Recently, Facebook, Inc. (NASDAQ:FB) made headlines with a controversial new announcement: within a year, the social media giant will launch a new digital currency called Libra. On its face, it’s an exciting development. If Facebook’s rollout goes as planned, consumers will be able to transfer money to anyone – and buy anything, anywhere – all without a bank account or credit card. For the 1.7 billion people without banking access, Libra could be the miracle gateway to the global economy.
But buried deep within a Libra.org whitepaper are hints of pitfalls and potentially treacherous consequences. While Facebook and its investors are popping the champagne, consumer advocates and regulators should examine if they should trust Facebook at all—by asking these three critical questions.[REITs]
Facebook Wants Us to Trust Their New Currency. Let’s Ask These 3 Questions Instead.
Last month, Facebook made headlines with a controversial new announcement: within a year, the social media giant will launch a new digital currency called Libra. By design, Libra combines user-friendly electronic payments (think: PayPal) with the security of blockchain currencies, such as Bitcoin. If Facebook’s rollout goes as planned, consumers will be able to transfer money to anyone – and buy anything, anywhere – without a bank account or credit card. All you’ll need is a Libra account and a cell phone.
The Upside: Instant Buying Power
For the estimated 1.7 billion people who currently have no access to banking, Libra offers a gateway to participate in the global economy. Unlike existing cryptocurrencies, Libra will be backed by stable securities, including dollars, pounds, euros, and yen, making it a good medium of exchange. This will allow consumers and merchants to be confident that Libra’s buying power today will be the same next month, and even next year.
The Downside: It’s Facebook
All of this sounds promising and even high-minded. But Facebook’s dubious data collection history has skeptics sounding the alarm.
Buried deep within a Libra.org whitepaper are hints of problems and pitfalls. They revolve around the fact that Libra creates a permanent record of every financial transaction conducted with the currency. This may sound harmless, but imagine if every dollar bill in circulation carried a tiny chip that recorded everywhere it has been since it was printed. Now imagine that all of those tiny chips report up to the cloud where data can be harvested and mined for insights.
It’s no wonder that early Libra investors, and members of the Libra Association that controls the currency alongside Facebook, include the payment giants PayPal, Visa, and Mastercard.
These companies want us to trust Facebook’s new currency. But should we? Let’s ask three questions instead:
Question 1: What prevents Facebook from pairing Libra’s financial data with Facebook’s social media profiles?
Facebook is highly motivated to make Libra a success. Amassing detailed financial transaction data will improve the accuracy of Facebook’s ad targeting and allow the company to remain competitive against insurgents like Amazon. Consider that Amazon owns the marketing funnel from end to end; with advertising data on one end and purchase data on the other, Amazon poses a serious threat to the Facebook-Google duopoly. Amazon can connect the dots between ad dollars spent by marketers and dollars spent by consumers on Amazon.com, where Amazon “owns the cash register.” Using machine learning, Amazon’s algorithms leverage this data to recommend products and adjust ad campaigns in real time to maximize the likelihood that consumers will buy, and buy again.
Facebook doesn’t have that luxury. It has to rely on third-party partnerships to obtain financial transaction data. Then, it attempts to pair that data back to online advertising. During this process, Facebook can’t be as sure whether this ad, or that one, led to a purchase—and this hampers the company’s ability to compete.
To remain competitive in the digital ad market, Facebook needs access to transaction data, and if they can’t own the cash register, their best alternative is to own the cash.
Facebook knows consumers are leery about giving them more data, so it has announced the incorporation of a subsidiary called Calibra, which will act as a user’s digital wallet. In theory, there will be a wall of separation between Facebook’s social media accounts and Calibra’s financial accounts, and this wall will be maintained through privacy agreements with consumers, rather than formal government banking regulations. But even data stripped of personally identifiable information (PII) can be helpful in ad targeting, and every digital application using Libra (including Facebook’s social media and messaging apps) will be able to mine transactions for insights.
Question 2: What prevents Facebook from monopolizing private payments?
If Facebook has its way, we’ll all be using their transnational currency across national borders and in lieu of traditional banking and credit structures. Yet there are even more ways Facebook can consolidate power. Facebook’s partners in the Libra Association create a powerhouse of payment companies that could quickly gain monopolistic control over e-commerce on a host of major websites and apps. In the end, businesses may be left to play by Facebook’s rules or forego accepting Libra, plain and simple.
Facebook has already faced tough congressional inquiries into how it controls the flow of news and information, and its potential to censor speech. Prominent opinion pieces in The New York Times and Forbes this year have called for the breakup and regulation of Facebook. Once the flow of information is controlled by the same company that controls the flow of e-commerce, there is little to prevent their news algorithms from delivering positive stories about financial partners and negative ones about competitors, all to further their monopoly over payments.
Question 3: Do existing laws that regulate monetary policy and ensure consumer protections apply to Libra?
The short answer? Right now, no.
Sovereign governments use fiat currencies, like the dollar, to regulate their economies. Central banks and institutions, like the Federal Reserve, operate to maintain the money supply at levels that ensure financial security and stability while warding off threats like inflation. If Libra succeeds in extending its reach to a substantial portion of Facebook’s 2 billion current customers—or to the 1.7 billion unbanked people worldwide—it isn’t hard to imagine what disruptive power it may hold.
At this scale, the Libra Association would have the power to manipulate the exchange rate of Libra against major national currencies, giving it political power over sovereign countries. It could introduce micro taxes and even tariffs on certain transactions. Outside the ordinary framework of consumer protections, Libra would be free to favor certain transactions while penalizing others. Libra might also offer bad actors a safe haven for laundering money, evading taxes, subverting sanctions, and conducting illicit trafficking, all while operating beyond the reach of democratically elected governments and their authority.
The answers to these three questions are far from obvious and deserve urgent consideration by consumers and regulators alike. The time for a serious conversation about the consequences is now. Facebook has announced its intention to launch Libra in 2020, and so far, their answer to these questions seems to be, “Trust us.”
William Ammerman is Executive Vice President of Digital Media at Engaged Media Inc. and has previously held leadership positions with Tribune Media, Hearst Television, and Capitol Broadcasting. Over his career, he has managed digital advertising for hundreds of television stations and their websites, mobile apps, and connected platforms. He is the author of The Invisible Brand: Marketing in the Age Of Automation, Big Data, and Machine Learning and writes about marketing in the age of AI at MarketingandAI.com. Learn more at wammerman.com.