The Motley Fool

4 reasons Facebook should abandon Libra

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Earlier this year, Facebook (NASDAQ: FB) assembled a consortium of companies to develop an open-source cryptocurrency called Libra. Facebook doesn't own Libra, but it stated that it would offer Libra as a payment option for its new digital wallet Calibra, then integrate those payments into Messenger and WhatsApp.

Facebook claims that Libra will simplify payment transactions made by roughly 1.7 billion unbanked people worldwide, but critics and regulators argue that the cryptocurrency could be used for money laundering and other illicit purposes. They also believe that Facebook's recent security and privacy debacles made it an unsafe platform for digital payments.

The Libra consortium's members are taking those concerns seriously. Visa, Mastercard, PayPal, Stripe, eBay, and MercadoLibre all recently left the alliance and cast dark clouds over the cryptocurrency's future.

Facebook's Calibra chief David Marcus tweeted that the departures weren't "great news in the short term" but insisted that they were "liberating." Marcus didn't say much more about Libra's future, but I personally think Facebook should abandon this ill-conceived project for four simple reasons.

1. A matter of trust

Prior to Facebook's official Libra announcement, LendEDU surveyed 1,000 adults in May about the social network's potential entrance into the cryptocurrency market. Only 18% stated that they would be interested in buying Facebook's cryptocurrency.

Following Facebook's format announcement in June, a poll of 1,799 American adults by CivicScience found that 77% of respondents still didn't trust Facebook with their personal data. It also found that 40% trusted bitcoin more than Libra, while just 2% trusted Libra more.

Facebook's recent losses of key partners like Visa, Mastercard, PayPal, and eBay also indicate that the companies don't trust the social network's long-term ambitions -- which could turn Messenger and WhatsApp into rival payment platforms.

2. Giving regulators another target

Facebook was already fined $5 billion by the Federal Trade Commission earlier this year for its privacy and security issues. Beyond that, though, U.S. lawmakers from both parties remain adamantly opposed to Libra; France and Germany have pledged to block Libra from entering Europe; and current cryptocurrency regulations are keeping it out of India, a major growth market for digital payments.

Therefore, pushing Libra toward a 2020 launch could attract more regulatory probes and fines -- which would throttle Facebook's bottom-line growth. Marcus recently stated that he still sees "Libra facing greater user acceptance problems than regulatory ones," but it seems neither consumers nor regulators are eager to embrace the cryptocurrency.

3. Another unnecessary expense

Facebook's operating margin plunged from 44% to 27% between the second quarters of 2018 and 2019. Several headwinds caused that decline -- its slowing growth in the U.S. and Canada, its two most profitable markets; its growing dependence on less profitable markets; the costs of expanding its ecosystem into adjacent markets like virtual reality and hardware; and the rising legal costs of its security and privacy problems.

Facebook generated over 98% of its revenues from ads last quarter, yet it keeps plowing cash into speculative side projects like Calibra. Facebook doesn't disclose how much money it's spending on its cryptocurrency efforts, but it's likely a significant amount, which could be better allocated toward its core advertising business.

4. Buying a digital payments company is smarter

Back in July, CNBC's Jim Cramer suggested that Facebook should abandon Libra and buy digital payments company Square (NYSE: SQ) instead. Cramer claimed that Facebook could conceivably buy Square for $70 billion, "blow out Square's payments network worldwide," and turn Square's Cash App into "Facebook Cash."

It was a bold idea, but I argued that Facebook probably wouldn't pay such a lofty premium (over 30 times this year's adjusted revenue) for a company that isn't profitable on a GAAP basis. Facebook would also need to fund part of the deal with either stock or more debt.

However, I think Facebook can still shop around for smaller payment platforms and integrate them into Messenger and WhatsApp. Linking those platforms to credit cards and bank accounts would complement Facebook's e-commerce efforts with minimal regulatory fuss.

The bottom line

Facebook's push into the cryptocurrency market is ambitious, but it fails to read the room. Instead of launching a new digital payments platform, it should be securing its platform, addressing its fake news and privacy issues, and rethinking its speculative projects like VR headsets and smart screens.

Facebook's top Libra partners realize the ship is sinking, so it's time for the tech giant to shelve this project and focus on the more pressing issues instead.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

NEW! Top 3 Dividend Bets for 2019

With interest rates likely to stay at rock bottom for months (or YEARS) to come, income-minded investors have nowhere to turn... except dividend shares. That’s why The Motley Fool’s top analysts have just prepared a brand-new report, laying out their top 3 dividend bets for 2019.

Hint: These are 3 shares you’ve probably never come across before.

They’re not the banks. Not Woolies or Wesfarmers or any of the “usual suspects.”

We think these 3 shares offer solid growth prospects over the next 12 months. Each of these three companies boasts fully franked yields and could be a great fit for your diversified portfolio. You’ll discover all three names and codes in "The Motley Fool’s Top 3 Dividend Shares for 2019."

Even better, your copy is free when you click the link below. Fair warning: This report is brand new and may not be available forever. Click the link below to be among the first investors to get access to this timely, important new research!

The names of these top 3 dividend bets are all included. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies move – we may be forced to remove this report.

Click here to claim your free copy right now!

Leo Sun owns shares of Facebook and Square. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Facebook and Square. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has the following options: short January 2020 $70 puts on Square. The Motley Fool Australia has recommended Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

FREE REPORT: Five Cheap and Good Stocks to Buy now…

Our Motley Fool experts have FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.7% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!