Libra Unraveling: Network of “Partners” Like Visa and Mastercard Refusing Even to Give Lip Service

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We have to confess that we didn’t shred Facebook’s Libra concept when it first hit the airwaves because it seemed too silly to merit giving it that much attention.

So Facebook, whose experience in finance consists of managing its own cash flows, cobbled together a document it managed to lard up with pretty much every hot buzz phrase from money-land. Libra would allow users to seamlessly and cheaply remit money…but using what amounted to a currency ETF based on a basket. So users would incur FX risk and probably fees in converting to the real world currencies to pay bills, along with taxes reporting and even taxes, since the US regards cryptocurrencies as property and subject to capital gains taxes.

Our belief was that Facebook announced Libra to imply that it had whole new business worlds to conquer, so as not to worry about the serious questions raised about its ad business, as well as to distract attention from the hot water the company was in.

Facebook had also entertainingly said it was going to domicile Libra in Switzerland. The Swiss banking regulators cleared their throats and said Facebook had said nothing to them about this idea.

Facebook nevertheless had gotten 27 Companies You Heard Of to sign up as partners, although upon inspection, that only meant a teeny bit more than Facebook trying to suggest it had the Swiss in its corner. The non-binding agreement amounted to: “We’ll give you $10 million if you get anywhere with this.” For companies like JP Morgan, Visa and Mastercard, $10 million is couch lint.

And even if these had all been hard dollar commitments, they still would not have amounted to much. Automakers invest in venture capital companies, not because they have Silicon Valley envy, but because they want an early look-see at auto-related tech. These companies in many if not most cases wanted to keep tabs on what Facebook was doing, and their intent could well have been to see if there were opportunities to launch new improved variants on the theme rather than stay with Facebook.

However, it soon became clear that if Libra were to get off the ground, its natural market would be money launderers and speculators.

Central bankers quickly cleared their throats to say Libra was not on. That has now led to Libra’s fair weather partner friends to try to disassociate themselves from the idea. From the Wall Street Journal:

Visa Inc., Mastercard Inc. and other financial partners that signed on to help build and maintain the Libra payments network are reconsidering their involvement following a backlash from U.S. and European government officials, according to people familiar with the matter. Wary of attracting regulatory scrutiny, executives of some of Libra’s backers have declined Facebook’s requests to publicly support the project, the people said.

Their reluctance has Facebook scrambling to keep Libra on track. Policy executives from Libra’s more than two dozen backers—a group called the Libra Association—have been summoned to a meeting in Washington, D.C., on Thursday, according to people familiar with the matter.

“Summoned”? I expect that to go over well. Facebook has no legal or business leverage over any of these companies. They are independent actors who don’t need Facebook. Facebook also plans to have a meeting in Geneva to present a charter and appoint a board for the “Libra Association”. This sounds heavy on optics and light on substance. Any meaningful relationship with any of the so-called association members will come about via contract with particular parties based on specific capabilities and services provided.

Facebook is still trying to promote the fantasy that Libra would be used in commerce:

Major defections could imperil Libra, Facebook’s attempt to persuade consumers to swap their national currencies for a digital coin that could be used to pay for goods and services on the internet. Without a network of financial partners that could help transfer currencies into Libra and global retailers to accept it as a form of payment, Libra’s reach would be limited.

Again, who wants and needs to buying things in a foreign currency and swapping in and out of their national currency? Who wants the volatility? Worse, merchants showing prices in Libra would presumably also need to show prices in local currency terms. It would be an enormous hassle for them to manage the pricing and avoid taking losses against their home currency in which they presumably paid their rent and employees, and most if not all of their inventory.

The Journal depicts central bankers wanting financial services incumbents to obey the law somehow nefarious because it exposes the half-assedness and arrogance of Facebook acting as if launching a currency is as serious as putting on a high school production:

Privately, U.S. regulators have leaned on Libra’s backers. The Treasury Department sent letters to companies including Visa, Mastercard, PayPal Holdings Inc. PYPL -1.02% and Stripe Inc. asking for a complete overview of their money-laundering compliance programs and how Libra will fit into them….

Libra Association members, meanwhile, have been pressing Facebook for more information. They have asked Mr. Marcus and other Facebook executives how illegal activities such as money laundering and terrorist financing would be kept off Libra and haven’t received detailed answers, one of the people said.

