In July, the U.S. Senate Banking Committee and U.S. House Committee on Financial Services held two consecutive hearings on Facebook’s plan to launch a new cryptocurrency called Libra. On the heels of the $5 billion fine imposed on Facebook by the U.S. Federal Trade Commission for violating user privacy and mishandling of personal data, lawmakers signalled their distrust of the company, especially over privacy and regulatory compliance issues. Specific concerns range from the group of organizations that will manage the currency to the strength of consumer protection against fraudulent transactions.
Associate Professor of Management Information Systems - Purdue University Northwest
How governments should respond to Libra depends on how the company integrates the cryptocurrency into their larger business. We envision Libra being integrated into the company’s broader business model as a basis for offering financial services, or possibly an even broader set of services. Given the increasing social and economic power of large tech firms, governments should proactively start thinking of how to respond to these firms’ entrance into new industries.
New business models
The most straight forwarded use of Libra is as a way to strengthen Facebook’s role as a provider of financial services. In this way, Facebook would be making money through transaction fees in addition to its traditional revenue stream from advertising. Through its new subsidiary Calibra, Facebook plans to integrate a digital wallet for Libra into Messenger and WhatsApp. This should make paying through these apps as simple as texting, whether you are buying from a shop, paying your rent, or transferring money to a family member.
Facebook could also utilize financial services to extend its dominant position in the digital economy by becoming a multipurpose app like WeChat, an application that serves as Chinese citizens’ primary interface to online services. Achieving this level of ubiquity would grant Facebook access to more and different types of user data. While Facebook states that Calibra will not share account information or financial data with Facebook or any third party without customer consent, this is likely a shaky promise. As a multipurpose provider, Facebook will also be able to tap into new revenue streams and grow their existing advertising revenues.
Given the importance of financial policies in controlling unemployment and inflation, a proactive stance towards these novel payment systems is necessary. Libra has drawn scrutiny from a number of financial regulators, with France forming a G7 cryptocurrency task force, and Federal Reserve Chairman Jerome Powell expressing concern that Libra could destabilize the entire financial system due to the sheer number of Facebook users. Mark Carney, the Bank of England Governor, stressed that while regulation for social media is struggling to catch up after its mass adoption, financial regulation needs to be in place well in advance to protect against risks such as money laundering.
Should Libra form the basis of a wider array of services, governments should be mindful about their customer protection, competition, and privacy policies. With the tendency for the digital economy to leverage network effects and develop into ‘winner-take-all’ markets, Facebook becoming a dominant customer interface will require governments to ask questions about customer protection. For example, will people now be forced to join Facebook if they want to live a normal life as is the case with WeChat for the average Chinese citizen? If so, what happens if someone is banned from Facebook? Would businesses trying to reach customers be effectively forced to use Facebook’s infrastructure? Moreover, Facebook as multipurpose provider will have unprecedented access to customer data and with the growing advances in analytics and AI this information will only become more valuable. This, combined with Facebook’s questionable data sharing policies, will require governments to act.
Learning from past experiences
When confronted with disruptive innovation, governments should try to make sense of the emerging business models in addition to the new technology. This will be essential to assess the impact of these technology-driven changes and to be proactive. As we learned from past experiences with Facebook and other companies (Google, Uber, AirBnB), it is much harder to try to influence these companies and their operations once they have established their own rules and obtained a dominant position. In particular, it will be important for governments to decide if they can react by modifying their existing policies and regulations, or if they need to create new policies and regulations. If this is the case, it will be important to determine where these complement or conflict with traditional policies and regulations.
Facebook is a general, unrestricted donor to the Brookings Institution. The findings, interpretations, and conclusions posted in this piece are solely those of the author and not influenced by any donation.