Facebook's Libra could meet prying regulatory eyes from the U.S. and beyond, experts say

Facebook’s Libra has a long path to its purported 2020 launch, and it's one that could be made more circuitous by inquiries from regulators, potential lawsuits and public mistrust.

What’s in a name?

Facebook's tarnished reputation when it comes to privacy has been Libra's main impediment out of the gate.

Despite the social media giant only having a 1% stake in the project, equal to the other consortium members backing the coin, the firm's history of privacy scandals could be a barrier to regulatory approval and usage by customers, experts say. 

Indeed, it is at the core of House Financial Committee chair Maxine Waters' call for a moratorium on the project. 

“Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data," she said Tuesday, June 18. "It has also exposed Americans to malicious and fake accounts from bad actors, including Russian intelligence and transnational traffickers.

"With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users," Waters concluded. 

Philip Berg, who chairs Otterbourg’s Corporate Department and its Privacy and Cybersecurity Practice, said he’s a proponent of Libra, but he also believes establishing trust in the association’s respect for data privacy, as well as building a general sense of propriety in the currency itself, will take time, especially given the other big players signed on.

“It will take a long time to convince people to trust this foundation to [adhere to data privacy], that it’s separate from Facebook and separate from Visa, besides knowing it's fully vetted and you can trust that your Libra equals dollars or euros,” he said.

The Cambridge Analytica scandal may still be fresh in the minds of some, when the political firm harvested Facebook data during the 2016 U.S. presidential election. Gabriel Hidalgo, Managing Director at K2 Intelligence, said it would take time to rebuild confidence in the company after an event like that, since data privacy and anti-money laundering are likely to be the biggest regulator concerns surrounding Libra.

“It looks like Facebook has implemented appropriate controls for data privacy after the Cambridge Analytica event,” he said. “But as with anything you need to build trust over time. And so even though they’ve formed Calibra as a separate entity and they’ve formed the Libra association in overseeing development of Libra, their association with the product is really going to cause regulators concern in regards to data privacy.”

Who will come knocking?

Bob Hockett, law professor and policy advocate, said because of Libra’s structure, the association will likely have to satisfy more than one regulator stateside.

"This is a case that was almost tailor made, it seems to me, for the Financial Stability Oversight Council to deal with," he said. "And that in effect means all of the principal financial regulators, with a special role to be played by the Treasury Department and the Fed in particular.

In addition, Hockett said the U.S. Securities and Exchange Commission will likely be interested as well, since Libra is tied to a basket of securities, and said it could be argued that it's a mutual fund, since it will be pegged to currencies that can fluctuate in value while traded on exchanges. Hockett explained that events like those seen during the 2008 recession, when stable assets pegged to money market mutual funds severely decreased in value, are also a danger to Libra.

"The danger is that it's always possible for those underlying assets...to lose value in the event of some sort of systemically cataclysmic events, sudden loss of confidence in a particular nation's currency or a particular nations' sovereign debt instruments," he said.

Similar to how mutual funds require regulation to ensure their assets are stable, a Facebook stablecoin could be subject to equivalent oversight.

For his part, Berg said he doesn't see Libra's basket of securities qualifying it as a mutual fund, but that doesn't mean the SEC will agree.

"Whenever you have a new asset class they're going fight you, then whatever antiquated tests they have to determine if it falls within their jurisdiction and they're going to each take a broad view of their own jurisdiction."

Aside from the SEC, Berg said Facebook could receive a lawsuit from the New York Department of Financial Services, since the department has been cracking down on money transmission businesses that lack certain licenses. Money transmission businesses are those that transfer money or complete payments, and because Libra will likely be used to complete payments on messaging apps, it will likely fall under that umbrella. Without a Bit License or federally recognized license, Berg said the NYDFS could take issue and file a suit. 

A global endeavor

Facebook’s coin went by the code-name “Global Coin” in the lead up to its release. The plan laid out in its white paper as well as the inclusion of many sovereign currencies in the source code of Libra's domain indicate the coin is meant to be used globally, as well as through messaging services like WhatsApp and Facebook Messenger.

Such an endeavor will require a legion of legal specialists from around the world to deal with regulators in different jurisdictions, said Berg. 

“I think it'll take you years before you get it fully vetted in each place and it's released in enough places to be truly significant,” he said.

In addition to this, Libra LLC’s Geneva location doesn’t make things easier or lighten the compliance load. Any product launched by the company will still require compliance in the U.S. if American users participate. Berg said compliance in America presents a "vast" number of potential regulators coupled with the jurisdiction's stringent data privacy concerns.

Similarly, any European activity will require compliance with Europe's Global Digital Privacy Regulation, which safeguards residents' control over their personal data, requiring businesses to disclose what is collected and implement privacy measures, among other requirements.

Hidalgo said he’s confident Facebook has done the necessary work to launch globally, but even so, regulators from each jurisdiction will be able to ask questions and demand answers. For this reason, Libra could wait to expand to certain areas with tougher standards.

“If the company feels like they are not going to be treated fairly or they don't feel like being there, the cost of doing business in that country is worth the investment, they can choose not to operate there,” he said.

The best way around this, according to Hidalgo, is ensuring Libra is following the most rigorous data privacy and anti-money laundering (AML) standards. For AML, he said the U.S. is likely the highest tier. However, data privacy could be more challenging, since adhering to one jurisdiction’s protocols can put an operation in conflict with others'.

This means comparing each jurisdiction’s control regime to the strictest standards and finding solutions to apply the highest level of compliance, according to Hidalgo. Facebook will likely have to compile a global repository of regulations to begin tracking and complying internationally.

Will Martino, founder and CEO of Kadena, and previously leader of JP Morgan's blockchain group and a senior science advisor for the SEC, said he was skeptical about Facebook’s ability to adhere to global regulation, since the scope of the coin makes it look like a sovereign currency, which could attract the attention of FinCEN among others since the currency will be transmitted among users.

Similar to stateside concerns, Hockett said a variety of regulatory interests will be implicated on the global level since no other project has come close to Libra in terms of scale or systemic significance. He said he expects the Basel Committee of Banking Supervision, the International Monetary Fund and international coalitions like the G7 could ask questions, and would need to be satisfied in advance of a currency launch.

So far, the U.S. Senate has set a hearing to discuss the implications of Libra  this July, and multiple U.S. lawmakers and financial players globally have expressed concern, but Facebook still has time to answer to its plans.

Good for crypto?

With Rep. Waters' call for a moratorium on Libra and the need for fleshed-out regulation, Hidalgo said this could mean crypto regulation gets pushed higher up the list of legislative priorities, which would benefit the entire space. A player like Facebook could garner enough attention to speed up the process. 

Similarly, Martino pointed out that if Facebook succeeds, it will likely introduce more of the world to crypto. In the same way Facebook's reach taught the layperson more about login/password usage, a step into crypto by the social media giant could educate a wider population on crypto and how to use it.