Facebook's cryptocurrency ambitions face privacy concerns, political backlash

The whole system is scheduled to launch in the first half of 2020.

SAN FRANCISCO/NEW YORK (Reuters) - Facebook Inc announced ambitious plans on Tuesday to launch a new global cryptocurrency called Libra, part of an effort to expand into digital payments that immediately raised privacy concerns.

The social networking giant has linked with 28 partners including Mastercard, PayPal and Uber to form Libra Association, a Geneva-based entity governing the new digital coin, according to marketing materials and interviews with executives. No banks are yet part of the group.

To facilitate transactions, Facebook also created Calibra, a subsidiary that will offer digital wallets to save, send and spend Libras. Calibra will be connected to Facebook messaging platforms Messenger and WhatsApp.

The whole system is scheduled to launch in the first half of 2020.

Facebook executives and others associated with Libra have big aspirations. They hope it will not only power transactions between established consumers and businesses globally, but offer unbanked consumers access to financial services for the first time.

Facebook is also betting Libra can squeeze more revenue out of its suite of apps, something already happening on Chinese social networks like WeChat.

Representative Maxine Waters, chairwoman of the U.S. House Financial Services Committee, called for Facebook executives to testify before Congress and asked the company to halt development of Libra until lawmakers and regulators have reviewed the project.

“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users,” Waters said in a statement.

Other regulators, lawmakers and government officials around the globe also quickly issued critical statements. France’s finance minister said he had asked central bank heads from G7 countries to write a report on the project by mid-July.

A Facebook representative said the company looked forward to answering lawmakers’ questions.

Before Tuesday’s announcement, Facebook was already facing significant backlash over mishandling user data and not doing enough to prevent Russian interference in the 2016 U.S. presidential election. Those issues have led some government officials to call for Facebook to incur penalties, or be forcibly broken up.

Kevin Weil, who runs product for the Libra initiative, said Facebook hopes it can bring global regulators to the table by publicizing its plan.

“It gives us a basis to go and have productive conversations with regulators around the world,” he told Reuters. “We’re eager to do that.”

The name “Libra” comes from Roman weight measurements, the astrological sign for justice and the French word for freedom, said David Marcus, who heads the project for Facebook.

“Freedom, justice and money, which is exactly what we’re trying to do here,” Marcus said in an interview.

Facebook shares closed up 0.1%.

UNREGULATED SECTOR

Facebook is using one of the least-regulated areas of finance for its foray into the sector.

Bitcoin, the best-known digital coin, was created in 2008 as an alternative to traditional currencies that are controlled by governments and central banks. Some countries have explored ways to regulate the market since then, but crypto trading remains largely unsupervised.

In the meantime, investors have lost hundreds of millions of dollars through steep price drops and crypto-exchange hacks. The market has also faced money-laundering and terrorist-financing allegations.

But Facebook’s status as a Silicon Valley behemoth touching billions of people around the world could help legitimize what has so far been a niche and volatile market.

Other Libra Association members include companies like Visa, Spotify, eBay and Vodafone, as well as venture capital firms like Andreessen Horowitz.

They hope to have 100 members by Libra’s launch. Each gets one vote on substantial decisions and firms must invest at least $10 million to join.

The group aims to raise money through a private placement in coming months. Facebook does not plan to maintain a leadership role after 2019.

Though there are no major banks among the inaugural members, there have been discussions with them, said Jorn Lambert, executive vice president for digital solutions at Mastercard.

Big lenders are waiting to see how regulators and consumers respond to the project before deciding whether to join, he said.

Some Libra backers acknowledged that consumer privacy brawls or regulatory resistance could hinder their lofty goals, and detailed some steps they are taking to pre-empt those issues.

For instance, Calibra plans to conduct compliance checks on customers who want to sign up, using verification and anti-fraud processes that are common among banks.

The subsidiary will only share customer data with Facebook or external parties if it has consent, or in “limited cases” where it is necessary, Facebook said. That could include for law enforcement, public safety or general system functionality.

Sri Shivananda, PayPal’s chief technology officer, said the project was still in its “very, very early days” in terms of getting necessary regulatory approvals and consumer buy-in.

And, Mastercard’s Lambert said that if the project receives too much pushback, “we might not launch.”

WHAT’S A CRYPTOCURRENCY ANYWAY?

It’s a form of digital cash that uses encryption technology to make it secure. Cryptocurrencies exist not as physical bills or coins but rather as lines of digitally signed computer code. Records are typically kept on ledgers known as blockchain. People can store their cryptocurrency stashes in virtual wallets that resemble online bank accounts. Facebook is developing a wallet app for Libra. As with other cryptocurrencies, people will be able to buy and sell libras on exchanges for traditional currencies. It’s not clear what fees, if any, consumers will have to pay for such transfers, although Facebook says they should be low.

