Analysis

Is Paypal’s Exodus from Libra the “First Nail in the Coffin”?

Is Paypal's exodus from Libra the first nail in the project's coffin?

The Libra Association and its 28 founding members have been the subject of much controversy since the project was launched in June. Regulators and analysts around the world have questioned the audacity of the entity, which originally said that it was hoping to launch a global digital currency in January of 2020.

However, as the reported launch date grows closer, the pressure has begun to build. Last Wednesday, Bloomberg reported that four payments companies–Visa, Mastercard, Paypal, and Stripe Inc.– were considering backing out of the project.

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Then, on Thursday morning, the Financial Times reported that Paypal representatives did not show at a scheduled meeting for Libra participants.

Finally, on Friday, Bloomberg reported that Paypal was officially withdrawing from the project–a move that has sparked much discussion about the future of Libra.

Did Paypal make the right move? And what could its exodus from Libra mean for the project in the grand scheme of things?

The current head of Libra is the former president of Paypal

Sarah Frier, a tech reporter for Bloomberg based in San Francisco, pointed out on Twitter that the withdrawal may have particular significance due to the ties that Libra has with Paypal.

“Blow to Facebook, especially considering David Marcus, heading up Libra, used to be a PayPal exec,” she wrote. Indeed, Marcus served as the President of PayPal from April of 2012 to July of 2014; Bloomberg noted that Facebook’s blockchain team is also comprised of a number of former PayPal employees.

PayPal didn’t explain exactly what their reasons for leaving were, but a company spokesman said that t“continue to focus on advancing our existing mission and business priorities as we strive to democratize access to financial services for underserved populations.” Furthermore, Paypal also said that it was open to future collaborations with LIbra: “[we] look forward to continued dialogue on ways to work together in the future.”

Libra’s response to Paypal’s exodus was rather cheeky: “It requires a certain boldness and fortitude to take on an endeavor as ambitious as Libra,” wrote Dante Disparte, Libra Association’s head of policy and communications, in a statement–a “certain and boldness and fortitude” that he doesn’t seem to think that Paypal has.

“The journey will be long and challenging. The type of change that will reconfigure the financial system to be tilted towards people, not the institutions serving them, will be hard.”

Disparte also wrote that Libra is “We’re better off knowing about this lack of commitment now, rather than later.” Indeed, the companies that have tentatively agreed to be members of the Libra Association haven’t technically fully committed yet–according to Bloomberg, they have merely signed “nonbinding letters of intent to explore joining the association,” and will be asked to reaffirm their later this month.

According to Disparte, there are at least 1500 entities that have expressed “enthusiastic interest” to become backers of the project. In other words, Paypal probably won’t be missed.

”Some of Libra’s early supporters are clearly growing uneasy about where all the attention is coming from.”

Although Paypal didn’t give any specific reasons for quitting the project, Bloomberg reported that according to sources familiar with the matter, the decision was made because the company is “concerned about maintaining positive relationships with regulators who have reservations about the project.” Visa, Mastercard, and Stripe are also reportedly considering withdrawal from Libra for similar reasons.

Matt Baer, founder and CEO of blockchain travel rewards company KeyoCoin, told Finance Magnates that the regulatory pressure on the project has been intense.

Matt Baer, founder and CEO of KeyoCoin.

“Facebook’s expedition into the world of cryptocurrencies was always going to turn heads,” he said, “but with congress, central bankers and government officials now breathing down its neck, and France and Germany pledging to block it from entering Europe, some of Libra’s early supporters are clearly growing uneasy about where all the attention is coming from.”

Kyle Asman, partner at BX3 Capital, said in an email to Finance Magnates that “Paypal withdrew because it doesn’t want to be subject to the strict regulatory scrutiny that is going to come down on all of the members of the association,” adding that “I expect most of the companies will drop out prior to making a financial commitment.”

Will other players follow suit?

Indeed, whether or not Paypal will simply be the first in a long line of companies that will jump ship on the project is certainly the million-dollar–or perhaps billion-dollar question.

“There’s no doubt that such a high profile departure will be felt like a nail in the side for Facebook and the Libra Association,” Baer told Finance Magnates, “but it’s too early to say if it’s also the first nail in the coffin for the currency itself. There is still plenty of confidence that the project will succeed, and a healthy number of supporters throwing their weight behind it, but any hopes that Libra will be a truly global currency are fading fast.”

However, there’s still a chance that Paypal’s exodus could be a one-off phenomenon: “one thing is certain. If Facebook wants to shrug off Paypal’s departure, it will need to show that it has taken regulators’ fears of money laundering and tax evasion seriously, has a clear plan for compliant rollout, while also convincing members of the Libra Association that the considerable regulatory scrutiny will not bleed into their own businesses,” Baer said.

And indeed, David Marcus, who heads the Libra project, has remained cool as a cucumber in the face of rumours of backers getting cold feet: “I can tell you that we’re very calmly, and confidently working through the legitimate concerns that Libra has raised by bringing conversations about the value of digital currencies to the forefront,” he Tweeted on October 2nd in response to reports that companies were considering leaving.

Libra as competition?

