Facebook’s Libra: The Next Tax Challenge for the Digital Economy

This paper covers Libra in its original form as it had evolved through mid-April 2020.

Introduction

Facebook and other tech-driven firms have escaped the reach of tax authorities the world over in many respects, prompting policymakers to work toward globally coordinated responsive action.1 Compounding the existing tax worries, in 2019 Facebook announced its plan to launch Libra, a new cryptocurrency, within the coming year, with the express goal of extending past its existing user base to those who lack access to traditional banking services.2 The prospect of Facebook enabling millions of global transactions outside of the (highly regulated) conventional banking system has prompted scrutiny, most immediately in the area of financial services regulation. But it should also heighten the sense of urgency to reconstruct prevailing global tax rules to ensure that highly digitalized businesses pay an appropriate amount of taxes wherever they carry out business activities and create value.3

The stakes for such scrutiny have only increased exponentially in the wake of the sudden shock the novel coronavirus brought to the global financial system in early 2020. While policymakers forge ahead with plans for the digitalized economy made before the pandemic, the current upheaval is sure to refocus the discussion. As nations around the world take on massive tax deficits to stave off economic collapse while meeting soaring public spending needs, a watershed moment in tax history emerges, opening a new opportunity to build a more sustainable global tax framework. Examining Libra’s design and scope illuminates some of the hurdles that governments will face in achieving that goal.

Accordingly, this paper lays out Libra’s design concept, the problems it seeks to solve, and the potential implications of its successful launch on the redesign of the global tax system that is already in progress. Part I opens the discussion with a non-technical overview of the main design elements of Libra as it is currently conceived. Part II examines Libra’s possible merits as well as some of the key regulatory issues it raises for governments. Part III analyzes the international tax implications of a successful Libra launch, drawing upon the efforts of the international community to date to design new rules for taxing highly digitalized firms. The paper concludes that the current global economic turmoil makes for an uncertain future, but one that will clearly require a coherent strategy for taxing high tech firms and innovations with global scope, with Libra a prominent case.

I. Libra by Design: Global, Stable, and Autonomous

Described as a simple, inclusive and global digital currency, Libra is intended to facilitate low-cost and user-friendly transactions without traditional financial intermediaries. Its target audience includes the Facebook user base of some 2.5 billion active monthly users,4 but Facebook also seeks to draw in those with mobile phones and Internet access but not access to bank accounts.5 There are an estimated 1.7 billion people in this category, many of them in lower-income countries. The range of technical options for the Libra infrastructure to reach this expansive user base is broad and still under development. The Libra white paper provides detailed design specifications.6 It lays out three main choices that are envisioned to make Libra a holistic financial system without peer among existing cryptocurrencies; namely, its permissioned technological platform, its plan for asset backing, and its autonomous governance structure. Each of these features is discussed in turn.

A. Global Platform

Libra will be built on a distributed ledger, specifically a blockchain.7 Facebook identifies blockchain technology as the key to Libra’s success for two main reasons, namely trustless verification and decentralized governance.8 Trustless verification refers to the ability to verify transfers without having to trust the sender or rely upon an intermediary.9 Decentralized governance refers to the ability to distribute power such that no one person or group will be able to alter or control the overall system for their own benefit.10 These features are key to differentiating Libra from fiat (state-issued) currencies, which rely on financial intermediaries and central bank governance.11

Realizing trustless verification and decentralization will be complicated by design choices and practical constraints, however.12 Trustless verification is still a cumbersome process, slowing down transaction processing relative to what is currently possible through traditional financial intermediaries.13 Libra’s designers are dedicated to increasing processing time, but progress is hampered by real-world constraints that are yet to be resolved, and that may never be resolved.14

If these validation issues are eventually resolved, users will be able to exchange local fiat currency for Libra using conventional ATMs and through participating merchants, including traditional banks and credit companies, as well as through a digital wallet app developed by Facebook subsidiary Calibra.15 Users will be able to download the Calibra digital wallet as a stand-alone app or access it through Facebook Messenger or WhatsApp (in addition to, presumably, future partners).16 A user with a Calibra digital wallet would be able to send Libra to any person or business in the world that also had a Calibra or compatible app, as well as to convert Libra back into fiat currency.17

Even if Facebook can solve the formidable technological challenges to realizing this vision, however, the goal of decentralized decision-making will be complicated by the fact that the Libra blockchain will be permissioned or centralized rather than fully decentralized, at least at first and possibly permanently.18 This means that only entities that fulfill specified requirements will be permitted to define consensus and make governance decisions.19 In response to criticism regarding this decision, Facebook points to its plan for autonomous governance, but it also explains that Libra will ultimately operate as a decentralized and open network so that anyone can build on its blockchain to provide similar financial services.20

