Facebook executives faced their first US Senate Banking, Housing and Urban Affairs Congressional Hearing this morning. The Libra White Paper caught the attention of national banking institutions worldwide and not for good reasons. But even without pressure from the US Senate, the Libra coin has substantial obstacles before it.
The Libra White Paper throws down the banking gauntlet: make Libra the coin of use for the over 1.7 billion adults worldwide who do not have a way to access traditional banking services. The coin is built on the “Libra Blockchain”, backed by an asset reserve, and controlled by the Libra Association. The asset reserve is a combination of bank deposits and short-term assets, including US Treasury Notes.
Facebooks first problem is that Libra isn’t a true crypto coin. The hallmark of a cryptocurrency is decentralization. No one person or group has control over it, transactions are freely conducted on a peer-to-peer basis and the network nodes verify the transactions. Each transaction is recorded on the blockchain which acts as a public ledger.
However, as the Libra White Paper discloses, the Libra Association retains full control over Libra coins. Per Section 05, Paragraph 4: “The association is the only party able to create (mint) and destroy (burn) Libra. Coins are only minted when authorized resellers have purchased those coins from the association with fiat assets to fully back the new coins. Coins are only burned when the authorized resellers sell Libra coin to the association in exchange for the underlying assets.” In addition, only a select group of resellers may buy/sell Libra using fiat currency in the host country for consumer use.
So, who are the Libra Association members? The White Paper states they consist of “a group of diverse organizations from around the world.” The Libra Association is an independent non-profit group headquartered in Geneva, Switzerland. Total power over Libra is concentrated in the hands of these select few. The Libra Association wants to conduct traditional banking operations using Libra in place of fiat money. To achieve this end, Libra authorizes resellers to accept fiat currency from customers buying Libra and pay out fiat currency when customers sell Libra.
Here comes Facebooks BIG second problem: the US Know Your Client (KYC) and AML (Anti-Money Laundering) regulations. Per the US Financial Crimes Enforcement Network (FinCen), a US company doing business overseas that relies on host country’s local subcontractors and agents is liable for their actions. Although the White Paper states that Libra will use only authorized resellers, it will be very difficult to verify that resellers are complying with KYC and AML requirements. There’s no way to tell if the authorized resellers are using their own unauthorized subcontractors as resellers to increase profits. Authorized or not, the Libra Association/Facebook is on the hook for any reseller wrongdoings.
The final problem is the Libra White Papers assumption that target countries will openly embrace the Libra Coin and allow daily cryptocurrency transactions. Unfortunately, some of the very countries Libra seeks to reach have either enacted laws to control and limit cryptocurrency use or have outright banned its use. Many governments are concerned that anonymous blockchain transactions hide money laundering, terrorist activities and other illegal acts. They also view cryptocurrency as a threat that could destabilize their banking system and economy. Some of the countries banning cryptocurrency usage and investment include China, Pakistan, Ecuador, Bolivia, Morocco, Algeria, Saudi Arabia, Iraq, Egypt, Namibia, Kyrgyzstan, Bangladesh and Nepal. Countries hostile to cryptocurrency include Ghana, Nigeria, Zimbabwe, India, Iran, Vietnam, Venezuela, Brazil, Guatemala and the Czech Republic. The White Paper does not state how it plans to overcome these formidable obstacles.
The Libra White Paper roadmap runs smack into the US Federal Reserve wall. Although Libra goals are lofty and idealistic, the coin designers should have taken a very close look at how the world banking institutions would react to a cryptocurrency banking rival.