currency” could facilitate unsavoury trades, but that Facebook could become a leading force in the global payments industry and threaten the dominant role played by central banks in the international monetary system.

And that’s not an exaggeration.

What is Libra?

The first thing to know about Libra is that it’s not really a cryptocurrency.

Cryptocurrencies are based on decentralised technologies called distributed ledgers. These serve as public, open-source databases that can be used to conduct financial transactions and serve as a platform for the creation of new units (or “coins”). The most famous cryptocurrency is bitcoin.

Libra, on the other hand, is more like a standardised, cross-border monetary unit and online payment system.

What does that mean? Well, imagine you’re sitting at home in, say, France, and an advertisement pops up on your Facebook feed for a beautiful vegan jacket made in China. To buy it, either you’re going to have to pay for it in euros – in which case the Chinese company is going to have to pay a currency conversion fee – or you’ll have to pay to convert your cash into yuan. 

Alternatively, both you and the Chinese company could use a third, “virtual” currency pegged to a basket of real-world currencies for your transaction. That’s what Libra is. And it could, in theory at least, be used to pay for pretty much anything that you buy online, which is to say pretty much anything.

Anything. If Zuckerberg succeeds in creating an anonymous peer-to-peer currency, it probably won’t be used just for Ubers and pizzas. It could become a convenient way to pay for illegal drugs, launder the proceeds of crime, fund violent activities or buy weaponry.

US Treasury Secretary Steven Mnuchin is concerned about how the digital currency could be used in criminal activity.

“The Treasury has been very clear to Facebook, bitcoin users and other providers of digital financial services,” he told reporters on Monday. “They must implement the same anti-money laundering and countering of financing of terrorism safeguards as traditional financial institutions.”

Yet it’s not as if ordinary banks have always been squeaky clean when it comes to preventing money-laundering and the financing of violence.

Zuckerberg says he does not want to own the new payment system itself, but to facilitate a network of at least 100 partner companies, with voting share rights bought in $10m increments. 

That network will be governed by the Libra Association, a nonprofit organisation (NGO) based in Switzerland – the country that ranked number one on the Tax Justice Network’s 2018 Financial Secrecy Index with a history of opacity and a light regulatory touch. 

Facebook and its WhatsApp messaging software already have more than two billion users. The tech giant maintains it can use its unique access into the lives of its users – especially those of us in the Global South – to bring financial services to millions of people who don’t have access to a bank account.

Of course, Kenya’s M-Pesa service has been doing this for years, allowing mobile phone users to pay for goods and services, transfer money to other people and deposit and withdraw cash through a network of people selling phone credit. M-Pesa has been running for 12 years, giving millions in countries like Kenya, Tanzania, India and Ghana access to formal banking services. And its success didn’t require a new currency or multimillion-dollar investments from companies.

Regulation

Nearly two billion people currently cannot access the global financial system. Many of them are among the most vulnerable: dispossessed, displaced, stateless. Some observers question whether Zuckerberg’s motives for grabbing a share of this “market” are entirely altruistic, or are more about exploiting users’ personal data.

Paul-Olivier Dehaye is a mathematician who helped blow the lid off the Cambridge Analytica scandal, in which Facebook inappropriately shared information belonging to 87 million users with a British political consulting firm. Dehaye, who now runs an NGO helping people control their private data, said regulators will see through Zuckerberg’s philanthropic spin about “banking the unbanked”.

“Criticism of self-serving humanitarian narratives is becoming more prevalent,” he told Al Jazeera.

“People are starting to perceive the entire ad tech industry as an extractive industry, and they are therefore challenging its social standing as they might challenge an oil company.”

Even if Zuckerberg has entirely innocent intentions, there are legitimate questions about whether Facebook has the capability to protect its users’ privacy. In April, the world learned that more than 540 million records from Facebook users had been leaked. It has also been revealed that more than 150 companies had been granted access to more users’ personal data than Facebook had previously disclosed.

People are starting to perceive the entire ad tech industry as an extractive industry.

by Paul-Olivier Dehaye, mathematician

The company has not yet recovered from the Cambridge Analytica scandal, in which people’s details were acquired by a data company building methods of manipulating voters during the 2016 US presidential election. 