One reason Facebook seeks to maintain centralization at least at launch is that under current technological assumptions, offering a completely decentralized network is likely to impede Facebook’s ability to ensure that its customers’ privacy and data will be protected.21 The implication is that if and when such protections become feasible, Libra will gradually decentralize. There are reasons to be skeptical, since a fully open network would lower barriers to entry for would-be competitors. Moreover, critics argue that the Libra blockchain will never be a truly decentralized network because it is structurally designed to be controlled by paying members of its autonomous governance organization, as discussed below.22 There is no guarantee that Facebook will actually move toward decentralization if its shareholders, affiliates, and partnering companies benefit from controlling the network.23

B. Asset-Backing

The second main feature of Libra is its planned reserve. Many have argued that Libra ought to be described as a digital currency or a stablecoin rather than a cryptocurrency because it will be tied to a basket of currencies and treasuries including the dollar, pound, and Euro.24 Pegging to fiat currencies and treasuries theoretically makes Libra less volatile and inflationary than other cryptocurrencies.25 It also enables users to assess the likely value of their Libra holdings at any given time.26 Facebook argues that asset backing will make Libra a good medium of exchange.

However, what it means to be a stable cryptocurrency is subject to debate.27 For instance, Libra is vulnerable to fluctuation in foreign exchange rates caused by political and financial crises.28 Libra customers will have to evaluate fluctuations in all of the relevant underlying currencies every time they transact between the Libra network and fiat currencies.29 Further, even though it is pegged to fiat currencies, Libra is liable to destabilization because it will have no backing from any governing body or central bank.30 Collapse could occur if investors trade in derivative instruments not backed by assets, a run on which could create large scale liquidity requests.31 The same could happen if investor panic arose following internal problems such as technical issues or a malware attack, or during exogenous shocks such as a force majeure.32

Such an event could cause Libra to fail, short of a public bailout.33 As seen in the 2008 crisis and potentially repeating in 2020, public bailouts may stave off depression but at a very high and sometimes ruinous cost to governments.34 Facebook promises that Libra is different, but it remains to be seen why and to what extent that could possibly be true.35 Given the sheer scale of Facebook’s current and prospective user base, a successful launch of Libra appear to be as systemically risky as a traditional financial intermediary, if not more so.

C. Autonomous Internal Governance

The final feature of Libra is its governance design, the main component of which is an autonomous nonprofit organization, the Libra Association.36 Formed in Switzerland in June 2019, the Libra Association allows Facebook to distance itself from direct management and supervision, possibly in an effort to stave off critics of its outsize market power.37 The Association was formed with 28 members and intends to expand to 100, with representation from diverse geographic and business backgrounds including non-profit organizations, academic institutions, and venture capital funds.38 Founding members included payment processing competitors, tech companies, blockchain companies, and other investors, including Mastercard, PayPal, Visa, eBay, Lyft, Spotify, Uber, and Vodafone.39 PayPal and others have since dropped out, some citing growing concern about Facebook’s issues with regulators around the world.40

Becoming a member of the Libra Association carries with it an investment pledge as well as the right and responsibility of being a validator node.41 To join, a firm must meet at least two of three criteria: (1) have a market value of greater than $1 billion; (2) hold customer balances in excess of $500 million; and (3) be recognized as an established top-100 industry leader by a third-party association such as the Fortune 500 or the S&P Global 1200.42 Each member is expected to invest at least $10 million in Libra tokens and cover its own node operation costs, though non-profits are only expected to provide the latter.43 Association Members will each have one vote on the Libra Association Council and will be entitled to a share (proportionate to their investment) of earnings on the Libra reserve.44 The Council must approve all decisions involving the network by a two-thirds majority vote.45

The tasks of the Association are to manage technology decisions, supervise the Libra reserve, and oversee the decentralization plan over time.46 Overseeing the development of the cryptocurrency and developing governance rules for the blockchain it is built upon are the primary technology-based tasks. The reserve’s supervision will consist mainly of maintaining the basket of assets to stabilize the value of Libra.47 The Association will also have the exclusive ability to create and destroy Libra currency.48

II. Merits and Concerns

Libra has immense potential, but its enormity of scale and scope create systemic risks that are still being explored by regulators.49 Currently, Facebook is making all major investment, coding, communication, and management decisions surrounding Libra, giving it de facto monopoly power despite the decentralized control structure promised by the Libra Association.50 As a result, lawmakers have expressed concerns regarding Facebook’s potential to pressure its Libra Association partners and Facebook users to adopt and transact in Libra regardless of its merits.51 Three areas appear to be key to regulators’ concerns, namely the possible outsize power of Facebook to manipulate global commerce, its lack of will or ability (or both) to protect users’ privacy, and the threat it poses to states, especially those with weak banking sectors and governance systems. Each of these issue areas is discussed in turn.

