After Losing Key Support, Is Facebook's Libra Dead In The Water?

When Facebook (NASDAQ:FB) 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.

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 (NYSE:MA), Visa (NYSE:V), 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.

This article originally appeared in the Motley Fool.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Booking Holdings, Facebook, Mastercard, PayPal Holdings, and Visa. The Motley Fool recommends eBay and recommends the following options: long January 2021 $18 calls on eBay. The Motley Fool has a disclosure policy.