Please ensure Javascript is enabled for purposes of website accessibility

After Losing Key Support, Is Facebook's Libra Dead in the Water?

By David Jagielski - Oct 22, 2019 at 3:25PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Visa, Mastercard, and PayPal are just some of the big names that have pulled out of Project Libra.

When Facebook (FB 1.83%) announced in June that it was planning to launch its own cryptocurrency, dubbed "Libra," it gave the cryptocurrency market some life. With a big name like Facebook exploring a bitcoin-like offering, crypto traders thought digital currencies could get renewed mainstream attention and attract more buyers. A Facebook coin would have the advantage of a massive user base on the company's social media site and could easily reach more than a billion potential consumers.

One big snag in the proposal was that Facebook doesn't have the greatest reputation when it comes to keeping user data secure and private. From allowing "fake news" and blatantly misleading ads on its main site to the devastating Cambridge Analytica user data scandal, the company has come under fire from regulators fairly often in the past few years. And getting consumers to trust Facebook with any sort of financial data could be an uphill battle.

Facebook CEO Mark Zuckerberg is still pushing hard for the project, saying it needs to continue in order for the U.S. to remain a leader in the financial markets rather than a follower. He pointed out that "China is moving quickly to launch similar ideas in the coming months." Knowing the concerns that the public has about Facebook being involved, Zuckerberg has repeatedly said he is distancing his company from direct management of the project, reminding people that it's the independently operated Libra Association that's in charge and "driving the project."

Zuckerberg is scheduled to testify before Congress on Wednesday, where he is going to speak to the House Financial Services Committee regarding Libra. One of the things he plans to clarify is that Facebook isn't going to launch the cryptocurrency without first obtaining approval from U.S. regulators, which could be a key step in winning back support for the project.

Bitcoins laying on top and nearby a cell phone

Image source: Getty Images.

Key companies pull support from Libra

What made Libra strong despite Facebook's trust issues was its support from big names in the financial industry. However, much of that support has dried up in recent weeks. MasterCard (MA 2.25%)Visa (V 2.08%)PayPal, Booking, Mercado Pago, and eBay are among the biggest names to withdraw their association with the Libra project. Having the two biggest credit card companies in the world behind Libra gave the project credibility, but without that support, it looks like Libra is back at square one. 

Mastercard and Visa know all about processing transactions securely across borders, and having that knowledge and expertise would've helped the project immensely. That's why losing that backing does a lot of harm.

While Visa management didn't get into specifics about why the company left the project, it did say that it "will continue to evaluate and our ultimate decision will be determined by a number of factors, including the Association's ability to fully satisfy all requisite regulatory expectations."

Regulation likely the biggest roadblock today

From a financial regulator's viewpoint, the biggest problem with any cryptocurrency is anonymity. Anonymous transactions make it nearly impossible for countries trying to track the flow of money. With Facebook's millions of worldwide daily users, the potential for cross-border financial transactions involving illegal money laundering rises exponentially. In addition to money laundering, a recent report from the G7 also outlined how taxation, privacy, cybersecurity, and terror financing could be affected. The countries made it clear that any new "global currency" would need to address these key issues.

It's a big hurdle for the tech stock. The report from the G7 stated that "Private sector entities that design stablecoin arrangements are expected to address a wide array of legal, regulatory and oversight challenges and risks." 

It's not hard to see the potential harm; the IRS recently uncovered the largest-ever child exploitation website on the dark web after tracing bitcoin transactions. Although it was uncovered in this case, anonymity is still a big risk; it can let terrorists and criminal organizations move money around the world, and safeguarding against those risks would be a big responsibility for Facebook. 

Takeaways for investors

Facebook still plans to go ahead with Libra. But it has a very long way to go in earning the trust of not just users, but world leaders as well. And without credible companies like Mastercard and Visa backing the initiative, it will be much more difficult for Facebook to gain that trust, given the company's battered reputation.

While it doesn't mean that Facebook will be unsuccessful, it does suggest that the project will be a whole lot more difficult, and costly, for the company. I wouldn't hold my breath that Libra will become a reality anytime soon.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Meta Platforms, Inc. Stock Quote
Meta Platforms, Inc.
$195.13 (1.83%) $3.50
Mastercard Incorporated Stock Quote
Mastercard Incorporated
$357.78 (2.25%) $7.89
Visa Inc. Stock Quote
Visa Inc.
$212.88 (2.08%) $4.33

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.