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Facebook's frontal attack on finances



Flawed, ridiculed, feared: Facebook's proposal for a new virtual currency last week has already led to a backlash. But could it cause the financial system to fly anyway?

The idea marks a "long overdue" Big Tech attack on the payments industry, says David Yermack, a finance professor at New York University's Stern School of Business. Apple has worked out a limited role for its own payment system on the iPhone: in contrast, Facebook's plan is a frontal attack. The planned launch of the Libra digital currency within a year would be supported by partners such as the payment networks Visa and Mastercard and the Internet companies Uber and eBay.

Facebook itself would create a "killer app" to take advantage of these benefits digital money: a payment system integrated into its messaging services, allowing users to easily and inexpensively send money to friends or make purchases. With 2.4 billion users, according to its proponents, the social networking company could single-handedly push cryptocurrencies into the mainstream and fulfill the hopes that were first aroused by Bitcoin a decade ago.

"The threat to existing banks is huge," says Mr Yermack. Companies like Facebook, Google, and Amazon have two major advantages over banks: they could handle transactions at a much lower cost, and they would have shown themselves to be masters at creating new digital services that would draw billions of people onto their platforms.

The entry barriers are also high and the resistance is already high. Politicians, privacy activists and bankers have questioned the proposal in the days since its disclosure. The fact that Facebook and its partners want to push ahead anyway is proof of how much is at stake.

The numerous criticisms and warnings made in the last week focused on three main areas.

First, it's about the credibility of Facebook itself. After the excitement over Russian interference in the recent US presidential election, including through content that appeared on Facebook, the social network is viewed with deep mistrust. Mark Zuckerberg, CEO, initially refused all responsibility, but noted humility as he tried to repair the social network.

But with his plans for a new cryptocurrency, Facebook's unlimited ambitions have been revived. The company has spoken of reaching billions of people with its payment service. Kevin Weil, vice president of the proposed Facebook payment service, hopes in an interview that the new currency will last hundreds of years.

Kevin Weil, vice president of the proposed Facebook payment service, says the company hopes the new currency will last for hundreds of years. © New York Times / Redux / eyevine

Even fans of the idea find it hard to believe that Facebook can think about such a project given the political and regulatory pressures it faces. Mamoon Hamid, a partner of venture capital firm Kleiner Perkins, who has invested in a similar payment idea from Messaging Service Telegram, welcomes the vision, but says: "Whether the world we live in wants this from them is another matter. Things have changed in the last two years. "

Facebook managers made an effort to emphasize that the financial services they provide are properly regulated. But it is already clear that the company hopes to circumvent banking regulations, which has affected industry executives.

According to Weil, the company would offer other financial services such as loans, but adds, "We are not a bank, we do not see each other like that. For example, we offer no interest and offer nothing to banks. "Many predict that this distinction will not apply as the financial regulator subjects the wayward Internet company to a closer scrutiny.

There were also questions about Facebook pledging to keep the financial information of its users separate and not to use for promotional purposes. Passing on data to other Facebook services would be possible if users opted for certain services. And even without the opt-in, a Facebook service like WhatsApp can see when a user makes a payment and to whom they pass on valuable information.

When so much data is entered into an organization, this is problematic Matt Stoller, a Fellow at the Open Markets Institute, a Washington interest group that opposes excessive concentration of corporate power, says Facebook has failed in the past is. He also warns that Facebook would be able to use its dominant position in social networks to open up a new market – something that might be rejected by antitrust authorities.

The fact that more than two dozen other companies and organizations are already doing so The Libra project, which was supported for the time being despite the obvious political and regulatory challenges of Facebook, underlines the scope of opportunities.

Despite all its shortcomings, Facebook's massive user base could pave the way to bring crypto currencies into mainstream. This has sparked hopes in Silicon Valley for a new generation of financial services built on the new Libra backbone.

Many developers have "been on the fringes of cryptography and really wanted to take the plunge," says Katie Haun, a former US Attorney who now manages a crypto currency fund for Silicon Valley venture capital firm Andreessen Horowitz. "This will be a catalyst for a lot of talents coming into space."

Katie Haun, who runs a cryptocurrency fund for a Silicon Valley venture capital firm, says financial services in many developed countries are "good enough" are slow and inefficient © YouTube

The second major problem in relation to Facebook's plan is the nature of the currency itself and the question of whether it would give too much financial power to a group of large corporations of its own choosing. The plan is for the scale to use a version of a blockchain – a decentralized ledger maintained by all participants in the network, where transactions are recorded.

However, it would not do justice to the ideal of decentralization created by the Bitcoin blockchain, where anybody can validate transactions. This creates a system without permission, in which no central authority decides who is trustworthy. Public blockchains such as these can not operate at the scale and speed required to handle a variety of real-time transactions with Libra, says Avivah Litan, blockchain analyst at Gartner.

Instead, Libra's supporters seek to create a private network of 100 companies that you can trust when booking transactions without the need for an independent validation system. Supporters want to move to a truly legitimate network within five years – though not everyone believes this is technically possible.

