Spotlight Piece - Facebook’s Libra: Will it happen? A Critical Legal Analysis
The financial sector has changed drastically in the 21st Century. Mobile banking, digital payments, cashless spending are commonplace as a result of Fintech developments. Ten years ago, six out of ten payments were with cash. Now, it’s just three out of ten.[1]
Facebook’s Libra seemed like an exciting new development in the Fintech industry when it was officially announced in June 2019. Intense criticism of Libra in its original form led the Association in April 2020 to announce a ‘scale-down’ in their approach, by also offering stable coins which will be backed by individual nation’s currencies.[2] However, legal issues faced by Libra remain widespread and difficult to overcome.
Key Questions about Facebook’s Libra:
What is Libra?
Libra is a proposed global digital currency, supported by blockchain technology used for cryptocurrencies such as Bitcoin.[3] It will be held in a digital wallet called ‘Novi’ (formerly ‘Calibra’).[4]
Unlike Bitcoin, its value would be pegged to a number of different national currencies (including USD, GBP, EUR) and backed by stable reserves of assets including foreign currencies and government securities.
Libra could be sent instantly for a small fee and accepted by businesses such as Uber and Spotify.[5]
There will also be stable coins in the Novi e-wallet which are ‘digital versions of established currencies’[6], such as GBP, USD and EUR. This will make the Libra project similar to other digital payment services, such as PayPal.
How will Libra work?
When a user purchases Libra, they will pay using their credit or debit card. This money will sit accumulating interest which will be used in part to pay back initial investors.[7]
Various amounts of Libra can then be sent to friends and family, anywhere in the world and either spent in Libra form, or converted into different currencies.
Unlike Bitcoin, there is an unlimited amount of Libra. One need not go through a mining process to create new Libra, and so this mitigates the negative environmental effects of many cryptocurrencies.
What is the aim of Libra?
The aim is to grant people who cannot access traditional banking the opportunity to be part of the financial system. Estimates suggest there are 1.7 billion adults globally without bank accounts.[8]
What is Facebook’s involvement in Libra?
Libra currency has been developed and will be regulated by a group of companies known as the Libra Association. Facebook is the founder and one of the members.[9]
The listed co-creators of Libra are all Facebook employees.
Is Libra a Cryptocurrency? What is the technology behind it?
Cryptocurrencies are powered by Blockchain technology. Blockchain is a database which tracks transactions and can be viewed by the public. This database is decentralised and can only be modified by a user who has a key that corresponds with a block in the chain, making it highly secure. When the database is modified, these changes are replicated across the chain.[10]
The value of cryptocurrencies such as Bitcoin is highly volatile and is linked to the supply and demand of the currency. Blockchain technology tracks exchange and value, rather than relying on a central bank to calculate the value.
Libra is not a true cryptocurrency. It is ‘stable coin’[11]; its value is determined by reserves of assets rather than supply and demand. Libra will not be “decentralised” as the computers which verify the blockchain transactions will be operated by Libra Association.
Traditional Blockchain is very slow, so Libra will have to figure out how to adapt this technology to make Libra transfers quick.[12]
The Main Legal Issues with Libra
1. Regulatory Requirements
Regulation is often a step behind technology. Many countries do not have established regulations for crypto assets. Lack of well-defined laws makes effective enforcement difficult and compliance by companies harder.
Mark Zuckerberg announced that Libra will not be launched until it is fully compliant with US regulations. This is insufficient as Libra must comply with regulations in every country they operate in, not just the US. Regulatory rules vary across countries. For example, China has a blanket ban on all cryptocurrencies, whereas Germany has extended existing financial services legislation to cover cryptocurrencies. Malta and Gibraltar have developed bespoke regulatory regimes for cryptocurrencies.[13]
Mark Carney, the governor of the Bank of England has recognised that Libra brings substantial benefits but that they will embrace Libra with ‘an open mind but not an open door’[14]. He states that Libra will still be subject to the ‘highest standard’[15] of regulation.