For such privacy lapses, the US Federal Trade Commission slapped Facebook with a $5bn fine, according to the Wall Street Journal. That’s a record-breaking sum, but given Facebook’s reported revenue of nearly $15bn for the first quarter of this year alone, it’s not surprising that US lawmakers on Monday derided the fine as a “a slap on the wrist”.

“Facebook is under more scrutiny from national regulators than at any time in its history,” Mitch Stoltz, a senior staff attorney at the Electronic Frontier Foundation, told Al Jazeera.

“There is no way to tell if Libra will be more or less secure than payment systems that already exist. One of the things about cryptocurrency is that it is decentralised, but the system Facebook is announcing is inherently centralised.”

“In the end, it may not be very different from existing payment systems like PayPal or the credit card network. It may not change the way we spend money, and may end up looking much like existing systems. But the difference will be in who takes the transaction fee and acts as the middleman.”

Stoltz said that though he doesn’t believe Facebook intends to take advantage of its users, “the company has always prioritised rapid growth over careful attention to privacy, and that could get them in trouble here.”

I don't think Facebook is setting out to take advantage of its users, but the company has always prioritised rapid growth over careful attention to privacy, and that could get them in trouble here.

by Mitch Stoltz, Electronic Frontier Foundation

Good governance?

The S&P500 ESG, created by financial services agency Standard & Poor’s, is an index of the top 500 global companies ranked on principles of environmental, social and governance standards.

In June, Facebook was dropped from the index.

There was “a lack of transparency as to why Facebook collects and shares certain user information”, S&P said in a statement emailed to Al Jazeera.

“These events have created uncertainty about Facebook’s diligence regarding privacy protection, and the effectiveness of the company risk management processes and how the company enforces them. These issues caused the company to lag behind its peers in terms of ESG performance,” the agency said.

While S&P rated Facebook with score of 82 out of 100 for its environmental credentials, the social network giant scored just 22 on the social count, and a paltry six on its governance score.

Luca Enriques is the Allen & Overy Professor of Corporate Law at the University of Oxford.

He said Facebook’s scores in the index could have been even worse.

What surprised me is that [the index’s methodology] appears to have nothing to do with the use of multiple voting shares,” he told Al Jazeera.

“Facebook has this structure with Mark Zuckerberg having multiple voting shares. Institutional investors tend to view this very negatively in terms of corporate governance, but S&P’s methodology for this index doesn’t consider this either negatively or positively.”

Still, he says, it’s unlikely to change minds regarding the social network’s trustworthiness.

“I don’t think ordinary people would find in this index any additional information for them to judge Facebook’s reliability. American comedians are making jokes about it, that you wouldn’t trust Facebook with your photos, but you would with your money.

“Everyone knows this [that Facebook has serious privacy issues], and this latest news is not likely to make much difference to people’s opinions.”

What’s next?

Zuckerberg has often shied away from government regulation of his business, refusing, for example, to appear when summoned by a UK parliamentary committee. 

But a growing chorus of bank chiefs, financial regulators and elected officials across the globe are voicing concerns over Libra. 

French finance minister Bruno Le Maire stated that Libra would not be allowed to supplant government-backed currencies, while Bank of England governor Mark Carney said Libra could become “instantly systemic” and would be subject to intense regulatory scrutiny.

The popularity of Facebook could even tempt people in countries with weak currencies to use Libras instead of their national currency, a nightmare for policy-makers trying to ensure budgetary stability, economics columnist Martin Sandbu writes in the Financial Times:

“Implicit in Facebook’s plans, therefore, is not just a capture of the banking industry, but a privatisation of monetary policy – a democratically abhorrent prospect in principle, and a power that there is absolutely no reason to think Facebook would discharge responsibly in practice.”

Elected politicians don’t always have the strongest grasp of technology. Regulators don’t always have a vision of how consumption patterns are changing in the future.

But even if he can win over a public that is already resigned to Facebook’s dominance, Zuckerberg faces an uphill battle in convincing the power structures of the capitalist world to let him get a foot in their door.