Intrigue and suspicion mark Facebook currency movement



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If you were using social media this week, you may have seen an ad warning you about imminent changes in the way you do banking transactions and online purchases.

This refers to the new European rules that officially take effect in September. The most obvious change you'll see will be around security, as users can expect to go through additional hurdles to prove who they are who they say they are.

However, a second aspect of the second payment services directive in the European Union has the potential to be much more meaningful in terms of how people deal with their money on a day-to-day basis. This is the introduction of open banking.

"This would mean that third-party payment providers – if the consumer consented – would have to have access to consumers' bank accounts," said Rowena Fitzgerald, a partner at Mason, Hayes & Curran.

"For the banking industry today, this has been a big change for them, as they now need to make sure the bank is open to new technology providers who want to access customers' bank accounts."

Instead of assuming the disguise of a traditional bank, the types of companies that could benefit from the open banking system would tend to be in the space of financial technology.

This can include applications that provide budgeting tools to users, who can now connect directly to an account or multiple accounts and aggregate all information in one place.

Irish banks have been preparing for these changes for more than a year – as is the Central Bank, which regulates financial services companies, including those that can benefit from the new rules.

One of the companies that is already under its regulatory mandate is the social networking company Facebook. However, this week he made it clear that his ambitions go far beyond simply connecting to someone's existing bank account.

Viva Libra

On Tuesday, Facebook released Libra – a new digital currency backed by a coalition of other companies. This, of course, includes Facebook; as well as big names like Mastercard, Visa, Ebay, Uber and Vodafone.

It follows the steps of criptomoedas like Bitcoin and Ethereum, nevertheless, its design seems to borrow heavily of more traditional forms of money.

"It's clearly a project that is created by adults – they clearly did their homework and are going for what is fundamentally a very conservative approach," said Quinn Dupont, assistant professor at the UCD College of Business.

A large part of this "adult" approach is the decision to support Libra with a reserve, which will rely on traditional assets such as US dollars and government bonds in order to provide price stability.

"They are supporting this very concretely," he said. "You'll never be sure that you can trade a pound for a dollar, but if you can buy a chocolate bar with a pound today, you can do the same tomorrow."

Undoubtedly aware of the growing distrust of the public, Facebook has also made a point of highlighting the independent nature of Libra – being a completely separate, non-profit entity governed by the companies, academic institutions and organizations that support it.

Along with the revelation of the criptomoeda, however, Facebook also announced the Calibra – a digital portfolio with Libra that is part of their business.

In the days that followed, the reaction to the news was mixed.

For those who have worked in the area of ​​criptomoedas and blockchain – the technical standard that helps to boost the money – Facebook's entry is being seen as a game change.

"The really incredible thing about this ad is that Facebook has the opportunity to deploy massive crypto-coins to billions," said David Wachsman, CEO of public relations firm Wachsman.

"The 2.4 billion Facebook users are almost equivalent to the global population in 1950.

"The number of people who use cryptography today is a bit scarce … estimates are perhaps 100 million people. Almost the entire world population of 1950 exists in [Facebook’s] platform. All these people could have a portfolio tomorrow. "

It is also clear that the founders of Libra want it to be more than a niche product – it is widely used as a useful currency.

In addition to some basics, however, the information on Libra is somewhat incomplete.

How this will be regulated and by whom, perhaps it is the most glaring omission at the moment.

Libra's mission statement provides fleeting references to the regulatory issue – but is brief and involved in the vague Silicon Valley – about "collaborating and innovating" to ensure that it functions in a "sustainable, secure and reliable structure."

Rapid Regulators to React

But national regulators have already made it clear they are watching – and will not allow the digital standard to define terms of engagement.

Jerome Powell's initial reactions to the Central Bank and Bank of England President Mark Carney seemed relaxed and open-minded, but they also made it clear they would not wait to catch up.

Meanwhile, France signaled its skepticism by initiating a G7 task force that looked at how central banks could deal with entities such as Libra.

