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Why Facebook鈥檚 Libra Cryptocurrency Is In Trouble - YouTube
Channel: CNBC
[0]
I actually don't know if
libra is going to work,
[3]
but I believe that it's
important to try new
[5]
things. When Facebook first
announced it was
[7]
getting into the crypto
business with a basically
[10]
unregulated currency called
libra, the reaction
[13]
from Wall Street and
government bankers was about
[16]
as expected. Libra raises
a lot of serious
[20]
concerns. I'm not a big
fan of what they're doing
[22]
there. I think it's
a big mistake.
[23]
It was a neat idea
that'll never happen, and I
[25]
have nothing else to
say about it.
[30]
Libra is in trouble.
[32]
The social media giant had
lined up a long list
[35]
of corporate backers
for the initiative,
[37]
including major players in
the payment space.
[39]
In early October 2019,
PayPal became the first
[43]
company to back out
of the libra coalition.
[45]
That led to an exodus
of other companies from the
[48]
project. MasterCard, Stripe, Visa
and eBay all
[51]
followed PayPal and
ditched libra.
[53]
So, why are all
these companies ghosting
[55]
Facebook's digital currency all
of a sudden?
[62]
First, let's explain how
Facebook got into
[64]
another mess like this.
[66]
I like the libra concept, but
you got to drop it.
[69]
It's clearly doing more
harm than good.
[71]
Facebook first announced libra
in June 2019.
[75]
Introducing Libra, a
new global currency.
[78]
It formed the Libra
Association in Switzerland to
[81]
run the cryptocurrency project
and lined up 27
[84]
companies to oversee it.
[85]
Facebook also set up
a subsidiary called Calibra,
[88]
designed to host the
financial services and
[91]
payment software built on
top of the libra
[93]
digital currency. Why did
Facebook get into
[96]
crypto in the
first place?
[98]
Facebook is big.
It has 2.41
[101]
billion monthly
active users.
[103]
That's a huge base.
[104]
Even if a quarter of
the users ended up using
[106]
Libra for payments. That's
600 million people,
[109]
about twice the population
of the United States.
[112]
Facebook, though, also has
a ton of baggage.
[114]
Think 2016 presidential
election and Russian
[117]
hacking kind of baggage.
[119]
So, when a company that
big and that influential
[121]
plans to introduce a
product that could
[123]
potentially disrupt the
global financial
[125]
community, you can
see why U.S.
[127]
lawmakers are paying even
closer attention to the
[130]
social media giant.
[132]
This is Facebook's currency
chief David Marcus
[134]
testifying before the
House Financial Services
[136]
Committee back in
July 2019.
[139]
The reason we designed libra
in such a way that
[141]
Facebook will only be
one among 100 different
[145]
members of the Libra
Association and we'll have
[147]
no special privilege, means
that you will not
[150]
have to trust Facebook.
[151]
Well except, Mr.
[152]
Marcus, you know
better than that.
[153]
You know that only Facebook
has access to 2
[156]
billion people and all, all
to say that, that you
[161]
are just one of many
is simply, is simply not
[163]
true after people's data
and private messages
[166]
have been stolen. And this
is Facebook CEO Mark
[169]
Zuckerberg testifying before
the House Financial
[172]
Services Committee about
the proposed
[173]
cryptocurrency in
October 2019.
[176]
I want to be clear. Facebook
will not be a part
[180]
of launching the libra
payment system anywhere in
[182]
the world, even
outside the U.S.,
[184]
until the U.S.
[185]
regulators approve. Lawmakers
are really, really
[188]
nervous about Facebook
getting into digital
[190]
currencies. Libra could be
misused by money
[193]
launderers and
terrorist financiers.
[197]
Cryptocurrency such as
Bitcoin have been
[200]
exploited to support billions
of dollars of
[203]
illicit activity.
