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Facebook's full frontal attack on finances



Error, Duty, Feared: Facebook's proposal for a new virtual currency, revealed last week, has already provoked a setback. But can it end up blowing the financial system at all open?

The idea marks a "long overdue" attack by Big Tech in the payment industry, says David Yermack, New York University's Stern School of Business Finance Professor. Apple has cut a limited role for its own payment system on the iPhone: In contrast, Facebook's plan is a full frontal attack. The planned launch within a year of Libra digital currency would have the support of partners such as the Visa and Mastercard payment networks and the Uber and eBay online companies.

Facebook itself would make a "killer app" to take advantage of this digital money: a payment system built into messaging services so users can easily and cheaply send money to friends or make purchases. With 2.4 billion users, the social networking company could easily manage the propeller courses in the mainstream, according to the audience, and meet hopes that were first touched by bitcoin a decade ago.

"The threat to the existing banks is serious," says Mr. Yermack. Businesses like Facebook, Google and Amazon have two significant advantages over the banks, he adds. They can handle transactions at much lower cost, and they have proven masters of creating new digital services and drawing billions of people to their platforms.

But the entry barriers are also high and the resistance is already extensive. Politicians, privacy activists and bankers have been among those who have questions about the proposal in the days since it was unveiled. The fact that Facebook and its partners plan to move forward is proof of how much is at stake.

The many criticisms and warnings that have arisen during the last week have centered around three main areas.

First, the credibility of Facebook itself. After the furore over Russian disruption in the recent US presidential election, including through content that appeared on Facebook, the social network is considered deeply distrustful. Mark Zuckerberg, CEO, firstly denied any responsibility, but has turned down a humility that he tries to fix the social network.

But with his plans for a new crypto competition, Facebook's unbound ambition has been revived. The company has talked about reaching billions of people with payment service. In an interview, Kevin Weil, vice president of the proposed Facebook payment service, says the company hopes the new currency will last "hundreds of years".

Kevin Weil, vice president of the proposed Facebook payment service, says the company hopes the new currency will last "hundreds of years" © New York Times / Redux / eyevine

Even fans of the idea find it hard to believe that Facebook can think of such a project, given the political and regulatory pressures it faces. Mamoon Hamid, a partner in venture capital firm Kleiner Perkins, who has invested in a similar payment idea from the messaging service Telegram, endorses the vision, but says: "If the world we live in wants them to do, it's another matter. Things have changed over the past two years. "

Facebook executives have been hurt to emphasize that any financial services they create will be properly regulated. But it is already clear that the company is hoping to cut bank regulations, which has offset the leaders in the sector.

Mr Weil says the company will look to provide other financial services as credit, but adds: "We are not a bank, we do not look that way. We do not offer interest, for example, and things like banks does. "The distinction is one that many tracks will not hold, as financial regulators have subject the weighing internet company to increased control.

There have also been questions about Facebook's laws keeping the user's financial information separate and not using it to target advertising. Sharing data with other Facebook services will be possible if users choose to participate in certain services. And even without the opt-in, a Facebook service like WhatsApp will see when a user makes a payment, as well as who gives it valuable information.

Putting so much data into an organization is asking for problems, especially given Facebook's previous mistakes, says Matt Stoller, a fellow at the Open Markets Institute, a Washington press group opposing excessive concentration of corporate strength. He also warns that Facebook will be able to leverage its dominant position in social networks to move into a new market – which can be countered by antitrust regulators.

The fact that more than two dozen other companies and organizations have already temporarily supported the Libra project, despite Facebook's obvious political and regulatory challenges, highlights the scope of the opportunity.

For all its failures, Facebook, with its massive user base, could open the way to bringing crypto inverters into the mainstream. It has moved the hopes of Silicon Valley for a new generation of financial services, built on the top of the new Libra spine.

Many developers have put on the sides of crypto and will really take the chance, says Katie Haun, a former US prosecutor who now runs a cryptocurrency fund for Silicon Valley venture capital firm Andreessen Horowitz. "This will be a catalyst for a lot of talent coming into the room."

Katie Haun, who runs a cryptocurrency fund for a venture capital venture in Silicon Valley, says financial services in many developed countries are working well but are slow and inefficient © YouTube

The second major concern about Facebook's plan derives from the very nature of the currencies, and whether it would provide too much financial power in the hands of a self-elected group of large corporations. The plan requires Libra to operate on a version of a block chain – a decentralized ledger, maintained by all network participants, where transactions should be recorded.

Nevertheless, it will stop briefly for the idea of ​​decentralization that takes place by bitcoin blockchain, where some can validate transactions. It creates a permissive system where no central authority decides who is worthy of trust. Public block chains like this can't operate in the scope and speed needed to handle the huge number of real-time transactions that will be required with Libra, says Gartner blockchain analyst Avivah Litan.

Instead, Libra backers are creating a private network of 100 companies that can rely on posting transactions without the need for an independent validation system. The campaigns say they aim to start moving to a truly lawless network within five years – although not everyone involved believes this to be technically feasible.

