When the Libra project was announced on June 18, it seemed like another worrying new front in Facebook's megalomania. The company already has billions of users and makes tens of billions of dollars annually. So Mark must have thought, why not have his own currency?.
The company’s blockchain chief, David Marcus, announced his plans for Libra in a detailed white paper. The document showed some very powerful financial companies already signing up to the Libra Association in support of the currency. Facebook’s vision for an international currency seemed unstoppable.
But that was back then. The first company to abandon the Libra project was Paypal, which withdrew on October 4.Then, within hours on October 11, Visa, Mastercard, Stripe, and Mercado Pago also withdrew from the project. Then eBay followed.
This means that every major financial company in the US has left the Libra Association. (The latest financial company is PayU, which has not commented since the developments).
Is this a worrying fact?
Losing five major companies in the space of two hours may seem like a panic, but it's not. Let's take a look at the timeline.
On October 14, all founding members will gather in Geneva for the first meeting of the Libra Association. There, they will sort out the roles that the participating companies will play and try to answer any governance issues not mentioned in the initial paper. Ultimately, this will lead to the creation of a formal charter, which will contain the signatures of each member to the new agreement.
This process will involve many specific commitments from the companies that make up the Libra Association – so if anyone had any doubts, the best time to avoid further commitments is to not sign the new agreement.
But this also means that the exodus of companies is not as disastrous for the Libra project as it seems. Anyone can sign up when they are willing to do so.
This group of companies had a particular reason to get going. With the exception of eBay, they are all financial companies, which means they have specific regulatory requirements regarding fraud, money laundering, and sanctions. Governments began to realize that the Libra project could make it difficult to monitor these requirements – and so the companies involved were exposed.
As said of the three companies that withdrew, “Facebook appears to want the benefits of conducting financial activities without having the responsibility of control as a financial services company.”
What does this mean in practice? If the Libra currency made transactions too easy for terrorists and money laundering in general, Visa, Mastercard and others may end up being accused.
This is a scary thought for financial companies, which could disrupt their core businesses. But for other companies in the Libra Association, this doesn't seem to be a problem. Lyft and Uber don't face the same pressure from regulators, so there's no particular problem.
The problems with financial institutions point to a central problem with the Libra project. Blockchain-backed currencies work best as a standalone system, but they often run into problems with conventional banking. In the early days of Bitcoin, financial institutions were prosecuted for not complying with regulatory anti-money laundering requirements. Recently, U.S. regulators were able to impose Know Your Customer requirements on all wallet providers.
In its initial paper, the Libra project handed over compliance issues to financial companies, hoping that Visa and Mastercard would be able to handle the complex compliance requirements for dollar trading. After Friday’s mass exodus, the companies’ fear of taking on the responsibility was evident, which is likely to discourage others who were considering supporting the project.
Whoever takes on this role will have a huge task ahead of them. They will have to convince governments around the world to trust Libra at a time when public trust in Facebook is in tatters.
