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ANALYSIS: Libra’s Lesson? Don’t Be Large and Perceived as Evil

Nov. 4, 2019, 11:57 AM

“Don’t be evil” was the unofficial motto of tech data giant Google from 2000 to 2018. “Don’t be large and perceived as evil” could be the unofficial lesson that tech data giant Facebook’s cyptocurrency project, Libra, learned the hard way in 2019.

The Libra stablecoin, announced to great fanfare in June, quickly encountered political opposition that has cast doubt on the survival of the project. Facebook only has its own past successes and failures to blame for Libra inspiring the kind of resistance that stablecoin projects from smaller, less controversial companies have not encountered.

Libra’s Problems Are Facebook’s Features, Not Defects

Libra is an ambitious project. It both embarks on the technologically complex task of building a blockchain to create a cryptocurrency, and attempts to implement an untested governance structure and a business model that might overlap with central bank functions.

Nevertheless, U.S. government opposition to Libra has focused as much on features of Facebook as on possible defects of the plan for Libra.

Facebook having more than 2.4 billion users as of June 2019 aroused concern that Libra could grow so large that it could become a substitute for the U.S. dollar. Shared by officials ranging from the Chairman of the Federal Reserve to the Secretary of the Treasury to the President, this concern has existed for no other stablecoin.

The possibility of Facebook abusing customer data also has dominated discussion of Libra among members of Congress, an obvious development following front-page coverage of Cambridge Analytica and federal enforcement action against Facebook culminating in a $5 billion penalty on July 24.

Anti-money laundering (AML) compliance—and the choice of Switzerland as the home jurisdiction for the Libra Association—also figure prominently in the doubts raised by U.S. executive and legislative branch officials, but similar AML compliance and jurisdictional issues have not prevented other stablecoin projects from moving forward.

Competing Stablecoin Projects

Tether, first issued in 2014, has become the largest stablecoin, with a market capitalization in the $2 billion to $4 billion range in 2019 despite more questionable jurisdictional and AML compliance situations. Tether is issued and administered by entities based in Hong Kong and owned by a British Virgin Islands holding company—a company alleged to be owned and controlled by the same persons as the crypto exchange Bitfinex.

Tether’s administrators have moved the reserves backing Tether from bank to bank in various jurisdictions, and it is unclear whether they have been conducting any AML compliance since 2014. Nevertheless, no U.S. regulatory enforcement action against Tether’s issuers and administrators has become apparent as of the end of 2019 Q3.

Binance—a cryptocurrency exchange founded in China that moved to Japan in 2017, to Taiwan in March 2018, and then to Malta and Bermuda in March–April 2018—has been moving forward with its own stablecoin project, with no apparent opposition from U.S. regulators or politicians. Instead of a single large global stablecoin, Binance has been launching smaller local ones. While Libra encountered a storm of political opposition, Binance launched the Binance GBP stablecoin, backed by British pounds, on July 23, and the BUSD U.S. dollar-backed stablecoin received official approval from the New York Department of Financial Services on Sept. 5, 2019.

Lesson Learned?

“Don’t be large and perceived as evil” appears to be a lesson already learned by some in the crypto sector.

Binance directly challenged Facebook with the announcement of its Venus project on August 19. Venus will compete with Libra by issuing localized stablecoins in willing jurisdictions, instead of a single global stablecoin like Libra that will have to adapt to the regulatory regimes of multiple jurisdictions.

Libra may itself end up following a variant of Binance’s approach. A month after the announcement of Venus, Libra’s leadership stated that they are considering multiple single-currency stablecoins instead of one global cryptocurrency.

We will see in 2020 whether the original plan for Libra will succeed or other strategies will prove to be more successful. As of October 2019, a quarter of the initial members of the Libra Association, including notable payment services names such as PayPal, Mastercard, Visa, and Stripe, have voted with their feet on this question by withdrawing from the Libra project. Libra’s leadership has pledged not to launch until Libra has secured regulatory approval in the U.S. and Europe. But based on the strident political opposition Libra received in 2019, those approvals appear unlikely to materialize in 2020, or ever.

Read about other trends our analysts are following as part of our Bloomberg Law 2020 series.