What is Facebook’s new Libra digital currency? A way to stop money-transfer companies exploiting the world’s poor by skimming off vast fees in cross-border transactions? Or an exercise in corporate megalomania that will involve persuading us to accept “a new global currency”?
The first ambition is clearly socially useful. Facebook is correct when its says “people with less money pay more for financial services”. If banks, Western Union and so on are obliged to cut fees on international payments to keep up, bring it on. A low-cost payments network, using smart technology, would represent welcome disruption to an industry where too much money clings to the sides of the owners’ pipes.
Quick GuideWhat is Libra, Facebook's proposed cryptocurrency?
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What is Libra?
Facebook says Libra is a 'global currency and financial infrastructure' - a digital asset built by Facebook and powered by a new Facebook-created version of blockchain, the encrypted technology used by bitcoin and other cryptocurrencies. The name Libra comes from the basic Roman measurement of weight. The abbreviation lb for pound is derived from Libra, and the £ symbol originally comes from an ornate L in Libra.
Why is Facebook launching a cryptocurrency?
Facebook claims it wants to reach the 1.7 billion people around the world who do not have access to a bank account.
Who is in charge of Libra?
Facebook is likely to run into regulatory hurdles and antitrust concerns. The currency will be serviced by a collective of companies called the 'Libra Association'. It functions as what is known as a 'stablecoin', pegged to existing assets like the dollar or euro, in the aim of making it less subject to the volatility that many cryptocurrencies experience.
The Libra Association is described by Facebook as an independent, not-for-profit organisation based in Switzerland. Within the Libra Association will be a governing body called the Libra Association Council, comprised of a representative of each member of the association, which will vote on policy and operating decisions.
Facebook claims that although it created the Libra Association and the Libra Blockchain, once the currency is launched in 2020 the company will withdraw from a leadership role and all members of the association will have equal votes in governance of Libra. The companies who contributed a minimum of $10m(£8m) to be listed as founding members of the Libra Association include tech companies such as PayPal, Ebay, Spotify, Uber and Lyft, as well as financial and venture capital firms such as Andreessen Horowitz, Thrive Capital, Visa and Mastercard.
However in October 2019 several of the companies that had been backing the initiative announced that they were pulling out, including Visa, Mastercard, PayPal and Stripe.
How and when can I use it?
With regulators asking questions and backing companies dropping out, it is unclear now if Libra is still viable. Facebook's original plans were that users could download Calibra, a digital wallet, that would allow them to send the currency to anyone with a smartphone. It is no longer clear which countries the coin will launch in first, if at all, though Facebook had said 'almost anybody' in the world with a smartphone would be able to download the app.
Kari Paul in San Francisco
Yet the second ambition is more important: the creation of a new global currency, albeit one backed by reserves held in established major currencies, plus a loose promise-cum-threat that the arrival of Libra is “just the beginning”.
It’s clearly directly helpful for Facebook if its 2.5 billion users can be cajoled into adopting Libra for buying goods on Instagram’s shopping service, for example. Punters might buy more stuff if paying becomes easier. And, if they’re obliged to stay within Facebook’s world for longer, more adverts can be shovelled in their direction.
But the wider ambition is problematic. Facebook, thanks to data breaches and the spread of faked and malicious content, is one of the world’s least-trusted companies. Is it a fit outfit to run a global currency?
Facebook’s answer is that it will, eventually, merely be one of 100 members of the Libra network. The new operation will also apply the fraud and money-laundering checks that banks must; it will follow the same “know your customer” rules, complete with ID checks; and transaction data won’t be married with Facebook profiles, or least not without “consent”.
Well, yes, this venture would not achieve lift-off otherwise. But if we’ve learned anything about Facebook in recent years, it’s that good intentions are not enough. The company is braced for a $5bn fine from the US Federal Trade Commission from an inquiry into “platform and user data practices” and is under criminal investigation by US federal prosecutors.
In those circumstances, financial regulators cannot merely sit back and think of the socially useful aspects. Their job is to ensure that Facebook is actually capable of preventing dirty money infecting its invention and that flows of money into the “Libra Reserve” fund don’t upset financial stability, a real issue given the potential for rapid adoption.
Governments and regulators have spent the past decade trying to inject more transparency into the global financial system. It would be absurd if those efforts are sent into reverse by a tech firm’s dream of a “global currency”, an idea that no central bank has yet deemed desirable. Libra deserves strict bank-style regulation – and then some. If Facebook disagrees, tough.
The Woodford watchdog that didn’t bark
If you feared the Financial Conduct Authority was asleep during the Woodford meltdown, don’t worry. The regulator was on patrol as early as February last year. It’s just that the FCA didn’t actually do anything. Its monitors kept monitoring all the way until the Equity Income Fund suspended dealings at the start of this month.
You can find the details in the FCA chief executive Andrew Bailey’s letter to Nicky Morgan, the chair of the Treasury select committee, on Tuesday. The first contact with Link, the corporate director of Woodford’s fund, was prompted by two breaches of the 10% cap on unquoted securities. Eight months of “monthly monitoring discussions” followed. More scrutiny came when Woodford shoved a few stocks on to the Guernsey stock exchange in February. From late April the FCA received daily liquidity reports.
So why didn’t the regulator act? Bailey’s plea, it seems, is that EU rules wouldn’t allow it. “A case can be made”, he says, for reviewing definitions of what counts as a liquid market. You bet: the FCA reckons 20% of Woodford’s portfolio was unlisted just before the cosmetic Guernsey shuffle.
But an equal case can surely be made that, whatever the EU rules say, a UK regulator should read the riot act to a high-profile retail fund manager who is persistently bumping against liquidity limits. The FCA’s investigation also needs to cover the FCA’s own timidity.
Max crisis, max discount
No big airline ever pays the list price for new aircraft; discounts are always available for bulk orders. But the British Airways parent, IAG, will have got spectacular terms for agreeing to buy 200 Boeing 737 Max aircraft at a moment of max crisis at the US manufacturer.
The IAG chief executive, Willie Walsh, will probably never tell us the details of this notional £20bn order. A plausible opening offer, though, might have been: buy one, get one free.