Regulators need to get up to speed with Facebook’s stablecoin technology so they can assess how it mitigates money laundering risks and where its weaknesses lie, says ComplyAdvantage CEO Charles Delingpole.
Facebook’s Libra cryptocurrency will be approached with “an open mind, but not an open door.” – These words from Mark Carney, Governor of the Bank of England, in response to what could become the world’s most disruptive and far-reaching innovation for financial services.
Libra is Facebook‘s cryptocurrency, and Calibra its digital wallet. According to the social networking giant, the aim of the digital currency is to eliminate the massive fees charged by credit card companies and digital payment systems, and to empower the financially excluded. The technology will allow users to pay for goods and services via Facebook apps, Messenger and WhatsApp, regardless of where the users are based in the world.
Some world leaders have praised it. The US President, Donald Trump, has even declared it ‘a good thing.’
But how good is it really? Will Libra manage to reach the estimated 1.7 billion people who don’t have access to affordable payments and help to promote financial inclusion? This is, after all, the main purpose of the initiative – to eradicate the unbanked problem and democratise financial services.
While it might sound appealing, Facebook’s attempt to launch a global stablecoin has attracted specific regulatory concerns.
Navigating regulatory hurdles
Governments around the world are gearing up to assess what the terms of engagement for Libra will be before it launches and is adopted by potentially billions of users. The last thing regulators want is to be caught off guard after the cryptocurrency goes mainstream, becomes dangerous, or raises antisocial problems.
The currency and its governing body are set up to try and offer the flexibility needed to adapt to the competing regulatory demands of different jurisdictions around the world. The goal is to enable regional players to work directly with local users.
Facebook wants to see Libra adopted by 2020, but that will be a difficult thing to achieve. The complex, regulatory landscape of different regions must be carefully navigated to get authority and approval – and Facebook hasn’t yet nailed down a comprehensive regulatory strategy to achieve this.
Even in jurisdictions that have implemented crypto-assets into legislation, there are still gaps to fill before this form of payment can be rolled out and adopted into the mainstream.
Calibra will also be shut out from markets where cryptocurrencies are banned. The world’s most populated nation – India, for example, won’t be embracing it anytime soon. According to local reports, a draft law is in the works that will potentially impose a 10-year prison sentence on persons who mine, generate, hold, sell, transfer, dispose, issue or deal in cryptocurrencies.
India is Facebook’s largest market with over 300 million users – and a country with a vast number of unbanked. Thanks to the crypto ban Libra will find it difficult to penetrate this nation.
Facebook will also face regulatory roadblocks in China as well. The country’s big payments providers have stayed clear of crypto so far with ICOs being formally banned. And China has no plans to change its position.
The dominant giant in the country, Ant Financial, which operates AliPay, publicly announced that it would eschew the issuance of any digital coins, and instead expand globally by partnering with local providers over direct services to their customers.
Meanwhile, American regulators are failing to act progressively in their approach to cryptocurrency regulation. How Facebook will navigate regulatory hurdles on its home turf will be interesting to see.
Calibra won’t be used in US sanctioned countries either – for fear that it could be used for money laundering or otherwise help fund terrorism. And, that is the biggest challenge of them all – how will Facebook find a way to stop Libra from getting into the hands of criminals, who have exploited the anonymity of digital currency for years and continue to do so.
An enabler of money laundering?
Libra could very well become the enabler of money laundering on a massive scale – and no amount of legislation will be able to halt the problem, because each region will have different views, different levels of understanding of crypto, and different ways to regulate it.
What regulators must do is come up to speed with Facebook’s stablecoin technology so they can assess how it mitigates risks and where its weaknesses lie. Only then can potential money laundering problems be addressed before they happen.
The Bank for International Settlements (BIS) also believes the adoption of digital currencies outside the current financial system could lead to serious breaches in data privacy.
According to Hyun Song Shin, economic adviser and head of research at BIS, “Public policy needs to build on a more comprehensive approach that draws on financial regulation, competition policy and data privacy regulation.”
Coordination among national and international authorities will be vital to the success of the project, the BIS says, but that will be difficult to manage on an international scale.
Only time will tell whether Libra will achieve global adoption. What is certain is that money laundering will continue to escalate with the ubiquity of digital channels – and the ease by which money can move around in the modern-day financial services ecosystem.
Add to the mix the enablers that make it happen (and Facebook could very well become the biggest enabler of them all) and it’s no wonder the war against money laundering remains so difficult to win.
Libra is an exciting idea with a great purpose, but cryptocurrency still has challenges to address, and they aren’t just regulatory hurdles, but also the willingness for users to adapt to this brave new world of payments.
Are we ready to embrace Libra? Do people even want Facebook managing their money, given the tech titan’s history of fake news and data breaches?
Whatever the outcome, the developments of this bold initiative will surely be closely monitored by the world of financial services – and, no doubt, by criminals too.
Charles Delingpole is CEO and Founder at ComplyAdvantage.