What does Facebook’s Libra mean for its partners?

A sum of 27 companies have signed up to Facebook’s Libra cryptocurrency project and more will join over the coming months. We have a look at what it means for stocks like Mastercard, Spotify, Vodafone and Uber.

Facebook Source: Bloomberg

The 27 behemoths of industry – including some of the largest payments providers, blockchain developers and telecoms companies – have thrown support behind Facebook's ambitious cryptocurrency project.

Read about how Facebook’s cryptocurrency takes on the world to target mass users

Some see this collective as having the best chance of winning over governments and shaping the inevitable regulation of cryptocurrencies that is yet to come, especially at a time when both cryptocurrencies and Facebook’s ability to handle data are under intense scrutiny. Others regard the collaboration as a way of maximising adoption and minimising risk. No single member of the Libra Association, which will govern the Libra cryptocurrency, has the expertise to undertake a project like this on its own.

According to the whitepaper, the purpose of the Libra Association is to build a stable cryptocurrency that lowers the cost of finance for consumers and promotes financial inclusion by bringing the world’s 1.7 billion ‘unbanked’ people – those that do not have access to traditional financial services – into the fold.

Founding members of the Libra Association

Payments Venture Capital Telecoms
Mastercard Andreessen Horowitz Iliad
Mercado Lago Breakthrough Initiatives Vodafone
PayPal Ribbit Capital
PayU (Naspers) Thrive Capital
Stripe Union Square Ventures
Visa
Tech and Marketplaces Blockchain Other
Booking Holdings Anchorage Creative Destruction Lab
eBay Bison Trails Kiva
Facebook Coinbase Mercy Corps
Farfetch Xapo Holdings Women's World Banking
Lyft
Spotify
Uber

Although there are currently 28 founding members there should be 100 by the time Libra is launched in the first half (H1) of 2020. Each founding member will pay $10 million to gain a seat on the board and to operate a validator node – which together run the network and validate transactions. Proposals need to be backed by at least two-thirds of the board to be approved. An independent managing director, yet to be appointed, will lead the board, which is structured to ensure power cannot be concentrated under a handful of members.

Money speaks louder than words

But it is important to stress that money speaks louder than words. No money has been exchanged and partners are unlikely to be willing to hand over their investment until the fine details about how Libra and the Association will work are ironed out. With no firm commitment in place and more members to sign up over the next year or so, there is a good chance that some of the current members will not be on the final list by the time Libra is launched.

Facebook: Libra Association is a partnership of equals

Facebook came up with the idea of Libra and is to ‘maintain a leadership role through 2019’, but it has tried hard to send a message that it will be just one member of the Association and won’t hold any superior influence over the project. For example, the whitepaper states: ‘as one member of many, Facebook’s role in governance of the association will be equal to that of its peers’. Plus, it has established a ‘regulated subsidiary’ named Calibra to ‘ensure separation between social and financial data’. That is also a way for Facebook to send a message to regulators that it knows it must tread carefully.

Further down the line, the association intends to gradually surrender control over the network and make it more decentralised. This involves moving from a ‘permission-based’ blockchain to a ‘permission less’ one, whereby the founders will become less responsible for validating transactions as those using the network take-on more of the workload. Within five years, at least 20% of the voting power of the Association will be handed to the largest node operators, regardless as to whether they were one of the initial investors.

Facebook’s Libra partners are wary and uncommitted

The strong and diverse array of companies backing the project paints a promising outlook for Libra, but there is a whiff of caution in the air. We know money is yet to change hands and that most members declined to boast of their participation or promote the launch of the whitepaper. Mastercard issued a statement but didn’t mention Libra by name. It seems those that have signed up have commitment issues.

The caution is justified, especially with so many unanswered questions. European and US regulators have already started to demand more engagement from Facebook and its plans, something it has been reluctant to do in the past when being criticised for mishandling our data. While Facebook claims to be just one member, it cannot escape the fact that Libra was its idea and that it will play one of the biggest roles within the project, being the only one with the reach necessary to take it global with 2.4 billion users. Companies are aware that governments will be extremely concerned to hear the words ‘Facebook’ and ‘cryptocurrencies’ in the same sentence. This is why the Association has failed to get any of the big banks on board, because many fear the regulatory grey area that cryptocurrencies currently operate in.

Joe Lallouz, the chief executive of Bison Trails, one of the blockchain partners of the Association, said soon after the whitepaper was launched that he was highly sceptical of joining a Facebook-led cryptocurrency project because the company doesn’t have the best track record when it comes to privacy – something that is essential for a cryptocurrency. However, he also said Facebook had allayed many concerns by relinquishing control over the project.

Will Facebook’s Libra partners commit to the project?

Many of those that have signed up to Facebook’s project were already dabbling in cryptocurrencies and blockchains beforehand, and most do not consider Libra as their one-stop solution to break into the market. Mastercard’s brief statement described Libra as one of many partnerships it is pursuing.

If Libra is the coin to take cryptos global then there are obvious benefits for all those involved. Payment providers like Visa and PayPal can minimise the threat it poses to their traditional businesses and expand by tapping into the billions of unbanked people that Libra will target. Tech companies like Uber and Spotify, as well as online marketplaces like eBay, can drive down the cost of things like credit card fees and make their apps more appealing. The blockchain partners are already in the space and are eager not to miss out on an opportunity that could prove to be a catalyst for their industry. And telecoms companies act as the hardware backbone of the entire thing, with most transactions to be completed through mobile devices. Indeed, Facebook and others have stressed that sending money and paying for things should be as easy as sending a text message.

Until they put their money where their mouth is, there is every chance that existing members have tentatively signed up to understand what Facebook is trying to do but have no intention of joining permanently. With new members to join, and the possibility that existing ones could leave, some fear the final 100 founding members could be made up of smaller businesses than the current 28 suggest. In addition to the big banks, some have suggested the lack of names such as Apple and Amazon imply the project doesn’t have as much potential as first thought.

What next?

It is early days, and this has been reflected in the markets. Bitcoin and other cryptocurrencies have risen on the news as investors hope Libra can propel the entire crypto-community forward, but share prices barely nudged on the news. Participating in Libra could end up being a catalyst for members over the longer term but, for now, it is a case of ‘wait-and-see’ what happens next, not just for Libra but the wider crypto space. There are many consortiums working together on blockchain and cryptocurrency concepts, and most of them have big-name backers behind them.

There are two developments to watch out for this year. The first is the appointment of a managing director who, as a full-time boss and independent of members, will be key to the success of Libra and to bringing 100 different views together. All the members have a common goal, but payment providers will have different views about where to take the cryptocurrency than, say, one of the non-profit members. The second will occur when the finer details are ironed out and members know exactly how everything will operate and be governed. This will also be the moment many existing members will decide how committed they want to be the project.

More members will join the project, and some are likely to be big businesses that can give the Association, and the confidence behind it, a boost. However, some will be hoping for the best of the biggest – like Apple or Amazon – to fling their support behind it.

The other thing to track is how governments and regulators respond. Libra has already proven divisive, as have all cryptocurrencies. The governor of the Bank of England (BoE) Mark Carney has held talks with Facebook’s founder Mark Zuckerberg and seems to be open to the idea, while Maxine Waters, the chairwoman of the US House Financial Services Committee, has called for the project to be halted until they have a chance to question Facebook. Facebook’s reluctance, or should I say Zuckerberg’s reluctance, to engage with officials over how his business is run is one of the reasons the business has taken so much effort to distance itself from Libra and stress it is just one of many members.

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