WHY NOT USE BITCOIN?

Although Bitcoin has gotten a lot of attention, it isn’t widely used. For one thing, its value fluctuates wildly, meaning that $100 in bitcoins today might be worth $300 a month from now — or $2.50. Only a handful of merchants accept bitcoins as payments.

Facebook is hoping to keep the libra’s value stable by tying it closely to established currencies. Unlike most other cryptocurrencies, the Libra will be backed by real-world bank deposits and government securities in a number of leading currencies.

Facebook is also recruiting partners ahead of time. Lyft, Uber and Spotify already have joined the Libra group. They will likely accept libras when the system launches. They’ll also help fund, build and govern the system. That’ll make Libra less of a free-for-all than Bitcoin. Facebook says Libra will embrace regulation, but it isn’t providing many details on how.

With most cryptocurrencies, including Bitcoin, anyone can lend computing power to verify transactions and to prevent anyone spending the same digital coin twice. With Libra, the verifications will initially be managed by its founding companies, such as Facebook and PayPal. Facebook believes the closed approach will mean better security.

ARE CRYPTOCURRENCIES ANONYMOUS?

Although it’s possible to trace bitcoins and some other cryptocurrencies as they are spent, owners of accounts behind the transactions aren’t necessarily known. That makes such currencies a favorite among certain cybercriminals. But it is sometimes possible to tie cryptocurrency transactions to a real person who has cashed out digital coinage into a traditional currency.

And if someone spends libras while logged onto Facebook, it’s theoretically possible Facebook could tie it back to a real person. Facebook says it won’t be able to see this data when someone uses a third-party wallet, although it hasn’t yet explained why that is.

Facebook says it won’t use Libra data to target ads, but may share data “to keep people safe, comply with the law, and provide basic functionality.” Facebook is creating a subsidiary, Calibra, to try to keep the operations separate.

GETTING STARTED

Libra is scheduled to launch publicly in the first half of next year. Whether consumers will embrace it is another matter.

Discounts potentially offered by Uber and other partners might be enough to get people to at least try the system. But many people find it easy enough to pay for goods and services online with credit and debit cards.

There could be greater appeal among people who don’t have bank accounts. Libra could open up e-commerce to them.

Though Libra could be a way for Facebook to drive spending when people interact with Facebook ads, the company says the currency will be independent and won’t require a Facebook account to use.

The name “Libra” was inspired by Roman weight measurements, the astrological sign for justice and the French word for freedom, said David Marcus, a former PayPal executive who heads the project for Facebook.

“Freedom, justice and money, which is exactly what we’re trying to do here,” he said.

Facebook also appears to be betting it can squeeze revenue out of its messaging services through transactions and payments, something that is already happening on Chinese social apps like WeChat.

The Libra announcement comes as Facebook is grappling with public backlash due to a series of scandals, and may face opposition from privacy advocates, consumer groups, regulators and lawmakers.

Some Facebook adversaries have called for the company to incur penalties, or be forcibly broken up, for mishandling user data, allowing troubling material to appear on its site and not preventing Russian interference in the 2016 presidential election through a social media disinformation campaign.

It is not clear how lawmakers or regulators will react to Facebook making a push into financial services through the largely unregulated world of cryptocurrency.

In recent years, cryptocurrency investors have lost hundreds of millions of dollars through hacks, and the market has been plagued by accusations of money-laundering, illegal drug sales and terrorist financing.

Facebook has engaged with regulators in the United States and abroad about the planned cryptocurrency, company executives said. They would not specify which regulators or whether the company has applied for financial licenses anywhere.

Facebook hopes it can bring global regulators to the table by publicizing Libra, said Kevin Weil, who runs product for the initiative.

“It gives us a basis to go and have productive conversations with regulators around the world,” said Weil. “We’re eager to do that.”

MAJOR PARTNERS

Bitcoin, the most well-known cryptocurrency, was created in 2008 as a way for pseudonymous users to transfer value online through encrypted digital ledgers. Early developers believed that the world needed an alternative to traditional currencies, which are controlled by governments and by central banks.

Since then, thousands of bitcoin alternatives have launched, and Facebook is just one of dozens of blue-chip companies dabbling with the underlying technology. But its status as a Silicon Valley behemoth that touches billions of people around the world has created significant buzz around Libra’s potential.

Partners in the project include household names like Mastercard Inc, Visa Inc, Spotify Technology SA, PayPal Holdings Inc, eBay Inc, Uber Technologies Inc and Vodafone Group Plc, as well as venture capital firms like Andreessen Horowitz.

They hope to have 100 members by Libra’s launch during the first half of 2020. Each member gets one vote on substantial decisions regarding the cryptocurrency network and firms must invest at least $10 million to join. Facebook does not plan to maintain a leadership role after 2019.

