Where will Facebook’s Libra be in six months?

In the shadow of a giant.
In the shadow of a giant.
Image: Reuters/Dado Ruvic
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Depending on who you ask, Libra—a cryptocurrency announced by Facebook last month—could usher in a new era of banking, or it could cause the next financial crisis.

Although Facebook shared plans for a Swiss non-profit called the Libra Association, which will manage its cryptocurrency’s reserves and network, the social media giant hasn’t provided many details about the governing body or Libra itself. Will Libra coins trade for $1 apiece? What happens when a Facebook account gets hacked? What if there’s a default on Libra’s underlying reserves? Many specifics are still to be determined—or studied.

Facebook has portrayed its vague approach as a collaborative one which might encourage input from other members of the Libra Association, but it’s also given lawmakers cause for concern. Already US congresswoman Maxine Waters, a Democrat from California, has called for a moratorium on Libra’s development, and on July 2, dozens of consumer groups joined her plea, sending a letter to US regulatory agencies to express their concerns.

In view of Libra’s backlash and the trickle of information from Facebook, many academics and executives are speculating about the cryptocurrency’s future, and what it might mean for Facebook users. Here are five ways the Libra could shake out, ranked in order of probability:

Libra gets delayed until 2021

If there’s one thing crypto enthusiasts know, it’s that release dates are flexible. Although Facebook said Libra will launch in the first half of 2020, the timeline seems optimistic. Other open-source crypto projects, like ethereum and Tezos, have repeatedly been delayed—for years—because of technical shortcomings as well as legal squabbling and infighting. Facebook is different because it’s an established company, but it faces an unprecedented challenge in scaling a blockchain network for billions of users. (It’s never been done before.) Of course, Facebook is also under tremendous regulatory scrutiny for its past privacy transgressions and monopolistic behavior, and the unfavorable response from international authorities has also thrown cold water on Facebook’s crypto plans. Because of the many uncertainties about how the network will operate and be managed, the chances of Libra going live in 2020 seem slim at best.

Libra launches as a glorified checking account

Financial authorities recognize the Libra network could facilitate near-instantaneous transactions, and they view that as a potential threat. Regulators worldwide are concerned that Libra could be used for money laundering and terrorist financing, issues that are directly linked to identification requirements.  Facebook and its banking/exchange partners will need to ensure that anyone who uses Libra (or redeems it) passes standard background checks. Compliance matters could—and probably will—force Facebook to shrink its vision for Libra.

While Facebook and the Libra Association may promote adoption by offering financial incentives to merchants, it seems likely that regulators would require limitations on who may send or receive the digital units. The network structure that Facebook is currently proposing—where anyone can send funds to anybody else, as in bitcoin—just won’t pass muster. To make Libra acceptable to regulators, it might get repackaged as something similar to the banking services that already exist. Libra might be useful in countries that lack financial infrastructure, and it could help with international transfers to family and friends, but that depends on whether transaction fees are lower than existing options. That could still be revolutionary for developing economies, but not quite as chaotic as Facebook’s current vision of boundary-less digital cash, available to all, and used to purchase just about anything and everything.

A US presidential candidate proposes a national crypto

Putting the US dollar on a blockchain is a bad idea. It would become an immediate target for cybercriminals, there still isn’t a good way to handle the irreversibility of crypto transactions, and the US already has electronic money in the commercial sphere that works perfectly well. However, that might not be enough to deter a pro-blockchain candidate.

Joseph Grundfest, a Stanford Law professor, said it would be a “delicious irony … if Facebook’s Libra proposal stimulates the United States government to develop a functionality that operates like Libra, backed by U.S. dollar deposits, but operated by the U.S. government.” Grundfest predicts a presidential candidate proposes a government crypto in “the not-too-distant future.” (Andrew Yang seems to fit the profile. He already has a crypto platform.)

Superficially, it seems to make sense to get ahead of Facebook by offering a national alternative. But upon examination, a national crypto could threaten the relationship between the Fed and retail banks, increase the likelihood and severity of bank runs, and substantially increase financial crime. A blockchain-based US dollar should be taken seriously—but perhaps, as a serious threat.

Facebook cancels the project

Remember Google Glass? Or AirPower? Those product failures/cancellations are instructive. Facebook’s Libra could die an unceremonious death before, or maybe soon after, its launch. To be fair, six months is probably too soon for Facebook to pull the plug. (It’s a billion-dollar initiative, after all.) But the company could subtly change strategy, and allocate talent to other projects or reduce its funding. The Libra Association, in particular, seems like a critical weakness, where Facebook and its partners may struggle to reach agreement over the network’s standards—for privacy, transaction fees, interest payments, and other matters. Other crypto consortiums, like the Enterprise Ethereum Alliance and R3, haven’t accomplished much beyond trials and press releases in the last several years.

Libra abandons its peg

There are many hurdles to jump before Facebook could reach this stage, but the company’s long-term vision for Libra could mirror bitcoin more closely than we realize. Mike Novogratz, CEO of Galaxy Digital, a crypto merchant bank, suggested that Libra may eventually abandon its peg, just like the US dollar ditched the gold standard in 1971. It’s far too early to say what that would mean for Facebook’s share of digital commerce or how that would impact domestic monetary policy. Private money run by Facebook could threaten the efficacy of tax collection, and it could even lead to a hyperinflated US dollar. Those possibilities may sound extreme, but this scenario warrants consideration because it could change society’s relationship to money (from government-issued to company-issued). Again, it’s unlikely that Libra would pivot that dramatically in its early stages, but its underlying reserve policy deserves close attention.