Facebook’s Libra a critical test for regulators

MoneyPlace chief executive Stuart Stoyan. Picture: Stuart McEvoy.

Facebook’s cryptocurrency Libra may be the latest test facing the big banks but the social media giant’s move is just as big a ­moment of reckoning for the world’s regulators.

Having sparked equal measures of adulation and apprehension with the release of the Libra white paper last week, Facebook is now bracing for a regulatory storm, and a furious one at that.

But that’s exactly what Facebook head honcho Mark Zuckerberg and his team are counting on. Libra is a test of how far Facebook can test the limits of its platform and the patience of regulators to get its hands on the critical intelligence it needs to turn its crypto thought bubble into something real.

The response from regulators has so far been predictable, from the concerns of US house financial services committee chairwoman Maxine ­Waters about Facebook’s unchecked expansion into our lives to Reserve Bank governor Philip Lowe’s scepticism on just how big a game-changer Libra will actually turn out to be.

While the responses are essentially valid, regulators, central banks and governments now have an opportunity to show the public they can effectively manage the collision of technology and financial markets.

Shutting the door on Libra, citing Facebook’s appalling track ­record on privacy, seems the obvious response. But it may not be the right one, and Facebook has moved to pre-empt the hostility by saying Libra will be managed by the non-profit Libra Association, which counts MasterCard, Visa, PayPal, Uber, eBay and ­Vodafone as founding members.

Facebook’s involvement in Libra will be through its subsidiary, Calibra, which is another measure to insulate it from the privacy backlash.

The regulatory retort to Libra could be one where clear guidelines are put in place, where all of the moving parts (the technology, security and what role Facebook ends up playing) coalesce into a product that delivers a good consumer outcome without giving tech companies carte blanche.

Such a feat will be unique in an environment where regulators have been playing catch up to “big tech”. From the rise of social media to the unrelenting expansion of the gig economy, seemingly innocuous technology ­plat­forms have managed to up-end consumer behaviour and ­expectations.

The Facebook-Cambridge Analytica controversy is a clear example of what to expect if ­technology companies are allowed to operate unfettered. Libra is ­unlikely to be the beneficiary of similar largesse.

Despite Facebook’s bullishness to get Libra out to the market by next year, that’s a big ask. There are many unanswered questions about Libra, many of which will remain so if regulators drag their feet.

While the white paper has a wealth of technical detail on Libra, it is light on other information.

Unlike Bitcoin, Libra is a “stable coin” backed by real assets, which Facebook says include “bank deposits and government securities in currencies from stable and reputable central banks”. But there is no clarity beyond that on what will anchor Libra as a currency nor how the Libra Reserve will cope if there was ever a run on the cryptocurrency.

This sort of ambiguity is par for the course in technology circles but the headlines generated by Facebook and Libra point to an inescapable trend of technology companies embedding themselves further into our lives.

While the banks by and large see “fintechs” as a minor irritant, Libra represents something far more sinister, a harbinger of a world where the banks play second fiddle to Facebook, Apple, Google and Amazon.

The chief executive of peer-to-peer lending platform MoneyPlace, Stuart Stoyan, says the big technology players are not interested in competing with the banks; they are looking to make them irrelevant.

“The most logical thing in the financial services sector is for a non-financial operator to start ­offering better, simpler products to its customers,” Stoyan says. “People already have a lot of their lives wrapped around Facebook, so the extension to use it for their financial needs isn’t a stretch.”

According to advisory firm Venture Insights, if Libra can get off the ground, the other tech ­giants may follow.

“Facebook’s Libra could lead to the start of a new cryptocur­rency arms race with other tech giants (Google, Apple, Amazon) jumping in with their own versions,” Venture Insights managing director Nigel Pugh says.

“Our recent fintech survey ­results show 64 per cent of Australians want better value for their banking, while 41 per cent want more convenience in banking.”

“Libra’s ecosystem of minimal cost and real-time payments to any two users around the world is an unmatchable proposition.”

There will be resistance to Facebook being seen as the gatekeeper of the new financial order but Zuckerberg and co could lay the basis of an ecosystem where big tech and its billions of users cut banks out of the equation.