BY ANTONY MUTUNGA
Since the birth of decentralized cryptocurrencies through Bitcoin, the number of digital currencies has been rising. However, with time, their popularity has dipped due to their volatile nature. As a result, a new class of cryptocurrencies was born, Stablecoins, which have price stability characteristics.
Unlike bitcoin and most other cryptocurrencies, this new class is designed for applications that deal with a low threshold of volatility.
This has seen several organizations look to invest in the new class. One such example is Facebook, which in June announced its Stablecoin, Libra, as well as made available its whitepaper.
According to the social media giant, their crypto coin could help improve access to financial services around the world by serving the unbanked and reducing the transaction fees one has to part with currently. Unlike other cryptocurrencies, Libra will be backed by a reserve basket of fiat currency deposits, including the dollar, euro, and Japanese Yen, as well as government securities.
With an expectation of launching next year, Facebook, in conjunction with the Libra Association, a consortium of companies and nonprofits that will oversee and govern the Libra network, have been trying to get the approval of regulators. However, this has proved to be difficult as regulators are of the notion that the crypto coin will disrupt the global financial system. They argue that Libra will compete with government currencies due to the influence of the organizations that make up the Libra Association. For instance, Facebook, by itself, has more than 2.41 billion monthly active users.
Apart from threatening the global financial system, Libra, like other digital currencies is also at risk of being misused in terms of money laundering and financing terrorists. As the misuse of digital currencies continues to rise, regulators are of the stance that the social media giant should hold off until they have ways to stop this or they shouldn’t launch it at all.
Privacy risks are another major concern as the Libra Association fails to clarify how they will protect and secure their customers’ information.
There is also minimal information on how their system plans on using its customers’ data. Facebook and the association need to ensure that the personal data they use is as minimal as possible. The regulators also insit that the social media network needs to ensure that users can access their data using the simplest procedures. In doing so, the users will have the right to delete or change their information as easily as possible.
This is a huge one for Facebook as in the past is has failed to meet the expectations of its users in terms of privacy. In 2018, for example, it was discovered that Cambridge Analytica, a political data firm, had gained access to information of millions of Facebook users. The firm collected the users’ profiles, likes, friend’s information as well as their locations. With the information, the firm was able to identify the users’ traits from which they build software to predict and influence the voters’ behavior. This was one of the biggest data breaches the social network has ever experienced and it showed its flaws when it comes to protecting its’ user’s information.
However, Facebook has created Calibra, a subsidiary that will be in charge of the digital wallet that will handle transactions of Libra. With the subsidiary handling the currency, Facebook will have no access to the information it will be getting from the users. The Libra Association, where Facebook has a single vote, will be in control of the currency and not the social network giant. This was a move to attract a majority of the people who have second thoughts on trusting Facebook with their data following the Cambridge Analytica scandal.
As a result of the regulatory and privacy concerns, Facebook’s Libra is facing another challenge. Some of the major companies that made up the Libra Association, which includes companies willing to part with $10 million towards Libra, have abandoned it. PayPal was the first to withdraw as it decided to rather focus on advancing its agendas. In losing PayPal, the Libra Association has lost a mainstream trusted partner in online payments. Days after the online payment systems company left, Visa, Mercado Pago, Stripe and Mastercard followed suit.
With these companies bailing the association, regulators will be more unwilling to approve it as the more company’s bail, the more questions on its security arise. eBay and Booking Holdings were next to bail Libra thus losing the millions of users they would have attracted by offering payment through the currency in these sites.
Libra is yet to launch and it is already losing major partners even though it still holds the likes of Uber, Coinbase, and PayU. These are not good signs especially in the eyes of regulators.
Facebook already has a lot of data on its users, the fact that Libra will add to this data especially in terms of financial information is scary. Even though the social network promises to have no control, after its Cambridge Analytica scandal it is difficult to believe it. With no signs of US regulators approving as Facebook would like, Libra will be lucky to launch by 2020.
Writer is an inhouse contributor and lead business researcher