Facebook Is Missing the One Thing Its Libra Crypto Plan Needs

July 16, 2019


By Tanaya Macheel

Members of the Senate Banking Committee are still uncomfortable and distrustful of Facebook and its global payments plans after David Marcus, the head of the project, testified before the Senate Banking Committee Tuesday.

More than anything, lawmakers seemed more concerned about Facebook and its trust deficit than Libra, cryptocurrency, or even bitcoin.

"Your biggest problem is that people don't trust you," Sen. Sherrod Brown declared toward the end of the event, echoing most of his colleagues. "Why, with all your problems, should we trust you on something as important as a worldwide currency and the damage that can come from it?"

Marcus responded: "We will have to work hard to earn people's trust." Marcus replied.

Trust is everything in banking — just ask the bankers. With the rise of consumer fintech apps in 2013 that initially sought to displace banks came the rise of "open banking." In some banking circles that means sharing data with competitors so customers can interact with different financial services providers more easily and manage their financial lives however they want. But open banking is really about providing any and all types of services for a customer's entire financial experience, without necessarily owning all of it.

Banks aren't there yet, and Facebook wants to be. Its innovation theater touts financial inclusion for the unbanked — specifically, more access to better, cheaper, and open financial services for billions of people in the world. Libra was designed so that Facebook would be able to access transactional data without owning all of the responsibility.

The Libra Association, the independent, not-for-profit entity based in Geneva, was created to ensure Facebook wouldn't have more power than any of the other 100 members-to-be. Facebook is pushing this point hard.

Even if Facebook's Libra was truly decentralized — which is questionable since decentralization is about taking the power out of a single central entity and distributing it among the many, and even if Facebook satisfied all the concerns of lawmakers and could move forward with the launch, the social media giant lacks the trust necessary for most to participate in what could be an entirely new economy.

To sell financial products, banks need to be competent at allocating cash, maintaining capital, and managing risk. But without trust they wouldn't sell anything at all.

If Libra project ever becomes successful, it would make one of a bankers' biggest, long-running fears come true: that they become the invisible but trusted back-end brand while the cooler and more relatable brands interface with the customer.

Today, thanks to Facebook, it's clear that while banks aren't the most loved brands, still recovering from the bad reputation they earned themselves in 2008, people trust and perhaps even like them more than Facebook. And perhaps more worrying is that Facebook is Too Big To Fail — far bigger than any bank might be.

What happens next with Libra remains to be seen. Marcus has said repeatedly that all parties involved plan to take the time to collaborate with the financial regulators and address all consumer protection concerns. Facebook has many questions to address, but it's unclear to anyone, including the lawmakers themselves, what Facebook needs to do or say to regain their trust.

Marcus also alluded several times Tuesday to future potential "partnerships" with financial services providers, suggesting that Facebook probably isn't seeking a banking license anytime soon. (Facebook appears keen to register as a Money Service Business, however.) Offering more sophisticated financial products would drive new revenue streams for Facebook unrelated to advertising, he said. He also said enabling the 90 million small businesses already operating on the Facebook platform and its 2.4 billion users to engage in more on-Facebook commerce would drive more advertising dollars from merchants.

Tuesday's hearing took place the day after Congress introduced a bill to bar so-called Big Tech companies like Facebook from becoming financial services providers. Normally that would sound like a cry for help from the legacy banking industry worrying about losing business to Big Tech. But banks themselves have been saying for decades that they are tech companies with a banking license (it was Citi that first used the term fintech in the 1990s, not a young Silicon Valley startup). They've also learned how to coexist with the younger companies, now allowing customers to link their bank accounts to most other saving and investing apps.

Treasury Secretary Steve Mnuchin said in a Monday briefing that the U.S. intends to maintain an even playing field for financial services firms, and that it is not partial to legacy financial firms.

"Whether you're Moneygram, PayPal, online or a bank, we do encourage electronic payments systems in dollars," he said Monday. "They've been very effective; there's been a lot of financial innovation. We will continue to support that and want technology to evolve."

Before Facebook's splashy reveal of Libra last month, the crypto world had seen a boom in fiat-backed stablecoins that many believe would lead to the issuance of a central bank-backed digital currency. It would be interesting to know how dangerous Libra would seem to regulators if it were backed by the U.S. dollar.