By Richard Chesley and Oksana Koltko Rosaluk
“We have done a lot to democratize free, unlimited communications for billions of people. We want to help do the same for digital currency and financial services . . . . ” –David Marcus, Head of Calibra, Facebook
In June 2019, Facebook announced its new digital currency project (Libra Project) – the creation of a private currency based on blockchain technology, called Libra, and a digital wallet for the Libra currency, called Calibra, that would be easily accessible across the globe by anyone with a cell phone or the internet. A lower-cost, more accessible and more connected global financial system is the stated goal behind the Libra Project that seems to be aligned with Facebook’s stated core value of economic empowerment and in furtherance of Facebook’s reported accomplishment of connecting 90 million businesses to their customers through its platform.
The potential impact of combining the Libra currency with the social giant’s platform (utilized by 1.56 billion users with year-over-year increase) may be astounding. It is anticipated that the positive impact may be most felt in undeveloped countries, where poor population does not have a bank account or an identification required to cash a check or where no bank is operating. According to the World Bank Group’s The Global Findex Database 2017, 1.7 billion adults remain “unbanked” (without an account at a financial institution or through a mobile money provider). In 2017, it was estimated that about 1.1 billion (or two-thirds) of such unbanked adults owned a cell phone or had access to internet and, thus, would be able to save, send and spend Libra as part of every-day transactions. Thus, if done right, the Libra could expand financial inclusion in undeveloped countries by granting access to the financial system to the underbanked individuals. At a minimum, the Libra usage may depress traditional banking fees, ensuring cheaper and faster traditional banking.
According to Facebook, 27 other companies have partnered with Facebook in the Libra Project, including companies in the payments (PayPal, Visa, MasterCard, Mercado Pago, PayU), technology (Booking Holdings, Ebay, Farfetch, Lyft, Spotify, Uber), telecommunications (Iliad, Vodafone), blockchain (Anchorage, Bison Trails, Coinbase, Xapo) and venture capital (Andreessen Horowitz, Breakthrough Initiates, Ribbit Capital, Thrive Capital, Union Square Ventures) industries as well as non-for-profit, humanitarian organizations (such as Mercy Corps, Kiva, Women’s World Banking, Creative Destruction Lab). The regulators and lawmakers across many jurisdictions, however, have mobilized to stress-test the newly proposed crypto-asset that is geared to have a never-before-seen global reach and effect.
David Marcus – former PayPal’s President, who moved to Facebook about 5 years ago to run Facebook’s Messenger and has now transitioned to lead the company’s blockchain efforts – himself predicted that the Libra launch would “be the broadest, most extensive, and most careful pre-launch oversight by regulators and central banks in FinTech’s history.” Although the Libra launch is set for 2020, not many are confident this timeline will be achieved, given the myriad of unanswered legal questions and Facebook’s commitment not to offer Libra until regulatory concerns are fully addressed and appropriate approvals are received. One thing is certain, however, unless some forces wipe out the industry all-together, whether or not in the context of Libra, the cryptocurrency and blockchain industry needs to be fully addressed by the regulators and lawmakers as the digital future seems inevitable and, in fact, is becoming the digital present
In the US, since the launch of the first cryptocurrency (Bitcoin) in 2009, blockchain-based assets have formed their own ecosystem, with its own, fully developed vernacular. Digital securities are being traded on SEC-approved alternative trading system (or ATS). Many US states and the federal government develop legal environment for transacting in digital assets, with the goal of either establishing state havens for businesses and investors that focus on digital assets or regulating the industry for public protection. It is common occurrence for the federal and state regulatory agencies approve crypto-transfer and placement agents and authorize new virtual currencies. Crypto-lending and borrowing companies (like Cred, for example) are emerging. The Uniform Regulation of Virtual-Currency Business Act, created in 2017 and supplemented in 2018 by the Uniform Law Commission, is receiving state legislative attention. The world’s largest trade association representing the blockchain industry – The Chamber of Digital Commerce – was created with the mission of promoting the acceptance and use of digital assets and blockchain technology and developing a pro-growth legal environment that fosters innovation, jobs and investment through education, advocacy and collaboration among policymakers, regulatory agencies and industry. The Blockchain Association similarly was formed to advance trust, transparency, safety and innovation through distributed technologies and services. Blockchain-based technologies are being extended to uses outside of cryptocurrency. Initial coin offerings (ICOs) raised a total of almost $11.4 billion last year, with 3,782 ICOs opened (although of those between 46% and 59% failed), according to Fundera.
In Spring 2019, Facebook reported that it was recruiting financial institutions and online merchants to help launch a cryptocurrency-based payment system utilizing Facebook’s social network, prompting an inquiry from the US Senate into, among other things, the contemplated payment system functionality and Facebook’s access to and use of consumer information. On July 16, 2019, shortly after Facebook issued a white paper providing a level of detail about the Libra Project, the United States Senate Banking, Housing and Urban Affairs Committee (US Banking Committee) held a hearing on “Examining Facebook’s Proposed Digital Currency and Data Privacy Considerations.” On July 17, 2019, Marcus also appeared before the House Financial Services Committee, testifying on regulatory policy issues surrounding the project. Marcus provided assurances about Facebook’s commitment to privacy and willingness to work with regulators as it develops its global currency. According to Marcus, Libra is about making real progress toward a more inclusive financial infrastructure by developing a safe, secure, and low-cost way for people to move money efficiently around the world. Marcus characterized Libra as “bringing together attributes of the world’s best currencies: stability, low inflation, wide usability, and fungibility.”