2. Legal Nature of Libra
The legal nature of Libra is uncertain. The classification of this asset will determine how it is regulated and the rights available for users. The initial US position is to regulate Libra through traditional banking regulations. Alternatively, it may be classed as a security, and be regulated by the SEC.
Facebook considers Libra a ‘means of exchange’[16] but the reserve of assets held by the Libra Association to determine Libra value, has similar qualities to a collective investment scheme, which suggests intermediaries providing services to Libra must consider fund and investment services legislation.
Libra’s asset reserves raise important legal questions. Will holders of Libra currency have any legal claims to the Libra reserves? Will goods and services purchased using Libra enjoy consumer protection laws?
The Libra Association needs to clearly specify Libra’s legal nature to make regulatory compliance easier.
3. Tax
Tax implications of Libra may be the most significant issue thwarting its development. Every time consumers pay using Libra, they will be making a currency gain or loss. Collective gains will likely be subject to capital gains tax (CGT).[17]
Compliance with CGT rules would be onerous as users would have to record the exchange rate for every sale and purchase and include the details in their tax return. Although there is a £12,000 annual allowance for capital gains in the UK, other countries have zero-annual allowances such as France and Germany.[18]
One solution is having Libra calculate the tax on any gains on behalf of the user. However, national currencies which do not attract any CGT will remain preferable. Another alternative is to set up Libra as an e-wallet system, but this removes its unique selling point.
Spending foreign currencies abroad doesn’t attract any tax liability. HMRC has stated crypto assets are not currencies because they are not issued by a foreign government.
4. Facilitating Funding of Criminal Activities and Money Laundering
$1.6 trillion is laundered annually through the financial industry. Fears that Libra will facilitate money laundering, finance terrorism and other criminal activities, because blockchain technology allows for anonymity, have been raised. Facebook has responded by stating that they have developed their own process of identifying users which will mitigate risk.
There is also the possibility that Libra could prevent countries from enforcing sanctions on foreign powers as restricting payments will be harder.
It has been reported that the global anti-money laundering watchdog is observing Libra developments closely and has warned that Libra will need to comply with anti-money laundering requirements[19]. The US Treasury Secretary, Steven Mnuchin, cautioned in July 2019 that Libra will need to meet the same safeguards as traditional financial institutions[20].
5. Privacy and Data Protection
There are major concerns about the lack of security regarding data and privacy for potential Libra users. Facebook has a poor track record of protecting data. Public trust in Facebook fell by 66% following the Cambridge Analytica scandal in 2018, which revealed the extent of the company’s mismanagement of user data.[21] The Libra Association has promised not to disclose users’ information to Facebook, but it’s unclear how information will be handled if transfers are to be facilitated through the app.
Privacy regulators from around the world issued a statement in August of 2019, noting the lack of a specific plan for how Facebook and the Libra Association intend to protect sensitive user data, including financial data. There is an obvious need for clear policies on the storage and usage of data, in particular protection of sensitive financial data. A variety of data protection regulations (for example, GDPR in the EU) will need to be considered and adhered to.
6. Competition/Antitrust Concerns
The US government has recently begun an investigation into potential antitrust/competition law breaches by tech giants such as Facebook.[22] Increasing the amount of data held could allow Facebook to leverage its position in the market and become excessively dominant.
There were concerns about potential collaboration between competitors when Visa and Mastercard were both members of the Libra Association. These have since been mitigated by their withdrawal from the association.[23]
Concerns about Libra in particular breaching competition laws are yet to be seen. As it is such an innovative product with currently no true competitors (other than national currencies), regulators may need to wait for the market to develop and expand further before they can step in and ensure there is no abuse.
