PayPal has pulled out of Facebook’s digital currency project, known as Libra, a blow to the social media company that has faced stronger-than-expected scrutiny over its proposed creation of an alternative payments system.
The digital payments company said it is withdrawing from the Libra Association so it can focus on its existing businesses.
“Facebook has been a longstanding and valued strategic partner to PayPal, and we will continue to partner with and support Facebook in various capacities,” PayPal said.
Facebook has presented Libra as a currency that could be used for digital payments, particularly outside the US. It would be backed by real currency, unlike other digital currencies like Bitcoin or Etherium.
The Libra Association, based in Switzerland, was supposed to give the currency project a comfortable arm’s length distance from Facebook, which wouldn’t own Libra.
Despite Facebook’s efforts, financial regulators as well as members of Congress have questioned the company’s motives for creating a new digital currency, particularly in light of criticisms that Facebook’s business model is too invasive of its users’ privacy.
Rep. Maxine Waters, the chairwoman of the House Financial Services Committee, has demanded Facebook founder Mark Zuckerberg testify in front of her committee before Libra is rolled out. Along with privacy concerns, Waters has cited the potential for Libra to be used in money laundering and other financial crimes.
Republicans and Democrats and even US President Donald Trump have called in various degrees for Facebook to be subject to US banking laws — an arduous, complicated prospect — if the social media company does move forward with the Libra project. In response, Facebook has reportedly hired several prominent Washington lobbyists to convince politicians to give their approval to Libra.
PayPal Holdings Inc., which is based in San Jose, California, is the first company to publicly end its partnership with Libra, but other companies have been reportedly having second thoughts. The Wall Street Journal reported this week that Mastercard and Visa, the world’s largest payment providers, were considering ending their Libra relationships.
Other Libra backers include ride-hailing apps Lyft and Uber.
‘A certain boldness’
The Libra Association said it plans to continue to move forward with the project without PayPal.
“Building (Libra) is a journey, not a destination … each organization that started this journey will have to make its own assessment of risks and rewards of being committed to seeing through the change that Libra promises,” said Dante Disparte, head of policy and communications for the Libra Association.
“It requires a certain boldness and fortitude to take on an endeavor as ambitious as Libra — a generational opportunity to get things right and improve financial inclusion,” Disparte said. “The journey will be long and challenging. We’re better off knowing about this lack of commitment now, rather than later.”
Facebook unveiled plans in June for Libra — which will roll out in 2020 — to be backed by a basket of currency assets to avoid the wild swings of Bitcoin and other virtual units.
Facebook envisages the blockchain-based coin as a new global cryptocurrency, pledging to deliver a stable virtual money that lives on smartphones and could bring over a billion “unbanked” people into the financial system.
“The type of change that will reconfigure the financial system to be tilted towards people, not the institutions serving them, will be hard,” Disparte said. “Commitment to that mission is more important to us than anything else.”
In leaked comments from a meeting of Facebook employees in July, Zuckerberg said he remained optimistic about Libra despite harsh comments from public officials in several countries. “The public things, I think, tend to be a little more dramatic,” he said.
“But a bigger part of it is private engagement with regulators around the world, and those, I think, often, are more substantive and less dramatic… That’s where a lot of the discussions and details get hashed out on things.”
Best left to states?
In an interview published Friday in French newspaper Les Echos, Apple chief executive Tim Cook said he was uncomfortable with the idea of a company taking over roles typically reserved for governments.
Without specifically naming Facebook, Cook said issuing currency, like national defense, is best left to states.
Facebook and some two dozen partners released a prototype of Libra as an open source code for developers interested in weaving it into apps, services or businesses.
Martin Chorzempa, a research fellow at the Peterson Institute for International Economics, questioned whether Libra would be able to fulfill its vision.
In particular, Libra will need to comply with regulations that require collecting personal information about customers in order to expose crimes such as money laundering or fraud.
“It is not clear to me that Libra is anywhere near being able to perform those know-your-customer requirements that would allow them to legally serve these communities,” Chorzempa said.
“Libra would have to work with governments to make sure they are compliant or get those rules changed, and that is a difficult process.”