"The timing is no coincidence," Martha Bennett of Forrester Research said regarding the high profile ... [+]
With the departure of PayPal, eBay, MasterCard and Visa, the future looks less promising for Facebook’s cryptocurrency project Libra. Forrester Research vice president and principal analyst Martha Bennett said the project is not dead but faces a tough road ahead.
“I wouldn’t write off the initiative yet, but the Libra Association’s work has become much, much harder,” Bennett said to me in an October 14 email. “Given that the key concerns from PayPal and the other payments firms were around the lack of meaningful detail around regulatory compliance, a real step change is needed here.”
Since Facebook released the white paper for its cryptocurrency project Libra in June 2019, regulating bodies have covered the project in red tape, slowing its development.
Essentially, Facebook planned for its blockchain-based Libra asset to derive its value from a basket of assets called the Libra Reserve. “[I]t will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks,” Libra’s white paper said.
Overseeing multiple areas, including the Libra Reserve, is the Switzerland-based Libra Association, a group comprised of many top companies across the globe. Over the past two weeks, however, multiple mainstream giants have left the Libra Association, such as PayPal, eBay, MasterCard, Visa and Stripe. The group originally had 28 members when it launched in June, with plans to eventually expand to 100 members total.
“The timing [of the departures] is no coincidence,” Bennett said in an October 11 email, pointing to the Libra Association’s inaugural board meeting slated to take place on October 14. “[I]t was time to decide whether it was worth the risk to participate, and potentially end up in the cross-hairs of regulators,” Bennett said.
Down from 28 participants, Facebook officially unveiled the 21 founding members for its Libra initiative in the October 14 meeting, CNBC reported. Spotify and Uber are among the 21 members.
“As I said a while ago, there was always a reputational risk associated with participation,” Bennett pointed out. The mentioned players, such as eBay, MasterCard and Visa, “clearly are the ones with the most to lose, and hence also the most likely not to proceed at this point,” Bennett said. “Understandably, they want to keep the door open; equally, they’re not prepared to risk being dragged into the regulatory quagmire that Libra is facing.”
Responses Lack Detail
Former PayPal head David Marcus, a key player in the Libra project, has come forward multiple times in response to concerns over Libra, speaking in a July Senate hearing, as well as well as publicizing various other comments.
Bennett, however, noted the need for further information. “The recent statements from David Marcus and spokespeople from the Libra Association have continued to be thin on detail,” she said.
“There’s also the matter of tone,” the Forrester expert added. “[I]t’s not a good look to keep reiterating, for example, that Libra won’t pose systemic risk – if regulators and governments have concluded that it does, a more comprehensive and in-depth response is called for.”
Senators Advise Payment Companies To Drop Out
Two senators, Ohio’s Sherrod Brown and Hawaii’s Brian Schatz, wrote to payment giants MasterCard, Visa and Stripe, citing several risks regarding the project and cautioned them on their engagement with Libra, Bloomberg said in an October 8 article. Shortly after, those companies confirmed their exit from the Libra Association.
These senators’ actions, and the subsequent impact from those actions, have been a highly referenced topic, according to Bennett. “Whether or not those letters were appropriate is a separate discussion,” she said.
“In my view, the companies in question would have pulled out anyway, for the same reason PayPal did: insufficient visibility on how Libra was really going to come to grips with compliance, and the associated risk of reputational damage (as repeatedly mentioned before), and potentially worse (e.g. impact on those organizations’ relationships with regulators).”
Facebook’s Libra has the cards stacked against it in terms of regulation and development so far. The project, however, is a unique concept with notable potential to shake up the current monetary status quo. The asset also has a unique structure in terms of value, different from other digital assets that are pegged to the U.S. dollar. It remains to be seen if the intricate web that is Facebook’s Libra will be successful.