Though there are no banks among the inaugural members, there have been discussions with a number of lenders about joining, said Jorn Lambert, executive vice president for digital solutions at Mastercard. They are waiting to see how regulators and consumers respond to the project before deciding whether to join, he said.

The Libra Association plans to raise money through a private placement in the coming months, according to a statement from the association.

PRIVACY, REGULATORY CONCERNS

Although Libra-backers who spoke to Reuters or provided materials are hopeful about its prospects, some expressed awareness that consumer privacy concerns or regulatory barriers may prevent the project from succeeding.

Calibra will conduct compliance checks on customers who want to use Libra, using verification and anti-fraud processes that are common among banks, Facebook said.

The subsidiary will only share customer data with Facebook or external parties if it has consent, or in “limited cases” where it is necessary, Facebook said. That could include for law enforcement, public safety or general system functionality.

Transactions will cost individuals less than merchants, Facebook said, though executives declined to provide specifics.

Each Libra will be backed by a basket of government-backed assets.

The company plans to refund customers who lose money because of fraud, Facebook said.

Libra will be accessible through Facebook Messenger, WhatsApp, and a standalone app

Facebook has said a Libra digital wallet, in which people can store the cryptocurrency, will be accessible through Messenger, WhatsApp, and an app called Calibra – which Facebook says will be downloadable through the Apple App Store and the Google Play store.

The above picture from a Facebook press release gives us some idea of what this will look like, although the company says there’s a way to go before it becomes a fully functioning consumer service.

You’ll need a government-issued ID to set it up

Once Libra launches in 2020, people will need to provide a government-issued ID to set up an account.

TechCrunch’s Josh Constine writes that users will need to provide additional verification details, but if Facebook wants to keep Libra accessible to the 1.7 billion people in the world with no bank account, it will want to keep the amount of documentation required to set up an account to a minimum.

Calibra is already signing people up for "early access".

How will users put money in their Calibra wallets?

Users will be able to convert their local currency into Libra and then store that balance of Libra in their Calibra wallet. They will be able to do this electronically, converting currency into Libra either using the Calibra app itself or third-party wallet apps.

In terms of converting real-world cash, they will also be able to head brick-and-mortar shops like grocers or convenience stores to top up their balance, much like people can now with top-up phone pay-as-you-go phone plans.

The idea is that a Libra will be roughly the same value as a dollar, euro, or pound so it will be easy for people to get their heads around. A valuation is still yet to be determined, however.

What will you be able to pay for with Libra?

So far, Facebook has shown off Libra for money transfer. Above is an example from the Calibra website.

However, Libra won’t just be for individual money transfers. The Calibra website says the first version of the app will "support peer-to-peer payments and a few other ways to pay such as QR codes which small merchants can use to accept payments in Libra."

"Over time there will be many others including in-store payments, integrations into point-of-sale systems, and more." Point-of-sale systems typically just means a till, or a card reader.

Facebook’s VP of blockchain product Kevin Weil also told Business Insider’s Rob Price that down the road, Libra could be integrated into the systems of Calibra’s partners – such as Uber.

It won’t be fully controlled by Facebook

Mark Zuckerberg wrote in a blog post following the announcement of Libra that he hopes to get 100 members onboard before the currency launches, and it is theoretically open to rivals like Google and Twitter.

Being a member of the association entitles you to one vote, which could be used to select new founding members and elect a Libra Association managing director who will appoint an executive team.

Calibra won’t share any info with Facebook — unless you really want it to

"Any information you share with Calibra will be kept separate from information you share on Facebook," Zuckerberg wrote in his blog post.

Libra’s default setting will be to not share any information with Facebook, and the company is insistent that financial data won’t be used to target ads at users. The Calibra website also says that users won’t need a Facebook or WhatsApp account to sign up to Calibra.

However, TechCrunch’s Constine said that Calibra may ask if users wish to import contacts or profile information from Facebook.

So what’s in it for Facebook?

In simple terms, more ad revenue. Facebook’s hope is that businesses on its platform will adopt Libra, selling goods to customers using the currency.

If this helps grow sales, the thinking is that it will encourage these companies to place more ads on Facebook. Developers will be able to build stuff using Libra blockchain tech

Facebook is open-sourcing the new coding language it used to build Libra, called Move. This means developers will be able to create new apps using Libra.

In its blog post announcing Calibra, Facebook was careful to hedge its bets with a disclaimer:

"This announcement contains forward-looking statements regarding our future product and business plans and expectations. These forward-looking statements may differ materially from actual results due to a variety of factors and uncertainties, many of which are beyond our control."

Basically Libra is an unfinished product, so anything could change before it materialises in 2020.

With input from Business Insider.