Despite this limitation, the scale is "probably a much more efficient system" than today's banking system. controlled payment networks, says Ms Litan. "But it's still controlled by the big corporations." She and others warn that this would give considerable power to a group of private entities – especially if Libra becomes a kind of global currency Facebook hopes for.

Such a private group could also lead to an antitrust challenge, says Mr Stoller – especially when two duopolists, Visa and Mastercard, work together on a project.

Matt Stoller, an employee of a Washington interest group that opposes an excessive concentration of corporate power, says the company could invite a challenge from the antitrust authorities

For crypto currency purists, these deficiencies are serious. "It's not decentralized, so Facebook customers are delivered and it's not going smoothly – it still uses the banking system and is tied to the political currency," said Tim Draper, one of the first cryptocurrency supporters in Silicon Valley.

] However, many people who oppose the introduction of a cryptocurrency by Facebook believe that this could have broader benefits. Libra "has a great distribution channel on Facebook, and it bridges the gap for those who are not yet ready to convert all of their transactions to Bitcoin," admits Draper. That could make it "a big step on the way to a fully open, truly global, transparent and smooth currency like Bitcoin."

The third problem is whether a new currency such as the Libra could represent a deeper system of risk, but also affect the ability of central banks to oversee their financial systems and operate a normal monetary policy. In this case, governments and regulators could try to strangle it at birth.

Mark Carney, Governor of the Bank of England, has clarified that the potential systemic risks in a system such as Libra make it necessary for it to be exposed to the highest levels of control.

Critics warn that it could be harder for governments to limit payments outside a country or impose sanctions on a foreign power when operating outside normal banking channels. "Each parallel currency undermines, to some degree, the state institutions that control the currency," says Stoller. "The reason why this seems particularly important is that it's Facebook, not just some libertarian guys hanging out on strip bars, smoking weeds and trading bitcoin, it's Visa and Mastercard."

Some Critics of Libra claim it would also give private companies undue influence over monetary conditions. Facebook and its allies deny this.

They point out that the balance will be fully covered by a basket of government-issued currencies or fiat currencies, meaning that the system would not create new money. Instead, the Fiat currency would remain in reserve while releasing its digital alter ego on the Internet, lowering transaction costs and supporting new types of services.

However, the mass acceptance of the currency could continue to have distorting effects. Supporters of the Libra hope that a large number of people in developing countries will choose to hold Libra deposits rather than the currencies of their country. This could weaken the power of local governments, which would have less of an impact on currency conditions if many transactions in the economy were implicitly backed by a foreign currency.

An IMF official, Thomas Adrian, made a speech last month that countries with weak currencies may find it more difficult to find their bearings in times of crisis: "You can either do it or get it from foreign e-money." [19659002] Even without Libra, digital currency systems supported by official currencies have become widespread in some parts of the world. They are led by China's booming mobile payment systems operated by Alibaba and Tencent – a reason why Silicon Valley, which is on the world stage in the race with China's technology leaders, believes regulators in Washington should not be too strict. "The mind is already out of the bottle with this technology," says Ms. Haun.

The Governor of the Bank of England, Mark Carney, has made it clear that Libra will be subject to the strictest controls. © Charlie Bibby / FT

Some central bankers may be ready to deal with the new era of digital currencies. Mr Carney said Thursday the Bank of England may allow technology companies to overnight overnight deposits with the central bank, which is an alternative to leaving deposits with commercial banks for these payment systems and equating them to commercial banks. This would also bring central banks a step closer to issuing digital currencies.

The tax authorities have no choice but to try to adapt, says Yermack. If they try to tackle scale or similar projects, the technology companies could easily move their payment plans abroad.

Since the potential shortcomings of Libra have been worked out in the meantime, there has been less attention. How the digital currency – or other ideas like them – could affect the financial world should prevail.

So far Facebook and other members of Libra have been trying to focus on cross-border credit transfers that incur fees. This could result in 1.7 billion people in the world who do not have a bank account being able to provide basic financial services. These are the politically most savory uses of the currency and those most likely to find official support.

However, the widespread use of e-money would also have far-reaching implications. Just because financial services work "well enough" in many developed countries does not mean that there is not room for improvement, Ms. Haun says, "They are slow, they are inefficient, you are paying middlemen on the move." [19659002] Facebook seems like that to have planned something for Calibra, the payment service that it wants to launch in the Libra Blockchain. Integrated into its intelligence services, this would support a new era of online commerce.

A true digital currency has other advantages. According to Facebook, it could be used for micro-payments to give users a new way to pay for digital content when they read or watch it.

Libra's supporters are still planning to introduce "smart contracts" for the network – arrangements where money automatically changes ownership when certain real-world conditions are met.

How this could affect a future world in which machine-to-machine communication and intelligent agents are at the forefront is what the Silicon Valley fever dreams of. This could, for example, lead autonomous vehicles to decide themselves when to pay, to switch to a fast lane, and to process the payment automatically.

Libra may never play a role in this imagined future. Concerns about Facebook – along with inherent limitations in the project itself – could make it a failure. However, with the spread of digital money systems in more and more parts of the digital world, the prospects for truly disruptive change in the financial world are increasing.


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