7. Undermining National Currencies and Financial Systems
Numerous countries have rejected Libra due to concerns that it will undermine national currencies. France in particular did not receive Libra well. French Finance Minister Bruno Le Maire declared Libra a ‘threat to the monetary sovereignty’[24] of nations and highlighted the ‘potential for abuse of market dominance’[25] and ‘systemic financial risks’[26]. This threat appears significant considering the recent announcement of a ‘shift’ in plans: Libra will support both government-backed currencies and the Libra token[27].
Widespread adoption of Libra could have the effect of weakening government power, especially in developing countries.[28] A private company may not be the best supplier of currency to potentially vulnerable states due to its unaccountability.
There is also the risk that Libra could upset financial systems and disturb monetary policy traditionally governed by central banks. Governments will have to assess whether existing financial frameworks will allow for Libra to be a success, or if Libra will have the effect of disrupting the current system. Due to Facebook’s large user base, if Libra is widely adopted, it could become ‘systemically important’ according to the US Federal Reserve Chair, Jerome Powell.[29]
Concluding Remarks
Libra as a global currency is a pioneering product, something of a futuristic world. Governments have yet to deal with anything of the sort, so it’s not surprising the automatic response from some has been negative. The extent of legal issues facing the launch of a product like Libra has clearly been underestimated.
For this reason, I think that Libra will fail in its current form. Drastic changes may be needed to meet regulatory and tax obligations, such as making Libra an e-wallet, rather than a new currency.
Even if Libra is unsuccessful, a global digital currency seems to be the future. If similar products continue to be proposed, creators will over time be ready to mitigate concerns, whilst governments will (hopefully) be prepared to deal with a Libra-equivalent product.
[1] Daniel Döderlein, ‘Moving towards a cashless society in a cash-reliant world’ (Forbes, 18 March 2019) https://www.forbes.com/sites/danieldoderlein/2019/03/18/moving-towards-a-cashless-society-in-a-cash-reliant-world/> accessed 29 June 2020
[2] Lauren Feiner, ‘Facebook’s vision for a new cryptocurrency gets watered down as it attempts to woo regulators’, CNBC (16 April 2020) <https://www.cnbc.com/2020/04/16/facebooks-libra-plans-new-crypto-offering-backed-by-just-one-currency.html> accessed 30 June 2020
[3] Richard Waters and Hannah Murphy, ‘Facebook’s full frontal assault on finance’ Financial Times (24 June 2019) <https://www.ft.com/content/2b9e2190-940a-11e9-aea1-2b1d33ac3271> accessed 29 June 2020
[4] Anthony Cuthbertson, ‘Facebook renames controversial cryptocurrency wallet to ‘Novi’’, Independent (26 May 2020) <https://www.independent.co.uk/life-style/gadgets-and-tech/news/facebook-cryptocurrency-novi-libra-bitcoin-calibra-a9533426.html> accessed 30 June 2020
[5] Nathaniel Popper and Mike Isaac, ‘How Libra, Facebook’s cryptocurrency, would work for you’, The New York Times (18 June 2019) <https://www.nytimes.com/2019/06/18/technology/how-libra-would-work-for-you.html> accessed 29 June 2020
[6] ‘Facebook ‘rethinks’ plans for Libra cryptocurrency’, BBC News (4 March 2020) <https://www.bbc.co.uk/news/business-51730772?intlink_from_url=https%3A%2F%2Fwww.bbc.co.uk%2Fnews%2Ftopics%2Fcgeme78rpnzt%2Flibra&link_location=live-reporting-story&fbclid=IwAR2Iz_TKhUNORLWDHF2MLUrYJ_xMMorKd_g9Hhnft7gS4W5LAv7Tpb53JQE
> accessed 30 June 2020
[7] Popper and Isaac (n 5)
[8] ‘Facebook’s Libra: An exciting but challenging road ahead’ (Clifford Chance Talking Tech, 27 June 2019) <https://talkingtech.cliffordchance.com/en/industries/fintech/facebook_s-libra--an-exciting-but-challenging-road-ahead-.html> accessed 29 June 2020
[9] Joshua Prior, ‘Facebook’s cryptocurrency and the regulatory challenges ahead’ (Legal Cheek, 29 October 2019) <https://www.legalcheek.com/lc-journal-posts/facebooks-cryptocurrency-and-the-regulatory-challenges-ahead/> accessed 29 June 2020
[10] Rob Sharpe, ‘Facebook’s Libra currency: the tax issues ahead’ (2019) 1451 Tax Journal <https://www.taxjournal.com/articles/the-tax-issues-facing-facebook-s-libra-currency> accessed 29 June 2020
[11] Prior (n 9)
[12] Kenneth Cukier, ‘Facebook’s Libra takes a pounding’, The Economist Radio (23 October 2019) <https://www.economist.com/podcasts/2019/10/23/facebooks-libra-takes-a-pounding> accessed 30 June 2020
[13] Clifford Chance (n 8)
[14] Bloomberg Markets and Finance, 'BOE Approaches Libra "With an Open Mind But Not an Open Door": Carney’ June 21, 2019 <https://www.youtube.com/watch?v=YvHZpGpoyGk> accessed 7 July 2020.
