SEC filing takes air out of Libra bubble

3 August, 2019

Could the proverbial hot air balloon that is Facebook's Libra be deflated before the company ever attempts to get it off the ground? Not only is it possible, such a scenario is looking more likely every day. The latest round of bad news for Facebook is its own admission in a U.S. Securities and Exchange Commission (SEC) filing that neither Libra nor Calibra are even close to being a done deal.

Facebook began talking about getting into the cryptocurrency space in 2018. In June 2019, they released white papers for Libra (their stablecoin) and the Calibra digital wallet intended to support Libra transactions on the Facebook network. Both white papers raised a lot of questions as cryptocurrency experts started reading them.

It took less than 24 hours for some critics to start complaining that Libra would do far more harm than good to the cryptocurrency sector. Others began speculating as to whether or not Libra was even viable. Now we know it might not be. Libra might not get off the ground after all.

A stunning admission

In their most recently quarterly report filed with the SEC, Facebook officials admitted that they may not be able to overcome all of the regulatory issues that come with their entrance into financial services.1 The filing explicitly stated as follows:

"In addition, market acceptance of such currency is subject to significant uncertainty. As such, there can be no assurance that Libra or our associated products and services will be made available in a timely manner, or at all. We do not have significant prior experience with digital currency or blockchain technology, which may adversely affect our ability to successfully develop and market these products and service."

The phrase 'reasonable assurance' appears 11 times in Facebook's SEC filing. In every case, the filing says that Facebook cannot offer reasonable assurances of a positive outcome. Company officials are not reasonably assured of Libra's potential profitability. They are not assured of its economic viability, its marketability, its utility, or anything else for that matter.

Even more amazing is an admission that their lack of experience in both cryptocurrency and blockchain could "adversely affect" their ability to make a go of it with Libra and Calibra. They have essentially admitted they do not know what they are doing and cannot make any guarantees that they will actually succeed in their plans for Libra. This is a stunning admission by any measure.

Regulators aligned against them

It would seem as though Facebook understands that both regulations and regulators are aligned against them. Maybe they have come to the conclusion that satisfying current regulations would not be enough. Such a conclusion would be completely reasonable considering some of the regulatory news that has recently making the rounds in the cryptocurrency community.

Despite all the fanfare surrounding its two white papers, Facebook has come to the realization that launching Libra is a lot more difficult than publishing a white paper and developing a mobile app. Going the stablecoin route instead of a pure cryptocurrency and ICO forces any company to have to deal with regulatory constraints. Matters are made worse for Facebook by the fact that a number of national governments simply do not trust them.

If Libra is to eventually succeed, Facebook faces the daunting challenge of convincing U.S. regulators that they are serious about privacy, security, anti-money laundering, and so forth. That would be the bare minimum. But Facebook also faces hostility from the EU and multiple South American and Asian jurisdictions.

This means that, at minimum, Facebook has an incredible regulatory mountain to climb just with those regulations currently in place. But you can bet that any serious attempt by the company to move forward with Libra is going to result in more regulations targeted specifically at them. U.S. legislators have hardly begun the process of holding hearings for that specific purpose.

The problematic Libra Association

Facebook is looking at a whole host of regulatory issues with Libra, not the least of which is the pseudo-independent foundation they intend to establish as Libra's governing body. That foundation is known as the Libra Association.

Experts point out a number of problems with the Libra Association. First of all, the Association will not have total control over Libra from the outset. Instead, control will be gradually ceded to them. In the meantime, Facebook will be directly involved in the launch and maintenance of Libra and Calibra. This automatically creates a conflict of interest regulators are not comfortable with.

The big problem with this model is that it guarantees that Libra is not truly decentralized. It puts Facebook in the business of offering financial services. All of that is fine and perfectly legal, but it forces Facebook to adhere to an extensive list of regulatory controls.

Another concern with the Libra Association is its membership. Facebook has already stated that a number of big-name corporations, including PayPal for example, will have controlling interests. This creates even more conflicts that have to be resolved through compliance with current regulations. The web could become so entangled here that regulators are forced to create new rules to untangle it.

Facebook admitted the problems with the Libra Association in their SEC filing. The filing states that "our participation in the Libra Association will subject us to significant regulatory scrutiny and other risks that could adversely affect our business, reputation, or financial results."

Goals are too ambitious

However you feel about Facebook personally, what their two white papers propose aligns quite well with the original purpose of cryptocurrency, at least in principle. Libra is intended to be an alternative monetary system that invites people to participate in the global economy without having to rely on fiat.

Facebook's failures appear to be rooted in two things. First are goals that appear too ambitious for the current environment. Second are the methods chosen to reach those goals. Either Facebook doesn't really understand what it is getting itself into or they published their two white papers intending to follow through despite knowing how much push back they would get from regulators.

In terms of their goals being too ambitious, it is understandable that the minds behind Libra want the stablecoin to eventually be the world's most dominant cryptocurrency. But you do not let such a goal be known right from the start. Setting goals like that scares regulators. It also scares investors, customers, and the very people you hope to use your coin someday.

Facebook's goal of creating what would eventually be an independent association to govern Libra is also overly ambitious. It sounds good in principle, but it defies some of the basic principles of cryptocurrency and decentralization. In essence, Facebook wants it both ways. Yet they cannot establish the Libra Association as outlined in their white paper without subjecting themselves to regulatory controls.

Starting with a pet project

It probably would have been better for Facebook to start with a small, pet project just to give the people behind Libra a better understanding of the technology and processes they would be dealing with. By Facebook's own admission, they don't know what they are doing. A pet project could have more effectively addressed that problem.

Imagine a scaled-back version of Libra intended only to facilitate payments for advertising on the Facebook site. Such a project would have created a very utilitarian token that would have been easy to implement. Once implemented, advertisers would acquire tokens by investing in the platform. They could then use those tokens to buy Facebook advertisements.

Advertisers could also trade tokens among themselves if they chose to. They could even accept the tokens as payment for goods and services sold to B2B customers. That would give them more tokens to spend on advertising.

The thing to understand is that the most successful blockchain projects in the world started out small. Even Bitcoin started out as a small project designed to test the viability and limits of blockchain. Today's Bitcoin far exceeds what its creator originally probably imagined.

Ethereum is another notable example. The Ethereum platform was never intended to be limited just to monetary systems. It was designed to be a computing platform on which all sorts of apps could be built. Once again, it started out small. Today, the Ethereum code continues to be the foundation for scores of decentralized apps covering everything from digital payments to logistics management.

An uncertain future

In light of Facebook's recent SEC filing, those looking forward to Libra must come to terms with the fact that it now faces an uncertain future. There are no guarantees that Libra or Calibra will ever be more than a proposition in a white paper. There are no guarantees either project will ever produce a service that customers can use.

The sad thing for Facebook is that they made the bed they now find themselves laying in. Their history as a company that plays fast and loose with consumer data has raised the ire of national governments around the world. And with the U.S. Congress, the G7, and a whole host of central banks suspicious of Libra, it's looking more and more likely that the project is already gasping its last breaths.


1) SEC Form 10-Q (PDF Document)