[208]
Facebook designed libra to
be a digital global
[211]
currency. Like other
digital currencies, libra
[214]
will be built on top of
a blockchain or a digital
[216]
ledger. Unlike other
cryptocurrencies, libra
[219]
would be backed by a
basket of real world
[221]
currencies. That would
stabilize its price,
[224]
protecting it from wild
swings seen in the
[226]
bitcoin market. The libra
reserve will hold bank
[229]
deposits and short-term
government securities for
[232]
every libra coin
created online.
[234]
If all goes according
to Facebook's plan, users
[236]
would have a virtual wallet
where they could buy,
[238]
sell, send and receive
libra through platforms
[241]
like Facebook or
Instagram or WhatsApp.
[244]
And, those payments would
move within seconds for
[246]
small fees. With bitcoin
transactions, it could
[249]
take several minutes to
confirm a transaction.
[251]
And in some cases
cost a few dollars.
[254]
Bitcoin is known for
its volatility and steep
[256]
price swings because it
isn't backed by
[258]
government. That means things
like inflation and
[261]
monetary policy don't
influence its value.
[264]
Instead, cryptocurrencies move
with supply and
[266]
demand and basic market
forces, fear and greed.
[270]
Bitcoin, for example, has
a fixed supply.
[272]
The total number that will
ever be minted is
[275]
hard-capped at 21 million,
and experts say that
[278]
hard cap won't be reached
for another 120 years.
[281]
Facebook says all that
volatility wouldn't happen
[284]
with Libra because it will
be backed by a bunch
[286]
of currencies, effectively
maintaining a stable
[289]
price even when
demand changes.
[291]
I think Libra is being
designed right now to be
[294]
spent because it's a stable
coin and it's pegged
[297]
to a basket of currencies,
and so most people
[301]
today are going to assume
that people will be
[303]
buying burgers or coffee.
[306]
That's Tom Lee.
[307]
He's head of research
at FundStrat Global
[309]
Advisors, an independent
research firm.
[312]
He says Facebook entry
into cryptocurrencies is a
[315]
huge positive. It brings a
lot of credibility to
[318]
space, but also with its
2 billion users, it's a
[323]
massive increase in the
addressable market, and
[325]
arguably one of the
biggest headwinds for crypto
[328]
adoption has been the user
interface or the ease
[331]
of sort of
finding on ramps.
[332]
Libra would use blockchain
technology, which is
[335]
what all cryptocurrencies
run on.
[337]
The blockchain is a
secure, digital collection of
[340]
financial accounts.
[341]
So, it's basically a
decentralized bank ledger.
[344]
There's no middleman. The
currency is exchanged
[346]
person to person and
recorded on the blockchain
[349]
so you can see
who owns what.
[351]
Traditionally in crypto, anyone
could access that
[354]
blockchain, but not
with Libra.
[356]
This is David Yermack.
[358]
He chairs the finance
department at New York
[360]
University's Stern School of
Business and he
[362]
teaches courses
on cryptocurrencies.
[364]
It's very different
than cryptocurrency like
[366]
bitcoin or ether, which
is decentralized, has no
[369]
leadership and relies on
a community of people
[372]
who compete to build the
blocks that update the
[375]
transactions. Because of the
design of something
[378]
like bitcoin, it really
can only accommodate a
[381]
small amount of traffic,
but something with
[383]
central management like libra
could really grow
[386]
to almost any size
that you wished.
[389]
Libra would be
permissioned, which means
[391]
transactions can only be added
to it by a group
[393]
of trusted parties.
[395]
That's where the Libra
Association comes in.
[397]
It's the Swiss-based consortium
of nonprofits and
[400]
companies like Lyft,
Uber and Spotify.
[403]
Each partner of the
Libra Association invested a
[405]
minimum of $10 million
into the project.
[409]
David Marcus is the
Facebook executive leading
[411]
the blockchain initiative, who
also once served
[413]
as the president of
PayPal, previously testified
[416]
to Congress that libra would
work more like a
[419]
traditional currency than
a cryptocurrency.
[421]
The intent of libra is
not to compete with other
[424]
cryptocurrencies. It's to compete
with the real
[426]
currencies issued by
the central banks.
[429]
That raised a red
flag among government
[431]
regulators. And that's a
big reason why libra's
[433]
corporate backers
began fleeing.
