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Facebook’s Reputation May Cause Libra to Fail

Dana Blankenhorn

The negative reputation of Facebook (NASDAQ:FB) looks increasingly likely to stifle its efforts to build out the Libra cryptocurrency. Despite having a 28-company consortium behind it and Facebook’s efforts to reassure governments that its mobile money complies with regulations, resistance to FB’s involvement seems to be hardening.

The Simple Reason I'm Not Ready to Buy the Dip on Facebook Stock

Facebook has created a $533 billion market cap in 15 years, compared to the $378 billion JPMorgan Chase (NYSE:JPM) created in 150 years. FB built its market cap on a network of cloud data centers and free consumer services.

A joint statement from French and German regulators seems unequivocal. “We believe that no private entity can claim monetary power, which is inherent to the sovereignty of Nations,” representatives from the two nations wrote. European governments say they want a stable cryptocurrency, but only a cryptocurrency that they control.

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Is Facebook’s Libra a Threat to Banking?

The Libra Association consists of 28 founding members, including Visa (NYSE:V), Mastercard (NYSE:MA) and PayPal (NASDAQ:PYPL). Those three companies alone have a market cap of over $800 billion. Visa, like Facebook, is worth more than JPMorgan Chase. Payments, traditionally the job of banks, already circulate through dedicated payment networks.

In theory, Libra is just a cheaper way of processing transactions. Libra coins would be tied to existing currencies and processed like credit card transactions. But transaction details wouldn’t enter the world of “real money,” so merchant fees would be eliminated.

The problem is that Calibra, a unit of Facebook, would handle the wallets. This seems to be behind government rejection of Libra. Regulators fear that the popularity of Facebook services, which already reach nearly two billion people, would allow it to create its own banking system. U.S. regulators also fear that Libra could be used by terrorists or as a money laundering instrument.

Banks, strictly regulated by governments, are not part of the Libra group or process. JPMorgan Chase has its own coin, dubbed JPM Coin, and customer trials are underway. Big traders are getting the benefits of stable coins. Small merchants and consumers are not.

Government resistance is spooking some Libra backers, who are thinking of walking away. Facebook, meanwhile, is tired of being the only company sticking its neck out.

The Payment World Turns

Meanwhile, the payment world continues to turn.

Alibaba (NYSE:BABA) and Tencent Holding (OTCMKTS:TCEHY) already have cost-effective, chat-based payment systems. India’s Unified Payments Interface is increasingly popular. Indian mobile wallets, some backed by Alibaba, are accepted by African merchants. European banks are working with these African payment networks rather than rejecting them.

Other cryptocurrencies are jumping into the payments space, claiming to be Libra’s competitors. None are likely to gain traction, because they lack market penetration. But they could serve as guinea pigs for banks that want to operate cryptocurrency. One, or several, might then be acquired by banks or other payment processors and slowly scaled to compete.

The Bottom Line on FB Stock and Libra

Transaction processing systems have a First World problem. Their costs are only acceptable in the First World.

Many nations can’t afford the fees that Visa and Mastercard charge through local banks. Facebook promised such a mechanism to avoid high fees. Facebook has a global, scaled, cloud-based data network on which low-cost transaction processing services could ride. This would in theory allow Visa and MasterCard to compete with the Chinese and Indian payment groups.

But Facebook’s leadership of Libra frightens governments. Nations see Facebook as a threat to government sovereignty in a way that Visa and Mastercard are not.

Before Libra can get going, Facebook may have to take a back seat in its own invention.

Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in BABA and JPM.

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