Regardless of this limitation, Libra is "probably a much more efficient system" than today's bank-controlled payment network, Litan says. "But it's still controlled by the big companies." She and others warn that this would bring significant force to the hands of a group of private entities – especially if Libra becomes the kind of global currency that Facebook hopes.

A closed private group like this can also invite an antitrust challenge, says Stoller – especially when it comes to two duopolists, Visa and Mastercard, who work together on a project.

Matt Stoller, a colleague of a Washington press group, opposed excessive concentration of corporate power, says venture may invite a challenge to antitrust authorities

For cryptocurrency purists, these deficiencies are serious. "It's not decentralized, so customers are grace to Facebook, and it's not frictionless – it still uses the banking system and is tied to political currency," said Tim Draper, one of Silicon Valley's earliest crypto curve recipients. [19659002] But even many people who oppose seeing Facebook launch a cryptic rate, accepting that they can get wider benefits. Libra "has a great distribution channel in Facebook, and it provides a bridge for those who are not ready to convert all their transactions into bitcoin, says Dr. Draper. It can make it a" big temporary step towards a completely open, real global, transparent and frictionless currency like bitcoin. "

The third concern is about a new currency that Libra could pose deeper systemic risks while interfering with central bank's ability to polish its financial systems and drive normal In that case, governments and regulators can try to stifle it at birth.

Mark Carney, governor of the Bank of England, has made clear that the potential systemic risks of a system such as Libra will require it to be exposed to it

By operating outside normal banking channels, critics warn that it may be more difficult for governments to limit payouts out of a country, e. or use sanctions against a foreign power. "Any parallel currency undermines to some extent the sovereign governance institutions," Stoller says. "The reason why this seems particularly important is that it is Facebook. These are not just some libertarian dudes hanging out on the strips, smoking and running bitcoin. It's Visa and Mastercard."

Some Libra critics say that would also leave private companies with undue influence over monetary conditions. Facebook and its allies deny this.

They point out that Libra will be fully supported by a basket of publicly issued or fiat currency, which means that the system would not generate any new money. Instead, the fiat currency will be in reserve while its digital alter ego is freed on the internet, reducing transaction costs and supporting new types of services.

Nevertheless, massive adoption of the currency can still have distorting effects. Libra's supporters hope that a large number of people in developing countries will choose to keep Libra deposits rather than the country's currencies. It could weaken the power of the local government, which would have less influence on monetary policy if many transactions in the economy were implicitly supported by foreign currency.

As Thomas Adrian, an IMF official, put it in a speech last month, countries with weak currencies may find it harder to crush in times of crisis: "You either do it or are taken over by foreign e-money."

Even without Libra, digital money backed by official currency has been widely used in some parts of the world. They are led by China's booming mobile payment systems, run by Alibaba and Tencent. One of the reasons that Silicon Valley, which is in a race with China's technological leaders worldwide, claims that regulators in Washington should not be too heavy-handed. "The genius is already out of the bottle with this technology," says Ms. Haun.

Bank of England Governor Mark Carney has made it clear that Libra will be the highest level of control © Charlie Bibby / FT

Some central bankers may be ready to engage in the new era of digital currencies. Mr Carney on Thursday said the Bank of England could potentially allow tech companies to save money overnight in the central bank, giving them an alternative to leaving deposits with commercial banks.

Providing direct access to the central bank as this would result in lower costs for these payment systems and equate them with commercial banks. It will also bring central banks one step closer to issuing digital currencies.

The financial authorities have little choice but to try to adapt, says Yermack. If they try to crack on Libra or other projects like that, the tech companies could easily take their payment plans offshore.

As Libra's potential deficiencies have been picked, meanwhile, less attention has been paid to how the digital currency – or other ideas like it – can affect the financial world, they were capturing.

So far, Facebook and other Libra members have sought to focus on cross-border transfers, where taxes can be slashed, and the ability to provide basic financial services to 1.7 billion people in the world who do not have a bank account. These represent the most politically tasteful use of the currency, and those most likely to win official support.

But the widespread use of e-money will also have broader implications. Just because financial services work well enough in many developed countries does not mean that there is enough room for improvement, says Ms. Haun: "They are slow, they are inefficient, you pay intermediaries along the way." [19659002] Facebook seems to have something like this scheduled for Calibra, the payment service it hopes to start on Libra blockchain. Integrated into its messaging service, this will support a new era of electronic commerce.

A real digital currency has other benefits. It can be used for micropayments, according to Facebook, which may provide a new way for users to pay for digital content when they read or view it.

Furthermore, Libra's backers say that they plan to introduce "smart contracts" to the Network – events where money switches hands automatically when certain real-world conditions are met.

How this can affect a future world where machine-to-machine communication and intelligent agents are keeping track, are things of Silicon Valley fever dreams. It can lead to autonomous vehicles, for example, who decide themselves when it is worth paying to move into an express path, and handle the payment automatically.

Libra can never play a role in this imagined future. Concerns about Facebook – along with inherent limitations in the actual project – may well stupid it to fail. But as digital money systems are spreading to more corners of the digital world, the prospect of really disruptive changes in the economy is increasing.


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