Cryptocurrency transactions do not yet have any error resolution rights — so if your money goes missing, there's no clear legal fix, warn consumer advocates.
Facebook's choice of the name "Libra" for its new cryptocurrency venture is apt, because experts and consumer advocates say it will take quite a balancing act for the social media giant to pull it off.
The company announced that it will lead a nonprofit collaborative — the Geneva-based Libra Association — of 27 organizations, including tech companies and payment providers like Visa, PayPal, Uber and Spotify, with the goal of launching Libra in the first half of 2020.
Unlike the fluctuating valuations that characterize many of the better-known cryptocurrencies, Facebook execs said the value of Libra would be tied to government-backed funds, making it relatively stable. Facebook said it won't manage the Libra currency itself, but it will create a digital-wallet division it dubbed Calibra.
The company also said it wouldn't use purchase information to target ads to users because the two divisions would be separate, but made clear it sees opportunities to monetize Libra through merchant fees and potentially even lending.
It's hard to tell how much of this might be legal, experts say. "Cryptocurrencies are so new that the manner in which they're regulated or not regulated is still being sorted out," said banking analyst Bert Ely. Most cryptocurrency regulation so far pertains to securities laws governing speculative investments — which wouldn't come into play in the case of Libra's hard-currency-backed valuation.
"Its usefulness really depends on how widely accepted it becomes," said Bruce McClary, spokesman for the National Foundation for Credit Counseling. "If you have acceptance from merchants and partnerships with payment transfer systems, I think it could have the potential to stand out," he said. "Early indications are that it has the potential to go mainstream, but really, time is going to tell."
But McClary also sounded a cautionary note. "My concern is that when you put social media and your wallet into a blender, there could be some problems. First of all you want to make sure your financial transactions are secure and private," he said.
McClary also noted that Facebook said one of its goals with the Calibra wallet was to keep people in its ecosystem for longer. "The initial intent is hoping this will get people to spend more time on its platforms. If people are spending more time on the platforms they're also spending more time in front of advertising," he said.
For people with limited financial literacy or discipline, this could be risky, he said. "It might be tempting for some people to overspend the longer they spend on the platform knowing they have available cryptocurrency."
But whether or not a critical mass of Facebook account-holders would use Libra — especially given the company's checkered record on user privacy — remains an open question. "It's difficult for me to see anyone who cares about privacy actually adopting this new offering, particularly given Facebook's laughable record on respecting their users' privacy choices," said Brian Krebs, a cybersecurity expert who runs the blog KrebsonSecurity.com.
Although Facebook said it would use two-factor authentication and protect consumers' assets if their accounts were breached, consumer advocates say this falls short of the kinds of protections people get from established payment systems.
"There are well-documented issues with the security of crypto/virtual currency wallets," said Christina Tetreault, senior policy counsel for Consumer Reports. "And as yet, consumers do not have error resolution rights under law for virtual currency transactions — meaning if something goes wrong, consumers do not have clear legal remedies. For these reasons, consumers should be leery," she said.
"Though they claim it is backed by government currency and that it is free, it is not backed by deposit insurance," said Lauren Saunders, associate director of the National Consumer Law Center. "It is not clear if costs could be built into the exchange rates, and it may not be protected by the federal laws that protect remittances or funds held in prepaid accounts like PayPal."
The Wild West atmosphere of the cryptocurrency marketplace might keep Libra relegated to the fringes of the financial mainstream, some experts pointed out.
"Cryptocurrencies are popular in large part because they enable people to transact anonymously, or at least they make it difficult to track financial transactions for goods and services that are illegal, dodgy or severely regulated," Krebs said.
Ely said one primary use of stable cryptocurrencies is to speculate in more volatile ones, he said — suggesting that Libra might have limited practical use for people in countries that already have stable currencies. "There are all these transactions taking place, but it's not being used in a meaningful way [like] paying for gas or groceries."