PayPal’s decision to ditch the association of companies put together by Facebook to develop its Libra digital currency coupled with well-publicized concerns of regulators seem to foreshadow challenges ahead. But, in some measure, it was not entirely unpredictable that regulators, wary of a digital currency powered by blockchain that they might not entirely understand, would put pressure on those entities that happen to be fostering the growth of this new tool.
That one significant member of the Libra Association is opting out seems not to faze the association itself. “Building a modern, low-friction, high-security payment network that can empower billions of financially underserved people is a journey, not a destination,” observed a Libra Association spokesperson asked about the PayPal brouhaha. “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,” the spokesperson said.
The first meeting of the Libra Council, the association’s governing body, is slated for mid-October. “We look forward to the first Libra Council meeting in 10 days and will be sharing updates following that, including details of the 1,500 entities that have indicated enthusiastic interest to participate,” the Libra Association tweeted on Oct. 4.
We look forward to the first Libra Council meeting in 10 days and will be sharing updates following that, including details of the 1,500 entities that have indicated enthusiastic interest to participate.— Libra (@Libra_) October 4, 2019
Friends, not friends
PayPal has not, in the minds of some, been particularly candid about its reason for withdrawing from the Libra project. “It might well be that PayPal does not want any negative publicity or regulatory scrutiny to intrude upon their current businesses,” says Michelle Gitlitz, global head of the blockchain and digital assets practice at the law firm Crowell & Moring. The company has not cited any specific reason for dropping Libra, she notes.
“PayPal has made the decision to forgo further participation in the Libra Association at this time and to continue to focus on advancing our existing mission and business priorities as we strive to democratize access to financial services for underserved populations,” says Amanda Christine Miller, a senior director of corporate communications at PayPal.
A reporter for the Wall Street Journal noted PayPal’s decision to drop out of the Libra Association was made public shortly after that publication revealed Visa, Mastercard, and other partners were having second thoughts about their involvement with Libra. The heightened scrutiny the efforts to launch this digital asset are receiving from regulators concerned about money laundering and privacy, among other things, apparently is not sitting well with some Libra members.
Still, observers of these recent developments might not read too much into them just yet. While PayPal’s withdrawal “is certainly not a good sign,” Gitlitz observes, “it would be an overreaction to say that PayPal’s withdrawal is a signal for the future of the Libra currency.”
“We remain supportive of Libra’s aspirations and look forward to continued dialogue on ways to work together in the future,” Miller says. “Facebook has been a longstanding and valued strategic partner to PayPal, and we will continue to partner with and support Facebook in various capacities.”
In regulators’ crosshairs
For some time, regulators and legislators have felt reticence toward Libra. “The Treasury Department has expressed very serious concerns that Libra could be misused by money launderers and terrorist financiers,” said Treasury Secretary Steven Mnuchin in a statement prepared for a White House press briefing this past summer.
In September, Rep. Maxine Waters (D-Calif.), chair of the House Financial Services Committee, expressed concern about the development of Libra at a hearing attended by all five Securities and Exchange Commission commissioners. “It appears that Facebook is working to create a new global financial system that is intended to rival the U.S. dollar,” she said in her opening statement. “I, and other Democrats on the Committee, have called for Facebook to halt their plans until regulators and Congress have an opportunity to examine these issues and take action.”
This interest in government oversight seems to have been anticipated by Libra. “We recognize that blockchain is an emerging technology, and that policymakers must carefully consider how its applications fit into their financial system policies,” says a Libra Association spokesperson. “The Libra Association and its members are committed to working with applicable regulatory authorities to achieve a safe, transparent, and consumer-friendly implementation of the Libra project.”
More headaches for Facebook
Meanwhile, Facebook faces a host of other problems outside Libra. Early this month, U.S. Attorney General William Barr and Acting Homeland Security Secretary Kevin McAleenan joined law enforcement partners from the United Kingdom and Australia in asking Facebook not to proceed with end-to-end encryption unless a few changes are made in its plans. In an open letter to Facebook founder Mark Zuckerberg, these leaders asked Facebook, among other things, to allow law enforcement “to obtain lawful access to content.” In sum, law enforcement is challenged to read encrypted messages criminal elements might be sending to one another.
In perhaps a more serious development, in September a number of state attorneys general announced an investigation of Facebook for possible antitrust violations. “I am proud to be leading a bipartisan coalition of attorneys general in investigating whether Facebook has stifled competition and put users at risk,” New York Attorney General Letitia James said when announcing the formation of the coalition of states, including New York, Colorado, Florida, Iowa, Nebraska, North Carolina, Ohio, Tennessee, and the District of Columbia. “We will use every investigative tool at our disposal to determine whether Facebook’s actions may have endangered consumer data, reduced the quality of consumers’ choices, or increased the price of advertising,” she said.
As many as 40 state attorneys general are expected to take part in the probe, according to a report this week from Reuters.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.