"Traditionally [regulation] it is based on where it is domiciled, so in the case of Switzerland, but if they want to provide access to specific markets, they need to be in compliance, "Dupont said. I think everyone, more or less, plays with the same rule book. ..but that's a moving target right now, regulators are constantly talking about these things. "

Robust regulation is also not just a cashier's exercise.

Officials will be watching closely to see if the Pound ends up as a sovereign currency – and as a competing result – which may affect how effectively they can regulate their own economies.

They also want sufficient oversight to ensure that the default does not become a focus of black market trading, money laundering or worse.

Failure to deal with this issue will put Libra on a collision course with national authorities, while also giving traditional banks an excuse to play hard with a potential competitor.

However, the more bureaucracy the Pound has to face, the harder it will be for the currency to keep the promise of quick, cheap deals.

One way you can try to address this is through the use of anti-money laundering standards, such as Know Your Customer – which requires the identities of those involved in a transaction to be verified.

"If you wanted to do something illegal with your Pound coins, they would be able to track you back from the prosecution's point of view," said Dupont. "But on the other hand, you could transact with companies or individuals anonymously."

Linking financial activity to an individual may be a prerequisite, but what more Facebook does with this link may attract the interest of regulators beyond central banks.

Libra v Calibra

Although Libra itself is not part of Facebook, Calibra – a digital wallet that deals with the currency – is.

It will fit the tastes of WhatsApp and Messenger, allowing users to send and receive money into their social media account.

The data privacy issues this can create are huge.

Facebook makes money by targeting ads to users like you, and the more it knows about you, the more targeted (and the more profitable) they become.

He currently learns what he can about you with the details that you actively provide on your platforms, such as your name, gender, or location. The Facebook pages you visit, posts you like or topics you discuss also go to the profile you have. In addition, the Facebook code is also spread across countless other websites, which means that it is silently picking up the bread crumbs that you loose even when you browse beyond your domain.

Now; imagine that he has access to your bank account as well. Not only your bank balance, but also your credit and debit card transactions, which detail when and where each purchase you make.

At a minimum, this could overwhelm ad targeting. However, knowledge of a customer's interests, past purchases, and current purchasing power may influence prices presented at the point of sale.

In turn, Facebook promises that Calibra will be an autonomous entity within its group.

Your (currently brief) document on your commitment to customers says that you will not share account information or financial data with the rest of the company "without the customer's consent" and that such "data" will not be used to improve ad targeting in the Facebook family of products ".

"My understanding is that there have been guarantees that there will be no link to Facebook profiles," said Wachsman.

"That said, because the details still do not exist fully, what I must say is that with certain blockchain protocols it is very easy to trace transactions, because there is an infinite record of all transactions, all recorded in the blockchain."

Regulators are likely to cast a suspicious eye on any assurances that Facebook can make.

To begin with, their promise to Calibra has echoes of what was done to EU regulators when they wanted to buy Whatsapp – something that quickly reversed when the deal was completed.

Even if there is a barrier between Calibra and the rest of the group, the opaque nature of how Facebook directs its ads will make it extremely difficult for national authorities to ensure that it is waterproof.

In the great unknown

The objectives Libra establishes are quite high. It wants to connect the 1.7 billion people who currently do not have bank accounts, for example, while offering faster and cheaper transactions for everyone.

If this is possible, it can only be clear when the rubber hits the road.

To begin with, many of the world's most financially isolated people live under governments that are hostile to cryptomoedas and social media. There is also no way to tell if people really want to use Libra / Calibra once they are available – or whether they will use it the way Facebook and Co want.

After all, Bitcoin was originally conceived as a currency for the internet – free from government interference or legal oversight. However, its open and unrestricted design has made its value extremely volatile, meaning that it is more useful to investors looking for profits than someone trying to make a purchase.

To be fair, there is the same uncertainty surrounding how the EU's view on the open banking system will turn out to be.

Success depends on your willingness to participate, and many of your best use cases may not be obvious for some time.

The crucial advantage it has, however, is that regulators and banks are already on board.

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