Back in the day, the Winklevoss twins asked their nerdy Harvard classmate, Mark Zuckerberg, to write some code for a project they were working on. Zuckerberg ran with the idea, cut out the Winklevoss brothers, created Facebook and became one of the youngest self-made billionaires. The twins extricated a financial settlement and parlayed it into business ventures, including a bitcoin exchange, Gemini Trust, which made them billionaires too—albeit, not at the level of their former classmate and nemesis.
On Tuesday, Facebook announced that it will have a cryptocurrency of its own called Libra. Hmm, sounds eerily similar to Gemini. In an attempt to show that Zuckerberg and Facebook will not completely control the currency, initial plans have been drafted for it to be run by a consortium of 100 elite corporate investors and non-profit members, each investing a minimum of $10 million, including Mastercard, Visa, PayPal, Stripe, Uber, Spotify, eBay, Uber Technologies, Vodafone Group Plc, venture capital firms Andreessen Horowitz and Thrive Capital.
Facebook plans to also offer a subsidiary that will feature a digital wallet to store, buy, sell and exchange the cryptocurrency. Libra will be backed by real-world assets, held by a network of custodians and trade on a network of exchanges. Here’s the sweet spot for Facebook: individuals and merchants will be able to buy and sell products across all of the company’s proprietary apps, such as WhatsApp and Instagram. Facebook could further dominate and compete against the likes of Amazon by having its members transact business on Facebook and its other properties using its Libra currency.
Libra’s introduction to the world incited a political firestorm. In light of Facebook’s highly publicized transgressions, people are understandably worried about its growing power and control. Congress is concerned about the cryptocurrency and business model, especially since they had Zuckerberg testify last year and were not too pleased with his failure to stem repeated questionable activities, such as privacy breaches. Rep. Maxine Waters, a Democrat and chair of the House Financial Services Committee, requested that Facebook halt their plans until Congress and regulators can carefully review this matter.
“With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users,” said Waters.
Other politicians have raised concerns about data privacy and Facebook’s influence and control over the currency. Former Congressman Barney Frank stated that “there’s already a concern that Facebook is being used by bad actors to disguise their identity and pretend to be other people—cryptocurrency enhances your ability to do that. In this case particularly, it’s a problem because there is potential synergy between the anonymity you get from cryptocurrency and the ability to mislead people on Facebook.”
I predict that U.S. and international regulatory agencies will be forced to conceive a comprehensive plan to deal with this new cryptocurrency. Additionally, they will need to adequately address the array of other existing cryptocurrencies in circulation. If Facebook’s initiatives progress forward, there will be a hiring boom for compliance, legal, regulatory, audit and privacy professionals to oversee this venture. Facebook and related entities would have to hire armies of these people to ensure that the moms, dads and grandparents—who dominate Facebook after the kids have all fled to Instagram and Snapchat—are protected from “bad actors.” The company will need to enact strict anti-money laundering guidelines to ensure that Libra is not used to launder money or engage in illegal activities. Since Facebook has demonstrated its inability to control other compliance and privacy breaches, there will be intense regulatory, political and media pressure to ensure that the platform is safe, secure and operates within the law.
The new crypto platform has the potential for manipulation. Losses can be incurred due to naive Facebook and Instagram users buying and engaging in transactions using Libra. If the consortium of 100 companies are offered Libra at pennies a share, then the price ramps up to $100 or $20k per Libra, which is what happened with Bitcoin. The temptation would be for the early adopters to sell the digital coins for substantial profits. The average mom-and-pop investor buys Libra at the top price, as the savvy insiders sell their holding to lock in profits. The prices may then dramatically drop and the small-time Facebook-user investor will lose money and feel ripped off. We see this happen all the time with IPOs, such as Uber and Lyft. The early venture capitalists and well-connected investors get cheap stock and sell it for large gains to the gullible public.
Facebook has a history of buying out its competition, imitating them or crushing them out of business. With this in mind, employees of other bitcoin-related entities may have to start being a little concerned about the safety of their jobs.
I believe that once these regulatory issues are raised, a spotlight will be shown on other Big Tech companies that display monopolistic traits, such as Google, Amazon and Apple. Facebook’s new business may draw the attention of antitrust regulators who maintain that tech giants have become too large and powerful and need to be broken up—like they did with AT&T, Standard Oil, Kodak and Microsoft. If this happens, it would likely cause an initial massive spike in the demand for the services of attorneys, regulators and related professionals. Should Facebook, Google, Amazon, Apple or other prevalent tech giants be broken up into smaller companies, there will be a large need to staff these new entities.