Ever since Facebook unveiled its plans to launch its new crypto-currency in 2020, the social network has faced a backlash from financial regulators all over the world over its questionable track record with security.

Wealth managers are increasingly having to concern themselves with the regulatory side of crypto-currencies as they make their recommendations about them to clients, or even handle them on their behalf. Libra, the “stablecoin”, is a digital asset backed by a basket of global currencies and other investments. The digital money is posed to make it easier to conduct online payments.

Scepticism about the plans continues, with the latest announcement being that the US House Democrats are asking Facebook to put its plans on hold until Congress and federal regulators such as the Securities and Exchange Commission have looked for any risks that it might pose to the global financial system. However, Facebook owns Calibra as a subsidiary, but says that no financial data will be available to it.

David Marcus, head of Calibra at Facebook, stated that the social network “will not control the network, the currency, or the reserve backing it. Facebook will only be one among over a hundred members of the Libra Association by launch. We will not have any special rights or privileges.”
Yet, on closer inspection, it transpires that the registered address for Calibra is the same as that of Facebook. This suggests that the association between the two is cosier than they are letting on.

Despite assurances from Facebook about Libra’s stability, a major factor causing headaches for lawmakers and regulators is the fact that Facebook’s reference to ‘regulators’ and ‘regulation’ in its 'whitepaper announcement' of its new cryptocurrency is somewhat vague. This is therefore misleading to the consumer (and potentially dangerous) and is perhaps creating an impression of compliance with regulatory obligations that is illusory.

There is also no evidence of staff doing regulatory compliance jobs. It is unclear whether a compliance function exists at the subsidiary or if any individual has been given responsibility for AML/CTF compliance. Additionally, the fundamental purpose of financial regulation is to imbue consumers with trust. Nobody knows who regulates Calibra/Libra, particularly in relation to capital adequacy requirements. It is never enough to say “we’re regulated” or that “anyone with Libra has a high degree of assurance.” Such assertions are not substantiated anywhere, nor has any regulator stated that it is responsible for monitoring such fundamental elements of financial regulation.

Anti-money-laundering controls and regulation

There is also just one reference to anti-money laundering (AML) in the white paper and no mention of any current talks with regulators. It goes without saying that money-laundering control is of huge importance for all banking regulators, especially in view of the links between crypto-currencies and financial crime. Put this together with Facebook’s recent privacy issues and it comes as no surprise that regulators are voicing fears about privacy and the risk of financial crime taking place.  

Many fear that a lack of robust and consistent controls with respect to ‘Know Your Customer/Counterparty’ (KYC) and money-laundering compliance in general is a major reason why institutions might not embrace the blockchain. Bad incidents often relate to cybersecurity and in many instances people hack into exchange systems and digital wallets to steal large sums of crypto-currency. Perhaps more worrying for institutions, however, are instances where market participants have eluded the usual KYC identification processes and thereby have been able to commit other types of fraud and theft.

Our research found that that less than 5% of financial institutions considered their existing crypto-currency KYC and AML processes to be effective, with 40% describing them as ineffective. A number of current regulatory initiatives might shine a light on the future of KYC/AML checks in the cryptocurrency environment. The US Financial Crime Enforcement Network has been doing its best to co-ordinate efforts and exchange information with other enforcement agencies around the world. The Financial Action Task Force (FATF) has also taken some steps in respect of virtual currencies, with endorsement by the 'Group of 20' (actually only 19) industrialised nations.

Market regulation all over the world

Facebook already faces mounting pressure from various governments over its privacy policy. Meanwhile, most of its AML/KYC regulatory problems involve address verification for onboarding, so Facebook may also experience difficulties in places such as the Middle East and Africa, where formal addresses or address registries do not exist. In 2018, Hong Kong removed its "proof of address" requirements, yet at the same time, in a set of questions and answers, the Dubai Financial Services Authority was unable to predict the evolution of "proof of address verification requirements" in the UAE. This begs a question: if regulators cannot think of a way in which private banks can 'onboard' customers within the boundaries of existing regulations, it is by no means clear whether Libra/Calibra will do so.

Moreover, the process by which a firm becomes a regulated entity is timely, costly and burdensome under most regimes and can take several weeks or even months. As Facebook continues to face the heat, nobody knows who is accountable for regulatory supervision and AML compliance. Facebook ought to approach crypto-currency and regulation less vaguely. Perhaps another big question that remains unanswered is: where will Libra be in time for its planned launch in 2020?

* Rachel Woolley can be reached on +353 1 901 3786 or at Rachel.Woolley@fenergo.com