Regulatory scrutiny may not be the only reason that companies may choose to leave the project. Kyle Asman, a partner at BX3 Capital, also speculated that other companies could withdraw from Libra because they may have begun to see the project as a competitor for “projects I would presume [the companies] are working on internally.”

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Kyle Asman, partner at BX3 Capital.

Tomer Weiss, co-founder of LibraCamp, a startup incubator projects in the Libra ecosystem, also told Finance Magnates that “maybe in the short term, PayPal does not see how [involvement in Libra] will provide them with benefits…that the payment system of Paypal and the payment system of Libra [will compete with each other].”

Tomer Weiss, co-founder of LibraCamp.

On the other hand, however, Paypal and other companies that choose to withdraw could be prematurely excluding themselves from important collaborative opportunities.

In addition to the “opportunity to get things right and improve financial inclusion” that Dante Disparte described Libra as future e-commerce and payment partnerships could be harder to come by for companies that are withdrawing at this stage of the game–partnerships that could potentially draw in more users.

For example, one Reddit user wrote that Paypal’s exodus from Libra “actually makes me sad.”

“99.99% of my customers use PayPal checkout on my online store (using their credit/debit card or PayPal account), and I was hoping that since PayPal was one of the Libra founders, this meant I could seamlessly go from PayPal to Libra, then deposit that Libra onto an exchange where I could easily convert it to BTC. That would’ve basically meant I could very painlessly buy BTC with all my online store earnings.”

Facebook’s reputation with user data

It’s also possible that Paypal may have made the decision to withdraw from Libra because of Facebook’s poor reputation with the way that it handles users’ data privacy.

Indeed, Jonathan Merry, Co-Founder of MoneyTransfers.com, told Finance Magnates that Paypal might have also wanted to withdraw from Libra because of Facebook’s reputation with the general public.

Johnathan Merry, Co-Founder of MoneyTransfers.com.

“Libra is not seen by many as a benevolent project–rather, it’s seen as a way for Facebook and by association, Paypal to control our economies and extract even more money from people,” he said.

Indeed, concerns about the way that the Libra Association will handle users’ data was the subject of many questions that US regulators asked David Marcus during hearings with the US Senate and the House of Representatives in July.

Fear of lawsuits

Companies who choose to stay in the Libra Association may have other legal concerns outside of pressure and scrutiny from regulators

Nick Szabo, computer scientist, legal scholar, cryptographer, and one of the individuals suspected to be behind the “Satoshi Nakamoto” pseudonym, said in response to Sarah Friers’ tweet on Paypal’s exodus that “trusted third parties are lawyer magnets”, pointing to a class-action lawsuit that was brought against Ripple Labs in 2018 as a possible warning on the fate of companies that are currently involved in Libra.

The case against Ripple accused the company of having sold unregistered securities. While the case still has not received class-action status, it has not yet been dismissed: Ripple formally asked that a US federal court throw out the case in September of this year.

Whether or not this particular case against Ripple is valid, it’s certainly not hard to imagine a world in which members of the Libra Association become targets of lawsuit-happy individuals and companies.

The problem with permissioned ledgers

RhythmTrader, a popular cryptocurrency-related Twitter channel, tweeted that the exodus of PayPal from Libra only highlights the problems with the rather centralized nature of the project.

Indeed, although Libra has billed itself as a “simple global currency” that is built on a “decentralized blockchain,” there have been serious doubts as to exactly how decentralized it is. Each of the Libra Association’s hand-picked members will act as a “node,” or a computing system that upholds the Libra network.

Therefore, if members of the Libra Association choose to quit the project, the network could be left vulnerable–either with a smaller number of nodes as new ones or selected, or nodes with compromised quality.

Robin Lee Allen, Managing Partner at Esperance Private Equity.

Here’s the thing: in order for a blockchain network to be altered or otherwise hacked, more than half of its nodes need to be compromised. There are nearly 100,000 nodes on the Bitcoin network: that means that more at least ~50,000 of them would need to be compromised in order to tamper with the ledger.

However, if there is a maximum of 100 nodes on Libra, that means that only 51 would need to be compromised in order to cause a problem on the network. While each of the chosen nodes (so far) are entities with enough cash and power to build formidable machines, it’s not impossible that a hacker could find a way to compromise half of them, and if there are less than 100 nodes at any point, the network becomes even more vulnerable.

Earlier this year, Robin Lee Allen, Managing Partner at Esperance Private Equity, told Finance Magnates that Libra is “set up like a central banking consortium. ‘Permissioned access’ gives power to certain actors, in this case Uber, Andreesen Horowitz and PayPal.”

William McCormick, founder of PureKnot blockchain communications firm.

William McCormick, the founder of PureKnot blockchain communications firm, added that “Libra is not decentralized, open, permissionless, or censorship-resistant. It’s a corporation of stakeholders with a $10M buy-in who vote and coordinate validating nodes that are distributed all over the world to processes and update state changes to the electronic ledger.”

And in the days before he disappeared from the internet, Bitcoin creator Satoshi Nakamoto wrote that centralized e-currency systems are “doomed to fail.”

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