The words “permissionless” and “regulated” don’t exactly go together. But Facebook’s cryptocurrency project, Libra, is promising to adhere to regulations and be open to everyone, which may turn out to be a tough — if not impossible — task.
That’s assuming there will even be a Libra coin, as originally envisioned.
It’s been a nightmarish week for Libra, with U.S. senators (Democrats and Republicans alike) grilling Facebook’s David Marcus; President Trump saying Libra coin will have “little standing or dependability”; German Finance Minister Olaf Scholz warning against the very idea of private companies launching currencies; and U.S. Treasury Secretary Steve Mnuchin saying Libra raises “significant concerns.”
A draft bill reportedly circulating among the Democratic majority that leads the U.S. House Financial Services Committee aims to completely ban big tech companies (read: Facebook) from issuing digital currency. If such a bill was to become law, it would likely kill Facebook’s Libra project entirely.
Most recently, four consumer advocacy groups — Open Markets Institute, Public Citizen, Demand Progress Education Fund, and Revolving Door Project — have urged members of the Libra Association (which includes Mastercard, Visa, PayPal, Coinbase, eBay, and others) to leave the project. The groups claim Libra’s aims are “unclear” and its leadership structure is “based on fear.”
The attacks have come from all sides and all angles. Some, like Trump, don’t like cryptocurrencies in general. Some, like Congressman Warren Davidson, don’t seem to hate Bitcoin, but are against Libra, specifically, referring to it as a “shitcoin.” Some aren’t happy with the timeframe; Representative Ann Wagner thinks that the proposed 2020 Libra launch date causes concern. And some, like Senator Sherrod Brown and Senator Martina McSally, primarily distrust Facebook, which, let’s not forget, was fined $5 billion by the FTC for privacy violations just a week ago.
David Marcus, Facebook’s head of Calibra — the wallet that will facilitate sending and receiving Libra for Facebook users — was on the stand during the two days of the hearing. His response was to repeatedly yield to calls for regulation.
Libra will be the “broadest, most extensive, and most careful pre-launch oversight by regulators and central banks in FinTech’s history,” he said in his opening remarks. “Facebook will not offer the Libra digital currency until we have fully addressed regulatory concerns and received appropriate approvals.”
As Ars Technica points out, on the second day of the hearing, Marcus specifically said that Libra “will implement safeguards that require service providers in the Libra network to fight money laundering, terrorism financing, and other financial crimes.”
Depending on how you define “service providers,” this notion may not be compatible with the idea of a permissionless or a pseudonymous network, even though Libra is promising to be both. Facebook’s vision for going decentralized was vague from the get-go, with a planned five-year transition from a permissioned to a permissionless model. But should that transition turn from “when” to “if,” Facebook’s got a problem.
Here’s why: If you promise you’ll put in safeguards to keep the bad guys from getting in, as satisfying as that may be to the regulators, you’ve also promised never to go fully permissionless. (Read this overview for some technical barriers Libra needs to overcome to transition from one to the other.)
In the cryptocurrency world, this makes all the difference. With some fairly inexpensive hardware and an internet connection, I can fire up a Bitcoin or an Ethereum node right now and start processing transactions on those networks. I can also open a wallet and transact with the blockchain. There’s no way to ban me from doing so, which is what makes these networks resistant to government and corporate censorship.
Kevin Weil, the VP of Product for Calibra, told me that you’ll be able to transact with Libra with a third-party wallet that’s unrelated to Calibra and is outside of Facebook’s ecosystem. And Libra initially promised to be “open to everyone—any consumer, developer, or business.” This is a notion attractive to many crypto enthusiasts, but it may be irreconcilable with the safeguards Marcus has promised to implement.
I’ve asked Libra for comment, but received only a reassurance that the Libra Association’s goal of switching to a permissionless network remains unchanged.
There’s also the question of who is regulating the various facets of Libra. Facebook’s original idea, per Marcus’ opening remarks, was for the Libra blockchain, association, and coin to be regulated by Swiss laws and regulators, with the Calibra wallet — which is Facebook’s proprietary software — requiring users to go through a KYC (know your customer) verification, typically by asking for a government-issued ID. But if those requirements move to the blockchain/coin itself, that’s a whole different ball game.
While answering questions during the hearing, Marcus appeared to backpedal from the idea of Swiss regulators governing Libra. “The U.S. should lead (in supervisory oversight of Libra), and I want to reaffirm that we chose Switzerland not to evade any responsibilities or oversight,” he said. Later that day, it surfaced that neither Facebook nor Libra have even contacted one of the Swiss regulators supposed to supervise it.
Libra’s governance rules aren’t quite clear at this point, either. Even though Libra is supposed to be governed not only by Facebook, but by all the members of the Libra Association — currently numbering 28 companies and organizations — other entities comprising it have been absent from the public discourse in the past week. I’ve sent an email to several prominent members, including Mastercard, Visa, PayPal, Coinbase, eBay, and Uber, to see whether their stance toward Libra has changed following the congressional hearing and the scrutiny that came with it.
At press time I hadn’t received answers from any of them, but will update this article when I do.
Not all U.S. lawmakers were inherently critical of Libra. Representative Patrick McHenry, for example, sounded bullish on cryptocurrencies and blockchain technology — though he was in the minority throughout the hearing.
Likewise, there are indications that developers are interested in building products and services atop Libra blockchain, as early as it may be in its development.
And some cryptocurrency experts, including trader Alex Krüger, think that Libra is a net positive, both for Facebook and the cryptocurrency space in general.
Generally, though, it’s obvious that Facebook and its partners have their work cut out for them; demands from lawmakers are piling up, and they’re not all compatible with Libra’s whitepaper.
It’s still early for Libra. None of its key parts — the blockchain, the coin, the wallet, or even the association that governs it all — are nearly complete. But the amount of criticism and pressure Facebook has seen this week is unprecedented, even for a company that’s been struggling with privacy-related scandals for years. Ultimately, Libra may survive, but it may have to receive a significant overhaul before it launches.