Facebook’s Libra Surrenders to Authority

Facebook told Congress today it will let police into its blockchain

There are few companies that can match the profitability of Facebook (NASDAQ:FB).

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In 2018, Facebook reported profits of over $22 billion, 40% of its $55 billion in revenue. Investors are paying more than 10 times revenue for that, based on the stock’s price of about $204 per share and a market cap of $583 billion.

But I covered such a company this week: Visa (NYSE:V). After bringing $10.2 billion to the net income line last year, Visa was worth over 20 times revenue as trading opened July 16 at $181 per share and a $406 billion market cap.

Electronic money is so powerful that Visa is now worth more than JPMorgan Chase (NYSE:JPM), the largest U.S. bank, which has a market cap of $373 billion.

Visa is what Facebook wants to be when it grows up. Libra is how it gets there.

Ensuring Compliance

After a month spent talking about Libra as cryptocurrency, Facebook plans to tell Congress this week that Libra is more like Visa.

Libra has registered as a Money Services Business and says its blockchain will comply with U.S. regulations regarding money laundering and financing of terrorism.

In a blog post, Libra co-creator David Marcus asserts the Libra blockchain’s “know your customer” practices will be “a big opportunity to increase the efficacy of financial crimes monitoring and enforcement.”

This turns the paradigm of cryptocurrencies on its head. It makes transactions less anonymous and more difficult to hide than in the present system.

The difference is that, while banks today have to police compliance at the teller’s window, so to speak, Libra will make its blockchain available to police. Facebook will control neither the network, the currency, nor the reserve backing it. Its Calibra subsidiary will just be running digital wallets.

Is That Enough?

Whether that’s enough for Democrats is an open question. The House Financial Services Committee is drafting legislation called the “Keep Big Tech Out of Finance” act, specifically aimed at keeping Facebook out of the money business.

Even the rest of the tech industry doubts Libra will get off the ground next year as planned. The wallet has already been banned in India, where banks are forbidden from handling cryptocurrencies.

Marcus has disposed of objections about money laundering, but economists now claim Facebook threatens to replace the dollar and other currencies.  That’s because the Libra Association, based in Switzerland, would hold reserves of various currencies to back Libra, acting as a digital central bank. If it’s less expensive to run than a real central bank – and that’s the whole point – it could replace national banks, according to economist Peter Morici.

The Bottom Line

The blockchain paradigm, in which transactions are part of a central database, avoiding the costs of real money, has inherent cost advantages over the systems used by central banks and transaction processors like Visa.

Libra’s structure, transactions backed by a currency reserve, is similar to that of Alibaba’s (NASDAQ:BABA) Alipay. Its costs are like those of India’s Unified Payments Interface (UPI).

What those two systems have are huge, unified markets to grow in. China controls Alipay, India controls UPI. Low-cost systems for electronic transaction processing exist, and unless the West gets in the game it could be buried by them.

That’s the card Facebook, and other “fiat” coins like JPMorgan Chase’s JPM Coin, are going to be playing in order to go into electronic money. Let us in, they’ll say, or China and India get the business.

Dana Blankenhorn is a financial and technology journalist. He is the author of a new environmental story, Bridget O’Flynn and the Bear, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in JPM and BABA.


Article printed from InvestorPlace Media, https://investorplace.com/2019/07/facebooks-libra-surrenders-to-authority/.

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