[438]
Zuckerberg took heat from
lawmakers looking for
[441]
clarity. Given the company's
size and reach, it
[444]
should be clear why
we have serious concerns
[447]
about your plans to
establish a global digital
[451]
currency that would
challenge the U.S.
[454]
dollar. For the richest man
in the world to come
[456]
here and hide behind the
poorest people in the
[458]
world and say that's who
you're really trying to
[460]
help. You're trying to help
those for whom the
[463]
dollar is not
a good currency.
[465]
Drug dealers, terrorists,
tax evaders.
[468]
He acknowledged the risk
of digital currency like
[470]
libra poses, but also argued
it could ensure the
[473]
U.S. position as an
innovative financial world
[476]
leader. I just think that
we can't sit here and
[480]
assume that because America
is today the leader,
[484]
that it will always get to
be the leader if we
[486]
don't innovate. And innovation
means doing new
[489]
things. And that does mean
new things have risks.
[493]
And we need to address the
risks and we need to
[494]
be careful in doing that.
[496]
But when pushed to
explain why corporate backers
[498]
exited the libra project,
Zuckerberg put the
[501]
blame on risk. Why
have they departed?
[503]
Scores of stable partners
have dropped out.
[509]
Why? Well, Congresswoman, I
think you'd have to
[512]
ask them
specifically for-
[514]
Why do you think
they dropped out?
[517]
I think because it's a
it's a risky project and
[520]
there's been a
lot of scrutiny.
[521]
Yes, it's a
risky project.
[523]
And when asked about
potential privacy concerns,
[525]
he told Congress there
are millions who trust
[527]
Facebook. Billions of people
come to our services
[531]
because they trust that
they can share content,
[535]
messages, photos, comments with
the people they
[539]
care about. And more than
100 billion times a
[542]
day, people do that.
[544]
They share something with a
set of people because
[546]
they know that that content
is just going to
[548]
reach the people that
they want it to.
[550]
So I think that if
we're able to move forward
[553]
with this project, there may
be some people who
[556]
who don't want to use
it because they don't trust
[559]
us or don't like us.
[560]
And that's one of the
values of having an
[562]
independent association where there
will be other
[564]
competitor wallets and
other approaches, too.
[567]
Zuckerberg spent most of
the hearing reassuring
[569]
lawmakers libra wouldn't
launch without approval
[572]
from U.S. regulators.
[576]
Facebook's push into digital
currency served as a
[578]
big wakeup call for
lawmakers and central
[581]
bankers. It's pitting Facebook
against the U.S.
[584]
and other governments.
[585]
And Facebook is
losing so far.
[587]
In September 2019, France
and Germany both agreed
[590]
to block libra. The
government said, "no private
[593]
entity can claim monetary
policy, which is
[596]
inherent to the
sovereignty of nations."
[598]
A few weeks later, libra
began to lose its
[601]
corporate backers. PayPal was
the first company
[603]
to leave in
early October 2019.
[605]
Days later, two senators
on the Senate Banking
[608]
Committee sent letters to
the CEOs of Visa,
[610]
MasterCard and Stripe to
express concerns over
[613]
their involvement in
the Libra Association.
[616]
Senator Sherrod Brown of Ohio
and Brian Schatz of
[619]
Hawaii told companies "to
proceed with caution"
[622]
until Facebook provides more
details on the risks
[624]
posed by libra, like
financing terrorism and
[627]
disrupting the global
financial system.
[630]
A few days after the
senator sent the letters,
[633]
eBay, MasterCard, Visa and
Stripe announced they
[636]
would leave the
Libra Project.
[638]
The U.S. Treasury Department
had also been
[640]
privately pressuring libra's
corporate backers,
[643]
according to the
Wall Street Journal.
[644]
The opposition to libra
is coming from countries
[647]
with established financial
and payment systems,
[650]
where a majority of
the population already has
[652]
bank accounts. That's not really
the kind of user
[655]
Facebook has in
mind with libra.
