The Facebook Libra Project faced setback recently when major payment processors and a few other companies backed out of the project. The companies include PayPal, Visa, Mastercard, Stripe, eBay and Mercado Pago which were part of the founding member council of Libra when it was announced. But the question of why these companies left the Libra lies in regulators crackdown on the project. In particular, US regulators have viciously attacked it right from the beginning calling it a threat to global financial stability. Regardless, US regulators can’t stop the project as it is registered in Switzerland, even though they have tried their best to coerce Libra’s payment processing companies to back off, given they can also face regulatory scrutiny.
Why Did Payment Processors Leave Libra?
Payment processor companies have withdrawn from Libra primarily because they are subject to similar scrutiny in transactional data as Facebook if they continue to support the project. This has also been highlighted by US senators, which says Libra is a threat to the core business model of such companies including Mastercard, Visa, PayPal, etc. “If you take this on, you can expect a high level of scrutiny from regulators not only on Libra- related payment activities but on all payment activities,” said Sen. Sherrod Brown of Cleveland and Sen. Brian Schatz of Hawaii in their letter to executives of Mastercard and Stripe. The regulators also say Facebook is trying to deflect the responsibility of addressing these risks on to potential Libra Association members, particularly in the payments ecosystem.
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Libra May Still Go Ahead
The Libra Project hasn’t lost other prominent members who continue to support the network. Additionally, member companies form part of the governance of Libra and may not necessarily contribute much to the technology product. Given Libra still enjoys the support of Vodafone, Uber, Lyft, Spotify, Andreessen Horowitz, PayU, Coinbase etc., it will have no issue in going ahead with the project in terms of the network launch.
“Although the makeup of the Association members may grow and change over time, the design principle of Libra’s governance and technology, along with the open nature of this project ensures the Libra payment network will remain resilient. We look forward to the inaugural Libra Association Council meeting in just three days and announced the initial members of the Libra Association, ” said the company. Facebook expected Libra’s membership to grow to more than 100 by 2020 and
now with the ongoing struggle with regulators, it will have trouble reaching that number.
Why Are Regulators Incessantly Fighting To Stop Libra?
Regulators have said Facebook’s Libra may turn out to be a disaster for the global economy in case there is another financial crisis. As the currency is pegged to low-volatile assets, any adverse financial scenario can prompt a huge challenge because there will be no lender of last resort to help redeem Libra coins. Apart from that, regulators have expressed concerns that the funds may be used to fund terrorist activities and money laundering, which Facebook has denied saying the network will have full KYC processes built-in.
In the past, incidents like the Cambridge Analytica exposed how data of millions of users were being harvested on Facebook. The company’s misuse in the spread of fake news and US election meddling has also come under heavy scrutiny. Facebook has tried to reassure by saying it will keep financial and social data completely separate, and users will not be targeted with adverts based on their spending habits.
Technically, Libra is no different from other blockchain-based stable coin networks which have been cleared by regulators. One example is USDC, a dollar-pegged cryptocurrency which is used by exchanges over public blockchain Ethereum. Yet another example is JPM coin, which is a permissioned stable coin from JP Morgan, and that also has not faced any issue from regulators. The unique thing about Libra that US regulators are most concerned about is privacy and Facebook’s past history of user data mining for nefarious reasons.
Libra aims to expand banking to the unbanked population of the world by lowering the costs of cross-border payments, which may also challenge the current banking system. The currently inter-bank messaging system also known SWIFT has been criticised on many occasions for slow payment speeds as well as inefficient processes. As Facebook is unable to convince the regulators of its transparency, the social media giant will see some difficulty in finding traction in the US.