3 tough challenges Facebook must solve for its Libra cryptocurrency

17 Jul 2019

Image: © Iana Alter/Stock.adobe.com

Forrester experts highlight three key questions that must be asked ahead of the launch of Facebook’s Libra cryptocurrency.

On 18 June, Facebook officially launched its Libra cryptocurrency project, which aims to leverage blockchain technologies to create a new stable cryptocurrency backed by a basket of fiat currencies.

Facebook says its aim is to enable accessible and affordable digital payments for billions of people, including unbanked and underbanked people across the world. It aims to make sending payments as easy as sending a message across its digital platforms for its 2.7bn global users.

The Libra vision is a bold and ambitious one, yet Facebook’s decision to introduce Libra as a cryptocurrency rather than just a new payment system sets up a series of massively complex challenges.

Below are three of the most important issues Facebook will have to address before Libra becomes a reality.

1. How to bring governments and regulators on board

A cryptocurrency being used by 2.7bn people across the globe would be a threat to national sovereignty and disrupt their ability to coin money. Some countries have outright banned bitcoin and other cryptocurrencies due to similar threats. The US, France and Russia have now all expressed concerns regarding the threat that Libra would represent.

In addition, the fiat-currency-backed nature of Libra means that it will have to collaborate with regulators either directly or indirectly (through regulated and licensed financial institutions). Thus, support from regulators is paramount. Lack of regulatory support could significantly reduce the capabilities of Libra or make it illegal.

2. How to rebuild consumer trust around data privacy

Though cryptocurrency itself is characterised by anonymity, the digital platforms that consumers use to make payments will be based on WhatsApp, Instagram and Facebook. The Cambridge Analytica scandal exposed egregious missteps by Facebook, and users haven’t yet forgotten that breach of trust.

Libra’s documentation indicates that Facebook has strengthened its data privacy protection mechanisms, but this will unlikely be enough to assuage deep concerns regarding its ability to govern such a system and currency.

Meanwhile, too much privacy will increase regulatory concerns about money laundering and tax avoidance.

3. Is Facebook a powermonger or social enterprise?

Not surprisingly, Libra’s consensus algorithm uses Byzantine fault tolerance (BFT), which trades decentralisation for scale and efficiency. Only Facebook-invited members can have the right to govern the chain.

In order to be decentralised, Libra plans to be a permissionless chain in the long term, where anyone can be a validator on the chain if they hold Libra coins, but the voting power is determined by the economic contribution to the chain and tokens. This means that larger or richer companies will potentially have more rights on the network.

Either way, the power-wielder in this chain is likely to be Facebook and the large company members of the Libra association.

Libra’s financial inclusion vision is a compelling one. But let’s be clear about the real intent: with this initiative, Facebook is essentially looking to go beyond social behaviour data and get its hands on consumer financial data.

Why launch a cryptocurrency at all?

Just weeks ago, the media was awash with calls to break up Facebook and reduce its influence. Considering this background, the launch of the Libra project seems brazen.

What is even more strange is Facebook’s decision to launch a cryptocurrency as part of this project. Launching a traditional payment system to better compete with the likes of Alipay and WeChat Pay would not have attracted such ire from governments and would have probably had a better chance of success.

By Meng Liu, Benjamin Ensor and Frederic Giron

Meng Liu is an analyst at Forrester, focused on emerging fintech such as blockchain and digital banking transformation. Benjamin Ensor and Frederic Giron are both vice-presidents and research directors with the company. Ensor specialises in understanding the effect of digital technologies on business models in retail financial services, while Giron leads Forrester’s China and south-east Asia research teams.

A version of this article originally appeared on the Forrester blog.