After Months of Rumors, Facebook Officially Announces New Libra Cryptocurrency
Social networking giant Facebook has unveiled plans for a global digital currency, which the company hopes will “transform the global economy” by offering an easy-to-use alternative to cash, credit card transactions, and bank transfers. The new cryptocurrency will be governed by the Libra Association, an independent not-for-profit established in Switzerland. Users will be able to use Libra with a digital wallet known as “Calibra”—a subsidiary of Facebook—to save, spend, and send the Facebook currency. The announcement of Libra has been followed by an immediate backlash by members of Congress and privacy, security, and antitrust experts alike over giving Facebook—a company with a history of mishandling user privacy—control over users’ financial information.
After teasing its plans for a new digital currency for some time, social media conglomerate Facebook has finally made it official that it will launch its new cryptocurrency, Libra, in 2020, through a new Facebook subsidiary called Calibra.
To use Libra, consumers will utilize a digital “wallet” offered by Calibra, where users can save, spend, and send Libra. The Calibra application will be available as a standalone app on users’ mobile devices, as well as in Facebook Messenger and WhatsApp. It is anticipated that Calibra will also be integrated into other existing apps, similar to the integration of ApplePay into other apps. Facebook expects that consumers will be able to execute purchases with Libra as soon as next year.
According to Facebook, Libra is built on a secure, scalable, and decentralized blockchain, which will be managed by the Libra Association—thus far, a 28-partner consortium of businesses and foundations, including Uber, Lyft, eBay, PayPal, Mastercard, and Spotify, which each invested $10 million to join. The Libra Association hopes to have 100 members by its launch, each of which will have one vote on “substantial decisions.” The founding members will act as “validator nodes,” collectively and democratically making decisions on the future of the network and protocol. All decisions require participation by a majority of the founding members.
The software that implements the Libra blockchain is open source—designed so that anyone can build on it, and billions of people can use it for their financial needs. Libra will operate as a “stablecoin,” in that its value will be tied to several historically stable international currencies, including the U.S. dollar. Facebook, Calibra, and other founding members will earn interest on the money users cash in that is held in reserve to keep the value of Libra stable. In doing so, Facebook has positioned Libra to avoid the volatility and sweeping moves in value that are a common characteristic of other major cryptocurrencies like Bitcoin. In addition, Facebook aims to eliminate transaction fees with Libra and create a universal payment system capable of facilitating payments across the globe.
Since the announcement, significant concerns have been raised regarding the Libra venture by members of Congress. On May 9, 2019, the Senate Banking Committee sent a letter to Facebook asking a number of questions regarding privacy, security, and other legal and regulatory concerns related to Calibra and consumer protection. The Senate Banking Committee will hold a hearing on July 16, 2019, to question witnesses regarding Libra. However, by apportioning ownership and control over Libra to its members, Facebook could potentially mitigate increased monitoring and review, especially as it relates to anti-competitive behavior.
Facebook has faced criticism for its handling of privacy issues, and notwithstanding the manifold composition of the Libra Association, using Libra means trusting Facebook, and, in particular, Facebook’s control over users’ financial data. Facebook designed the blockchain project, recruited and approved Libra Association members, and the Calibra wallets will be embedded in Facebook-owned apps, such as the aforementioned Facebook Messenger and WhatsApp. Moreover, unlike Bitcoin or Ethereum, which are permissionless blockchains, Libra will commence as a permissioned blockchain. Although the goal is for Libra to eventually become permissionless, the current structure is not truly decentralized. Such a permissioned framework could be more susceptible to external attacks and increased influence from members. We note that Libra’s blockchain technology is similar to that of Bitcoin and Ethereum in that it relies on pseudonyms comprised of strings of letters and numbers that represent user identities, also known as the public and private key pairs. (The public key is an address for money that can be shared; the private key, like a password, is used to sign and validate transactions as authentic.) However, Libra’s blockchain does not offer anonymity like privacy-focused Zcash and Monero. According to Facebook, a user’s real identity will not be tied to the user’s publicly-visible transactions.
Facebook has indicated that the social media data it controls will be segregated from the financial data received by Calibra, but it is unclear how exactly that will be accomplished. Even without sharing personally identifiable information, Calibra will give Facebook remarkable access to information globally about how much money people have, what they are buying, and how much they are paying for it. Facebook has acknowledged that Libra should enhance Facebook’s core revenue source of ad sales. David Marcus, Facebook’s VP of Blockchain said, “If more commerce happens, then more small businesses will sell more on and off platform, and they’ll want to buy more ads on the platform so it will be good for our ads business.”
In addition, Facebook will potentially share user account information and financial data with third parties if potential fraud or criminal activity is involved, for “legal compliance” and for “product performance,” which likely includes vendors and payment processors to effectuate payments.
Largely in response to prior criticisms over the company’s mishandling of user data, Facebook has attempted to proactively alleviate data privacy and data security concerns over Libra by ensuring that user privacy will be protected and the cryptocurrency will be secure, stating that: “Privacy and safety will be built into every step. For example, Calibra will have a dedicated team of experts in risk management focused on preventing people from using Calibra for fraudulent purposes.” However, ensuring both user privacy and safety in connection with fraudulent activity at the same time may be a thorny task for Facebook to accomplish. In many instances, the fight against fraud and money laundering may come at the cost of privacy for Libra’s users, as keeping transactions secure and legal often requires knowing who is completing transactions using the digital currency. In addition, while Facebook has pledged to use two-factor authentication and provide refunds when accounts are breached and money is stolen, these protections generally fall short of the legal safeguards offered by credit cards. Furthermore, even though Facebook promises to make privacy and security a priority, recent events demonstrate that even the largest companies with stringent privacy practices can still fall victim to catastrophic data breaches. As such, significant questions remain as to whether Facebook will be able to provide adequate privacy and security controls. Moreover, while banks are required to incorporate robust privacy and data security frameworks, it is unclear how Facebook intends on interpreting and synthesizing existing legal protections for consumer financial transactions with its new cryptocurrency.
With the announcement of Libra, Facebook aims to bring cryptocurrency into the mainstream and, in the words of Mark Zuckerberg, “make sending money as easy as sending a photograph—digital, immediate, secure, and free.” With a global user base of 2.4 billion individuals, Facebook possesses a worldwide audience that could help propel the digital currency to become a go-to payment option for both everyday purchases and sending money to others in every part of the world. With that said, Facebook has a well-known history of misusing and failing to protect the privacy of millions of its users, and is currently facing a potential 10-figure fine from the Federal Trade Commission for abuses of its users’ data following an investigation into the social network’s privacy practices. More importantly, the strong negative reaction by both Washington, D.C., and privacy and security professionals poses a significant threat of stopping Facebook’s digital currency in its tracks before it even has a chance to get off the ground. However, Facebook is single-handedly forcing Congress to expedite its knowledge and understanding of cryptocurrencies, which could lead to more legislative clarity for the sector in general. Ultimately, it remains to be seen if Facebook will be able to achieve its objective of creating a new Internet of money. However, if successful, the mainstream use of Libra could have a noteworthy impact not just on the United States economy, but on economies around the world.
© 2019 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.