The Facebook retort was so lame as to validate the “partners” claims:

Mr. Marcus said on Twitter on Tuesday evening that it was “categorically untrue” that detailed information about how to protect the Libra network from illegal activity wasn’t shared.

“I can tell you that we’re very calmly, and confidently working through the legitimate concerns that Libra has raised by bringing conversations about the value of digital currencies to the forefront,” Mr. Marcus said.

Help me. “Conversations about the value of digital currencies” is Silicon Valley sales patter, the opposite of engaging in nitty-gritty discussions of how to devise controls to prevent criminal activity. This proves that Facebook is either high on its PR or hopelessly out of its depth.

The article finishes with the finance types pulling the choke chain:

“It’s important to understand the facts here and not any of us get out ahead of ourselves,” Visa Chief Executive Al Kelly said on the company’s earnings conference call in July. “No one has yet officially joined.”

As Lambert would say, pass the popcorn.

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  1. shinola

    “…it soon became clear that if Libra were to get off the ground, its natural market would be money launderers and speculators.”

    Isn’t this true for all cryptocurrencies?

  2. Wukchumni

    Libra Horrorscope:

    Today seems to have a rather aggressive atmosphere. Things may heat up quite a bit, so be prepared for blasts of intense energy coming at you from others. If you’re the one dishing it out, make sure you’re prepared to receive it right back. You’re much more sensitive than you look, despite wearing the same shirt all the time.

  3. The Rev Kev

    Don’t take this as an insult but I have to confess that if you read this article in the right light, that it amounts to high comedy because of all of Facebook’s blunders and stuff-ups. A comedy of errors if you will. The whole thing got so ridiculous in what Facebook was planning and how it was going about it’s business plans, that by the end of this article, I was imagining someone like Jimmy Dore reading it out aloud.

  4. Larry

    It’s 100% the culture of being smug and right because you’re rich. Facebook is nothing but a trend chaser at this point, trying to latch onto anything that smacks of the all important growth at all costs and yet failing miserably at all of it. Remember when it made a phone? Or was going to become the place to watch movies on the internet? Good times. Libra is just the latest thing to latch onto. Bitcoin is big with the Silicon Valley set due to faux libertarian leanings and more importantly, the scent of money in the water. Ergo, FB had to get into issuing a coin, bigly. Can’t be left behind in anything. And shocker, FB failed at execution completely.

  5. Jim A.

    This proves that Facebook is either high on its PR or hopelessly out of its depth.

    –Insert Why not both GIF here. Seriously, this just looks like some suit at FB wanted onto the Crypto currency gravy train. A day late and a Bitcoin short.

  6. Susan the other`

    Thank you for this update. I’m still so freaked out about even the remote possibility of “Libra” I’m hyperventilating.

  7. Sound of the Suburbs

    The central bankers were charged with creating financial stability, but they didn’t have a clue what they were doing.

    The FT had a good time line with all the financial crises marked on it and the period with hardly any financial crises was in the Keynesian era.

    This is when they had learnt their lessons from the 1920s and early 1930s, which had been forgotten again by the late 1970s.

    The Western financial system nearly collapse in 2008.

    Banking should be so easy.

    Bankers get to create money out of nothing, through bank loans, and get to charge interest on it.

    What could possibly go wrong?
    Bankers do need to ensure the vast majority of that money gets paid back, and this is where they keep falling flat on their faces. Banking requires prudent lending.

    If someone can’t repay a loan, they need to repossess that asset and sell it to recoup that money. If they use bank loans to inflate asset prices they get into a world of trouble when those asset prices collapse.

    “It’s nearly $14 trillion pyramid of super leveraged toxic assets was built on the back of $1.4 trillion of US sub-prime loans, and dispersed throughout the world” All the Presidents Bankers, Nomi Prins.

    When this little lot lost almost all its value overnight, the Western banking system became insolvent. Wall Street can turn a normal asset price bubble into something that will take out the global economy using leverage.

    You can tell when they are using bank credit to inflate asset price by looking at the private debt-to-GDP ratio and this is how China saw their Minsky Moment coming.

    It’s as clear as day.

    Back to reality and no one operating in the conventional system has got a clue what they are doing.

    Libra is a real threat as everyone will put their money there.

    They are not messing about with casino banking and the whole thing is so straight forward an idiot could make it work. With the levels of incompetence we see around us today, it could fail, but it shouldn’t.

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