A month after announcing its new global digital currency “Libra,” Facebook is finding itself under increased scrutiny with U.S. regulators. Lawmakers and senior government officials are raising concerns about how Libra would comply with money laundering, terrorism financing, and trade sanctions laws. While Facebook says it will comply with the laws, the company has offered no concrete ideas on how a semi-anonymous digital cryptocurrency could fit within a legal landscape designed around traditional financial institutions. Given the size of Facebook’s userbase, the financial industry is watching to see whether Libra turns cryptocurrencies into a widely-used banking option.
What is Libra?
Libra is a digital currency built on blockchain technology, backed by a sovereign currency reserve, and governed by an independent membership organization comprised of businesses, non-profits, and academic institutions.1 The blockchain currency would, according to Facebook, give anyone with an internet connection access to a secure and stable global banking system. Open access would in turn bring billions of unbanked people into the global financial system and lower the costs of cross-border remittances and other financial services traditionally provided by banks.
Governments have traditionally been skeptical of cryptocurrencies because of their ability to allow people to evade anti-money laundering (“AML”) laws and other regulations with which banks and financial institutions comply. Generally, AML laws are designed to prevent legitimate financial systems from being used to make illegally-gained proceeds appear legal.2 Although cryptocurrencies like Bitcoin are not truly anonymous—anyone can access and look at the blockchain to trace payments to a specific account3—determining the real-world identity linked to an account or whether a payment is connected to illicit activity is where the difficulty of regulation lies. Facebook’s own white paper notes that the “Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity.”4
Libra is hardly the first cryptocurrency to exist, so what makes it different? First, Facebook intends for Libra to be regulated. Libra will be traded on an exchange promising some degree of AML and know-your-customer compliance, though exactly how, seems unknown. Second, Libra will be backed by a reserve of real-world currencies. According to Facebook, this will give Libra intrinsic value and therefore stability. If Facebook is right about Libra, gone will be the days of Bitcoin roller-coaster speculation. A third difference, and the difference triggering concern from governments around the world, is the fact that Facebook’s existing userbase—currently 2.38 billion monthly active users worldwide, or 30% of the world’s population—gives Libra an enormous potential userbase.5 If successful, Libra could be orders of magnitude larger than existing cryptocurrencies, with a correspondingly larger risk of illicit activity, privacy violations, and even destabilization of monetary policy.
Regulators Push Back
Despite these promises from Facebook, lawmakers and senior U.S. officials have become increasingly critical of the platform in recent weeks. Federal Reserve Chairman Jerome Powell testified that Libra “raises a lot of serious concerns” about “privacy, money laundering, consumer protection, financial stability.”6 Powell also noted that any problems associated with money laundering or terrorist financing would “arise to systemically important levels just because of the mere size of the Facebook network,” thus subjecting Libra to stricter financial regulation. Treasury Secretary Steve Mnuchin expressed “very serious concerns” about cryptocurrencies in general, stating that “cryptocurrencies such as bitcoin have been exploited to support billions of dollars of illicit activity.”7 Mnuchin went on to say that he is “not comfortable today” with Libra and that Facebook has “a lot of work to do.”8
Just last week, David Marcus, Head of Calibra at Facebook, testified before House and Senate committees. Lawmakers at both hearings expressed deep skepticism of both Libra and Facebook, and highlighted their concerns about Libra’s potential to enable illicit activity. Mr. Marcus stated in prepared remarks that the Libra Association is fully committed to help develop technology to help companies comply with AML laws, and will devote considerable expertise to the task.9 Mr. Marcus offered little in the way of concrete ideas, however, touting Libra’s benefits over cash (arguably the least traceable method of transacting business) from a law enforcement perspective.10
Libra appears to be the most serious threat yet to the international banking system’s status quo. If successful, the digital currency could bring banking services to more people at lower prices. Facebook has recruited dozens of early backers—many of whom are blue-chip household name companies like Visa, Mastercard, eBay, and Uber—further legitimizing the currency. A serious currency, however, invites serious pushback. U.S. lawmakers and top government officials have made clear their skepticism of Libra (in no small part due to their skepticism of Facebook) and intend to strictly regulate the currency under existing AML laws.
For its part, Facebook has yet to offer anything but a desire to work with regulators to implement financial safeguards on Libra. Though we can expect a rapid evolution in technologies designed to bring blockchain to AML compliance, it remains to be seen how blockchain currency can conform to rules written for a fundamentally different banking system. If successful, the wild west days of blockchain could become a thing of the past, but so too could the banking industry as we know it.