Regardless of the high quality attributes it may possess, cryptocurrency is built on a new, unfamiliar and not easily understood technology, falling outside of existing law and regulations, pushing the boundaries of accepted norms and challenging the very pillars of the world economies. In its Considerations and Guidelines for Consumer Protection Report, the Token Alliance (an industry-led initiative of the Chamber of Digital Commerce) rightfully remarked that “[w]e are in a moment when technological advancement is pushing the boundaries of decades-long established law – law that was made at a time when tokenized assets and instantaneous digital transfers of value were not contemplated.
As a result, and as reflected in Deloitte Consulting LLP’s 2018 Global Blockchain Survey, nearly 39% of the broad global sample (44% in the US) said that they viewed the blockchain as “overhyped.” Thus, it is of no surprise that a large cross-section of the global community remains critical of Libra, particularly given Facebook’s recent privacy law violations and outstanding fines, among other things.
Many remain skeptical of Facebook’s altruistically colored goals behind the Libra project, given that Libra’s success will likely exponentially increase commerce across the Facebook platform, arguably ultimately benefitting Facebook. Marcus seemed intentional during his testimony before the US Banking Committee in stating that Facebook will relinquish control over the network and currency they help create.
Regardless of the bottom-line, profit-driven mindset, given the reach and influence of Facebook on the global society, economy and security, the Libra Project puts significant pressure on the regulators. On one hand, regulators feel the urge to embrace the crypto-innovations to promote the image of the global leader in innovation. On the other hand, the regulators must ensure that such crypto-innovations do not compromise the rights and security of their constituents. Thus, the thrive for cutting edge innovation is counter-balanced with the need to effectively and fully protect the public. The success lies in a regulatory response that must be speedy, communicative with the industry and as innovative as the underlying innovation; this trifecta, in large part, depends on the availability and dedication of cutting-edge regulatory taskforces, who will defy stereotypes and, instead of fitting crypto-innovation into century-old laws, will create a new body of law and potentially a new regulator. This may be problematic in undeveloped countries with inadequate regulatory response, deficient rule of law or governmental or economic instability, or currency stability – the very countries the Libra Project is intended to financially liberate.
The tech companies and the lawmakers, however, seem to be counter-positioned: on one side, the tech companies – navigating through regulatory minefields; on the other side, lawmakers – tasked with swiftly tailoring consumer protections, addressing security concerns and preventing illicit activities in connection with unfamiliar and difficult to understand blockchain technology. This polarity, in part, may be attributed to cryptophobia, a fear of cryptography that ultimately undermines the history, tradition as well as laws and regulations of the well-entrenched fiat currency. The key is to depolarize the mindsets through an open dialogue between the tech sector and legal-regulatory sector in order to clarify the technology’s functionality and potential benefits and explore the ways to create a well-tailored legal and regulatory framework. As the Blockchain Association eloquently put, the key is to “share knowledge, identify opportunities, and co-create a digital future that’s more transparent, more inspiring and more secure.”
There is no doubt that a multitude of open issues must be considered and adequate protections must be developed across the globe to avert dangers to our society – such as, money laundering, terrorism funding, sanction-related reporting, privacy violations, economic destabilization and ethics violations, to name a few. The aforementioned threats, however, exist and must be continuously addressed even in a traditional banking or other systems. The objective should be to study the issues and develop effective solutions in order to chart the path forward by utilizing working groups or taskforce on blockchain-based currency.
Certain countries are ahead of the curve on the legal framework for cryptocurrency while others commit to block cryptocurrency, including Libra, on their soil as it would threaten their monetary sovereignty. Although the US leads in the number of ICOs (749) and ICO funds raised ($7.5 billion) and Israel leads on a per capita basis (with startups fund raise of $600 million through ICOs in 2018, according to CoinDesk), the US and Israel take the middle-ground, being accepting, yet far from embracing.
Israel is known as a tech startup nation, having the highest density of startups per capita: over 7,000 startups for a population of only about 8.6 million, generating $4.5 billion of funding in 2016, for example, 20% of which was attributable to fintech startups, according to FICCI. Cryptocurrency entered Israel in 2012, gaining popularity by year 2014 with sprouting ATMs with the bitcoin exchange service, bitcoin-café and crypto-exchanges, according to Benefit. Today, as CoinDesk reports, Israelis, representing less than 0.1% of global population, are making 3% to 5% of global ICO fundraising. According to data compiled by the Israel Blockchain Association, approximately 200 blockchain-related companies are operational.
Many international crypto-companies have teams and research groups working in Israel’s high-tech hub, Tel Aviv. The Libra Project has a strong presence in Tel Aviv, with Facebook’s team working on the digital wallet launch. Facebook first opened its office in Israel 2013 and has been acquiring various Israel-based startups, including those with artificial-intelligence capabilities to be specifically used by the Libra Project.
In Israel, cryptocurrency is not considered a currency or working capital or security but a financial asset, subject to capital gains tax. Transactions paid in cryptocurrency are deemed a barter, not a payment. The Israel Securities Authorities recommend ways to support cryptocurrency, but Israel is lacking a defined regulatory framework (though many sources project Israel will be one of the first to introduce a precise crypto regulatory framework). According to CoinDesk, Yaniv Feldman, CEO of One Alpha, remarked that Israel is not interested in being overly crypto-friendly, but it is looking to US regulators as guidance.
The crypto-industry is one of expansion, stimulating demand for regulatory and legislative framework. As technological innovations generally streamline and promote competition in various markets, blockchain-based technology is positioning itself to serve such role better than many other technologies. Even if the Libra Project does not get off the ground this or next year, its front-line presence is steadily changing the perception of the “norm,” rendering cryptocurrency mainstream and indirectly affecting the future regulatory and legislative actions.