META Meta Platforms Inc

By Jeff Horwitz and Parmy Olson 

Facebook Inc. formally announced plans to launch a cryptocurrency, an ambitious move that could diversify its business from advertising while claiming a larger role in its users' financial lives.

The cryptocurrency, called Libra, will be a secure blockchain-based payment system backed by hard assets and designed for ordinary users -- making it among the boldest efforts yet to bring digital currencies into mainstream use.

Facing continuing scrutiny of its privacy practices, Facebook said it is creating a regulated subsidiary, called Calibra, to ensure "the separation between social and financial data." Calibra will roll out a crypto wallet -- a digital app that can be used to pay for items online and send money -- using Libra.

Facebook on Tuesday named a series of big, corporate partners -- including financial-services heavyweights Mastercard Inc. and PayPal Holdings Inc. and tech giants Uber Technologies Inc. and Spotify Technology SA -- that it said would help it create a "secure, scalable and reliable" cryptocurrency. The Wall Street Journal reported in May that the initiative involved the creation of a "stablecoin" -- a digital asset backed by a basket of global currencies or other investments -- unlike other cryptocurrencies, such as bitcoin, whose values are susceptible to sharp fluctuation.

Facebook said Libra would be available by 2020 on its Messenger and WhatsApp services and as a stand-alone app. In a blog post early Tuesday morning, the company said one of the Libra network's early goals would be to provide basic financial services to people around the world who lack bank accounts and to save some of the $25 billion "lost by migrants every year through remittance fees."

The company has worked quietly on a blockchain-based payments system for more than a year, with the effort headed former PayPal President David Marcus. Facebook has large ambitions for the project and its use by the social platform's 2.4 billion monthly active users. The company envisions Libra potentially being used to make everyday financial transactions like paying bills, making retail purchases and paying for public transport.

Early reactions from bank analysts covering Facebook were ecstatic, in part because the Libra project would help the company move away from a near-complete reliance on targeted advertising. Though wildly successful, that business model has exposed the company to criticism regarding its privacy practices and its handling of misinformation on public platforms. The company is also shifting toward more private communications, and payments would potentially provide a way to make money in those channels.

JPMorgan's Doug Anmuth said Libra would help Facebook diversify its sources of revenues beyond advertising "while also empowering billions of people." In a note to clients after Facebook's Libra disclosures, Royal Bank of Canada analysts Mark Mahaney and Zachary Schwartzman described the project as the foundation for fundamental changes to the digital consumer economy.

"In terms of scale and importance, we believe this new financial infrastructure could be viewed similar to Apple's introduction of iOS to developers over a decade ago," they said.

Still, the potential advantages Facebook's proposal might offer over more conventional means of digital payments aren't yet clear.

"What makes this better than what exists?" asked Raina Haque, a Wake Forest University professor who says it's too early to say whether Facebook's plan poses a real threat to the existing global payments industry. "It's almost like the term 'crypto' is so sexy it puts the blinders on anyone asking all the questions that should be asked."

Many questions indeed remain. Facebook said the Libra subsidiary would be regulated, but didn't say from where or by which agency. It is also notable that the original list of Calibra partners didn't include any major U.S. banks, raising the possibility that Wall Street would see Facebook's effort as a potential competitor that it should try to impede.

To the extent Facebook acts as a money transmitter, it would have to comply with U.S. anti-money-laundering rules, including taking steps to verify who is sending transactions through its platform and to report suspicious transactions to the government. Among other requirements, it also would have to form an internal anti-money-laundering program, train key personnel and conduct independent compliance reviews. The Treasury Department's Financial Crimes Enforcement Network has said those requirements extend to cryptocurrency companies.

French Finance Minister Bruno Le Maire said on French radio Tuesday that Facebook is free to issue a transaction tool but that Libra shouldn't replace sovereign currencies, citing a risk that such a currency could be used to finance terrorism. Mr. Le Maire said he would ask the central bank governors of G-7 countries to prepare a report on what guarantees to demand from Facebook to avoid such risks ahead of a meeting of finance ministers planned for mid-July in Chantilly, north of Paris.

"It is out of the question that it become a sovereign currency," Mr. Le Maire said of Libra. "Sovereignty must remain in the hands of states, not private companies that respond to private interests."

Mr. Le Maire also said that the currency's planned launch "reinforces my conviction that we must regulate digital giants to ensure they aren't monopolies," including by pushing for additional taxes on digital services, which policy makers are pursuing both in France and at the international level.

Facebook's effort also raises questions about the company's suitability to play a larger role in users' financial lives.

The tech giant is under investigation in the U.S. for its privacy practices. The Federal Trade Commission began such an investigation more than a year ago, following reports that the personal information of tens of millions of users improperly wound up in the hands of Cambridge Analytica, a data firm tied to President Trump's 2016 campaign. The FTC also has secured jurisdiction on any possible antitrust matters related to Facebook.

The existence of Facebook's new subsidiary, Calibra, could help the company head off some potential regulatory concerns by keeping separate the personal data held by the social-media site and the financial data needed to make the crypto wallet work.

How Libra would differ from existing digital money-transfer technologies in practice remains unclear. At least initially, it will neither be fully decentralized nor fully anonymous, two of bitcoin's defining anarchic features.

In some respects, bitcoin and Libra look alike; both are essentially digital versions of cash designed to allow users to directly exchange value online. There are major differences, though. Facebook is looking to build a new payments network around Libra by creating an online ecosystem on which users can buy things and pay each other. Bitcoin, though initially conceived as a payment mechanism, has evolved into a kind of digital gold used to store value rather than exchange it.

This is largely due to the bitcoin network's inability to process a large number of transactions quickly, a volume that tops out at around seven transactions per second -- minuscule compared with the roughly 24,000 transactions Visa's network handles every second. Alibaba Group Holding Ltd.'s Alipay said it processed more than 250,000 payment transactions per second one busy day in 2017.

Facebook's rollout of Libra will be limited at first. In a document published for developers Tuesday, the company said it expects its network will be able to support just 1,000 payment transactions per second initially. However, Facebook said its cryptocurrency was still "at the prototype stage" and expects to increase the number of people who can use the system.

Libra also will be set up to avoid the wild price swings that have plagued bitcoin. It will be backed by a basket of global currencies and other stable assets, making it far less likely to experience the volatility of other cryptocurrencies that aren't pegged to anything.

--Sam Schechner, Lalita Clozel and Paul Vigna contributed to this article.

(END) Dow Jones Newswires

June 18, 2019 16:19 ET (20:19 GMT)

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