INSIGHT: Libra—Should We Protect Ourselves From Facebook’s Controversial Cryptocurrency?

When Facebook announced its new cryptocurrency in June, the company claimed it would make online banking cheaper and more efficient, while making financial services more accessible, particularly to those without bank accounts.

Many are excited about Libra’s possibilities, but Facebook has a significant public trust issue. The company’s usage of user data and how it displays information has negatively affected millions of users. Facebook plans to keep Libra decentralized. The company claims it will not use data from Libra transactions for targeted ads.

The Facebook subsidiary, Calibra, will operate Libra independently from Facebook and will not share financial data with the social media website without user consent unless Calibra is attempting to prevent fraud or cooperate with legal authorities.

Privacy Concerns

It seems like every month hear about a new data breach. Major corporations have been affected by breaches of private information—Equifax, Target, and most recently Capital One—have exposed hundreds of millions of consumers private information.

Between Facebook hacks and third-party developers gaining access to unsuspecting users profiles (e.g. Cambridge Analytica scandal), Facebook is no stranger to having a problem keeping consumer’s personal information “private.” So it is likely we already have evidence to predict how Facebook is going to handle the collection and security of data in relation to Libra.

However, Libra, introduces an interesting new dimension because, according to the information available, Libra is not run directly by Facebook but by the Libra Association, located in Switzerland, and comprised of for-profit companies like Vodafone, Visa, Uber, and venture capital firms.

In the recent Netflix special entitled “The Great Hack,” which details the Cambridge Analytica scandal, Brittany Kaiser, a former executive at Cambridge Analytica turned whistleblower, claims that data has become more valuable than oil. This being so, it is fairly easy to imagine these for-profit companies wanting access to the data collected. More companies introduce more vulnerability.

Hackers may be the number one cause of most data breaches, but the most common way that hackers infiltrate the systems is through vulnerabilities with people; weak passwords or other human error is the typical point of entry. The more people who have access the more vulnerable the data is to attack.

Privacy laws, which vary by country and state, generally require a company to disclose in a privacy policy what data is collected, how it used, who it is shared with and what actions a user can take to control and /or limit the disclosure, especially to third parties.

Further, companies are required to take reasonable steps through encryption and prudent business practices to keep personally identifiable information (PII), which usually includes any two pieces of information that can be used to identify a person, and other sensitive payment information private from unauthorized access.

The problem with any disclosure is that most consumers fail to read it. For example, most people probably don’t know that by using third-party apps to manage their Gmail, they are unknowingly granting those developers access to read their Gmail messages.

As with any new product or service, the use of Libra will come with terms and conditions and a privacy policy. Those terms will vary depending on which country and or state the user is from and lives.

The point for consumers is to read disclosures so they can be informed about the information collected and risks associated by that data. Unfortunately, what we have seen is that the public has unwittingly assumed the risk of unauthorized disclosure of data when using any technology product or service; and when there is a breach where consumers personal and private data is exposed without knowledge or consent, the remedy is wholly inadequate taking the form of a class action lawsuit, where each class member gets a fraction of the harm, and monetary damages, which the company can pay easily.

Potential for Global Financial Inclusion

Despite the risks, Libra still may have the power to create stronger financial inclusion across the world. To make this a reality, there are vital issues Facebook must address.

Banks require a government-issued ID to open an account; it is doubtful a Facebook page will be sufficient ID. Another issue Libra has to sort out is the subject of fees. While Libra has already promised low-cost banking, will it have different fee schedules for different countries? How will Facebook balance making Libra affordable for the global unbanked population while trying to make profit?

Libra might be most useful in stabilizing weaker economies. In many ways tying the Libra to a multi-currency reserve is similar to what the European Union did with the Euro in the nineties to stabilize and strengthen the European economies. The decentralization of that reserve means that it isn’t tied to any geopolitical regions and therefore could be useful anywhere in the world.

While Facebook is hoping to bring banking to those who don’t have access to it, many are worried the cryptocurrency will destabilize the U.S. dollar, global currencies, and the economy as a whole. Maxine Waters said in last month’s Senate hearings that Libra could “yield immense economic power that could destabilize government.”

Bitcoin is notoriously volatile, but Facebook will stabilize Libra by backing it at a 1:1 ratio with a blend of currencies called the Libra Reserve. The Libra Reserve will be comprised of the US Dollar, Japanese Yen, other national currencies, and low-risk government bonds. While Libra’s value to respective currencies will vary, the price will not be based on supply and demand like Bitcoin. Many experts agree that this lack of liquidity exacerbates the volatility of Bitcoin. Libra will be more liquid and stable due to the Libra Reserve.

While it’s plausible that Libra can be a useful tool to the nearly 2 billion unbanked adults across the world, there are a lot more questions than answers. Facebook has expressed a desire to work with regulatory committees to make Libra a reality. Facebook continues to undergo intense scrutiny for Libra, but it still intends to launch the cryptocurrency in early 2020.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Aaron Swerdlow guides emerging technology, corporate, sports, and entertainment clients with transactional, employment, and corporate law matters. He has extensive experience negotiating and drafting joint venture, finance, employment, marketing, and third-party media service agreements for emerging technology companies, medium-sized business, and entertainment ventures.

Joel Sherwin is a business lawyer with entrepreneurial, executive management and operations experience. Joel regularly advises financial technology, payments, and e-commerce companies, along with banks and prepaid program managers on strategic partnerships, payment monetization and settlement, commercial transactions and regulatory requirements including consumer privacy, BSA/AML and KYC.