[657]
It's going after the
world's unbanked population.
[660]
You know, that unbanked world
is a lot larger
[662]
than we all appreciate
because anyone living in
[664]
the U.S., you know, has
pretty simple access and
[667]
low-cost access to banks.
[668]
Facebook points to statistics
that show 31
[671]
percent of adults in the
world don't have a bank
[673]
account. That's about 1.7
[675]
billion people globally.
[677]
And those numbers are
worse in developing
[679]
countries and even
worse for women.
[681]
Turns out, the unbanked
community of 1.7
[684]
billion people can be
leveraged through reliable
[687]
internet infrastructure and
mobile phones.
[689]
Those two things alone have
given rise to a new
[692]
generation of financial
services without
[695]
requiring fancy tech.
[696]
1.1 billion of those 1.7
[699]
unbanked people have
a mobile phone.
[701]
For example, in
sub-Saharan Africa, simple,
[704]
text-based phones have
popularized mobile money
[706]
accounts. So, Facebook has a
lot to gain from
[709]
winning over the unbanked
with a global payment
[711]
service based on its
own digital currency.
[716]
It's not just Facebook
making waves in the
[718]
digital currency market.
[720]
China's government also wants
a piece of the
[722]
action. China's central bank
has made some very
[725]
public announcements that
they're going to
[727]
compete with the private
digital currencies in
[730]
their economy by having a
crypto version of the
[732]
renminbi, their
own currency.
[735]
And there have been a
lot of central banks around
[737]
the world researching this over
the last five or
[739]
six years. The People's
Bank of China announced
[742]
in August 2019 that it's
close to launching its
[745]
own digital currency, saying
the rationale behind
[748]
the move is to
protect its foreign exchange
[750]
sovereignty. Some say the
move would encourage
[753]
the worldwide use of
the yuan, the Chinese
[755]
currency and the deputy
director of the People's
[757]
Bank of China's Payments
Department said this
[760]
currency will have similarities
to libra and
[763]
would be as safe as
the central bank-issued paper
[765]
notes Libra is really trying
to mimic what has
[770]
already occurred in China,
where two social media
[773]
companies, Tencent and
AliBaba, have launched
[776]
payment services.
[777]
They've run very, very quickly
and have begun to
[781]
push aside the regular
banks as sources of
[784]
payments for people.
[786]
And if you look at
how quickly the Chinese social
[788]
media companies have grown
and the fact that
[790]
they're now going abroad
into other countries,
[794]
there seems to be
an opportunity for companies
[796]
like Facebook, Google, Amazon
to create a very
[800]
similar service.
[802]
China's central bank plans
to launch this digital
[804]
token through a two-tier
system, where both the
[807]
People's Bank of China
and commercial banks would
[809]
be legitimate issuers.
[811]
All this means that Facebook
doesn't just have to
[814]
contend with the opposition,
with regulators and
[816]
politicians. It means the
social media giant is
[819]
also in a race against
time with governments that
[821]
want to build their
own digital currencies.
[825]
While libra still may be
in deep trouble, despite
[827]
Zuckerberg's performance on
Capitol Hill, the
[830]
promise of digital currency
should live on,
[832]
according to Tom Lee.
[834]
I mean, I think the
future is really bright for
[837]
digital assets.
[838]
one, because I think it
is reducing a lot of
[840]
friction in traditional
financial architecture.
[843]
The average person spends almost
a month of every
[847]
year paying for the
right to use banks.
[849]
So, I think that that's
a level of value capture
[852]
that's high, and so digital
assets are going to
[855]
help sort of create
productivity around that.
[857]
No one knows when
the federal government will
[859]
enact regulation that would
impact how the libra
[862]
coin operates or what
that regulation would look
[864]
like. All they do know
is it's coming at some
[868]
point. Some even speculate
Facebook won't be the
[871]
first public tech company
in the U.S.
[873]
to issue a currency.
[874]
I don't think other
majors Silicon Valley
[877]
technology companies are far
behind, so I think
[880]
Facebook is the first, but
I think we'll see many
[882]
other versions.
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