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Despite privacy overhang, Facebook's Libra could be a 'watershed moment'

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Despite privacy overhang, Facebook's Libra could be a 'watershed moment'

Facebook Inc.'s recent push into cryptocurrency faces a number of hurdles given the company's recent privacy issues, but if successful, could help the social platform diversify and tap into an emerging field, analysts and legal experts said.

The cryptocurrency, called Libra, will be a blockchain-based global currency aimed at easing money transfers across the globe and helping underserved populations that lack access to basic financial services. Set to debut in 2020, Libra will be backed by a reserve of assets designed to give it intrinsic value and more stability than other cryptocurrencies.

Visa Inc., Mastercard Inc., Uber Technologies Inc. and eBay Inc. are some of the major firms that will invest about $10 million each in a consortium that will govern the Libra digital coin.

Facebook also is creating a subsidiary, called Calibra, that would be regulated by external partners to ensure the "separation between social and financial data." Calibra will offer a digital wallet that can be used to pay for items online using Libra currency.

Some analysts are touting Libra's potential to usher in a new era of growth for Facebook and cryptocurrencies overall, while others say the timing of the announcement is problematic based on recent calls for increased regulatory pressure on the company.

SNL ImageAn early look at the Calibra app
Source: Facebook

Congress responds

Libra has already received backlash from several key players on Capitol Hill. For instance, Maxine Waters, a Democrat from California who serves as the chairwoman of the House Financial Services Committee, has called on Facebook to cease work on Libra, citing concerns about the company's privacy practices.

"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 said in response to the Libra announcement.

Waters plans to hold a hearing in July on the matter.

Other lawmakers, such as Rep. Patrick McHenry, the Republican leader of the House Financial Services Committee; Sen. Sherrod Brown, D-Ohio; and Sen. Mark Warner, D-Va., are voicing concerns about the new project.

"Technologies like blockchain were touted as helping to break the hold of large platforms; instead we see Facebook using its scale to blunt the promise of decentralizing technologies," Warner said in an emailed statement.

The Senate Banking Committee, another critic of Libra, also plans to hold a hearing in July on the topic.

Privacy matters

"The fiat-currency-backed nature of Libra means that it will have to collaborate with regulators either directly or indirectly (through regulated/licensed financial institutions), thus support from regulators is paramount," noted Forrester Research analyst Meng Liu in a research report. Liu said a lack of regulatory support could significantly reduce the capabilities of Libra or even "make it illegal."

Liu is unsurprised by the pushback in Congress, saying Facebook's recent privacy scandals have "exposed egregious missteps" by the company. Consumers will likely be as skeptical, he said.

Regulatory scrutiny on the company has been increasing in recent months. Facebook, in fact, recently announced that it expects up to a $5 billion fine from the U.S. Federal Trade Commission over an apparent violation of a previous privacy agreement.

"Just weeks ago, the media was awash with calls to break up Facebook and reduce its influence," Liu wrote. "Considering this background, the launch of the Libra project seems brazen."

Blake Reid, a law professor at the University of Colorado who specializes in technology policy, also noted the recent concerns over Facebook "being so enormous that it's sort of operating as a quasi-sovereign." Reid said Facebook's announcement that it is planning "this full-fledged monetary system ... is going to raise alarm bells."

Facebook has said that Calibra will not share user account information or financial data with Facebook or any third party without consent. Customers' private data will not be used for advertising purposes, said Facebook, and would only be shared under limited circumstances, such as complying with the law and preventing criminal activity.

New growth

Despite the privacy overhang, some analysts are lauding Facebook's cryptocurrency plans as another avenue for growth beyond advertising.

"It's an extra way for Facebook to diversify from the current model they have, which is very much a mature model," said Daniel Morgan, a senior portfolio manager at financial services firm Synovus Trust.

The fact that Facebook's Libra will have a backing of real assets should help distinguish the offering from other cryptocurrencies on the market that do not have that same level of support, Morgan said.

For his part, RBC Capital Markets analyst Mark Mahaney called Libra a potential "watershed moment" for Facebook, also highlighting what it could do for the overall global adoption of cryptocurrency.

"In terms of scale and importance, we believe this new financial infrastructure could be viewed similar to Apple Inc.'s introduction of iOS to developers over a decade ago," Mahaney wrote in a note.