[15] Prior (n 9)
[16] Clifford Chance (n 8)
[17] Clifford Chance (n 8)
[18] Sharpe (n 10)
[19] Ruby Hinchliffe, ‘FCA: Libra will lead to financial exploitation’ (Fintech Futures, 3 October 2019) <https://www.fintechfutures.com/2019/10/fca-libra-will-lead-to-financial-exploitation/> accessed 30 June 2019
[20] Katanga Johnson, ‘Mnuchin says Facebook cryptocurrency needs safeguards against money laundering’ (Reuters, 15 July 2019) https://www.reuters.com/article/us-usa-treasury-mnuchin-facebook/mnuchin-says-facebook-cryptocurrency-needs-safeguards-against-money-laundering-idUSKCN1UA23T> accessed 30 June 2020
[21] Herb Weisbaum, ‘Trust in Facebook has dropped by 66 percent since the Cambridge Analytica scandal’, NBC News (18 April 2018) https://www.nbcnews.com/business/consumer/trust-facebook-has-dropped-51-percent-cambridge-analytica-scandal-n867011 accessed 30 June 2020
[22] Diane Bartz and Jan Wolfe, ‘US moving towards major antitrust probe of tech giants’ (Reuters, 3 June 2019) <https://www.reuters.com/article/us-usa-technology-antitrust/u-s-moving-toward-major-antitrust-probe-of-tech-giants-idUSKCN1T42JH> accessed 30 June 2020
[23] Waters and Murphy (n 3)
[24] Yessi Bello Perez, ‘France calls for EU-wide cryptocurrency rules amid Libra concerns’ (The Next Web, 13 September 2019) https://thenextweb.com/hardfork/2019/09/13/france-calls-for-eu-wide-cryptocurrency-rules-amid-libra-concerns/ accessed 30 June 2020
[25] ibid.
[26] ibid.
[27] Nick Statt, ‘Facebook is shifting its Libra cryptocurrency plans after intense regulatory pressure’ (The Verge, 3 March 2020) <https://www.theverge.com/2020/3/3/21163658/facebook-libra-cryptocurrency-token-ditching-plans-calibra-wallet-delay> accessed 30 June 2020
[28] Waters and Murphy (n 3)
[29] Daniel Kuhn, ‘Fed Chairman Jerome Powell compares Bitcoin to gold’ (Coin Desk, 11 June 2019) <https://www.coindesk.com/fed-chairman-jerome-powell-compares-bitcoin-to-gold> accessed 30 June 2020
About the author:
Lucy Larner is a fourth year Law student at the University of Warwick. Lucy has previously written an analysis piece for Obiter Dicta about Donald Trump's tax reform. Her research interests include Corporate Law, Tax Law, Financial Law and Regulation, and Corporate Governance. Lucy spent the third year of her degree studying law in Australia.
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