A. Global Scope and Monopoly Risk

The broad reach of Facebook as a social network could mean that a successful Libra launch would deliver benefits to users and merchants all over the world by facilitating more transactions and reducing currency exchange fees in the process. This is the great promise of Libra.52 However, a larger network of Libra users creates a disincentive to convert Libra back into fiat currencies, thus creating an advantage to further transacting in Libra.53 This could be a virtuous cycle for users and merchants, at least at first, but the closed nature of the system ultimately raises concerns for both markets and governments.

Whether Libra presents a structural market risk depends on the likelihood that it would be able to expand to monopolistic proportions.54 Facebook’s popularity already makes it a monopoly power in the eyes of many critics.55 Like any other company, Facebook seeks to constantly expand its reach and eliminate its competition including by aggressive acquisition.56 To date, the company has acquired 79 companies, including WhatsApp, Instagram, Oculus, Friendfeed, and LiveRail.57 As such, once launched, Libra would be instantly usable through WhatsApp and Facebook Messenger, among other apps.58 Third party platforms are expected to sign on, with the Canadian-based Shopify an early adopter.59 Further, Facebook has expressly indicated its aim to quickly and vastly expand the number of developers, investors, and merchants using Libra as a currency, including with incentives (possibly Libra coins) and rewards as encouragement.60

As such, Facebook’s existing user base and global reach give Libra the potential to disrupt and undermine highly-regulated competitors built on fiat currencies, including traditional banks, credit card companies, and digital payment platforms.61 The larger the Libra system becomes, the more likely it will be that standard monopoly risks arise, namely the increasing ability to extract rents as Libra eclipses and ultimately eliminates it competitors.62

Undaunted by the long-term consequences of such monopoly power, some cryptocurrency enthusiasts and venture capitalists are eager to embrace Facebook in the cryptocurrency space owing to its massive network of users; ample financial and technical resources; and influential place in U.S. economic and political life.63 However, researchers and lawmakers are increasingly aware of the risks and are examining whether and how regulators should respond at the national and international levels.64 As Libra’s launch date nears, the pressure on governments to act will only intensify.

B. Privacy and Data Protection

Beyond the current and prospective monopoly risk, economic and financial concentration in the hands of a monolith like Facebook creates personal data control and manipulation issues that are sure to intensify with the launch of Libra. Many of these issues center on the ever-tenuous balance among individuals’ quest for privacy as a human right, their (sometimes unknowing) cooperation with firms for which trading on private data is the core value prospect, and the need for societies to gather data from such firms in order to prevent criminal activity.65 With Facebook already a major target of criticism for its failure to strike the right balance in this regard, regulatory authorities have good reason for intensified concerns with the launch of Libra.66

Individual privacy is seen by many as the key to the functionality and uniqueness of cryptocurrencies.67 For this reason, independent programmers and cryptographers work diligently to increase privacy in cryptocurrency transactions to protect people against both government surveillance and data manipulation by firms.68 While individuals constantly seek to negotiate the terms of their freedom from government surveillance, often in the context of public confrontation, the same cannot be true as between individuals and Facebook given its core business model centered on user data.69

Recently, Facebook has appeared to operate in direct opposition to the fundamental idea of personal privacy, as it benefits in financial terms from consumers’ effective inability to opt-out of data sharing defaults and lack of information about their data vulnerability.70 This may stand to intensify with the launch of Libra. In a recent investigation of Facebook’s plans, House Financial Services Committee members expressed serious concerns that the company is fundamentally characterized by its failures to protect data and privacy.71 In particular, Facebook was found to have insecurely stored user passwords dating back to 2012,72 paid unsuspecting teenagers to download spyware,73 experienced a hack of nearly 50 million accounts,74 and experienced a software bug that granted third-party access to 6.8 million users’ photos.75

Perhaps to create distance between Libra and this ongoing scrutiny, Facebook responded to the Congressional inquiry by pointing out that Libra will be governed by the Libra Association.76 Nevertheless, skepticism is warranted. Not only is the Association’s governance structure still nascent and negotiable, arguably there appears to be a conflict of interest between Association members and those of current Facebook and prospective Libra users. At minimum, Association members may have a strong incentive to commercialize available data to increase their profits once Libra is established.77

At this stage of Libra’s development, it remains unclear what privacy laws will or could be applicable and how they would be enforced, whether at the local, national, or international level.78 With the sweeping global scope of Facebook and Libra, the privacy, data breach, consumer protection, and technology issues appear myriad and intractable.

C. Private-Public Power Asymmetry

Finally, Libra warrants attention for its potentially significant impact on financial systems at the national and international level. Proponents argue that if Libra becomes successful, it could monetize 31.5% of the global population and earn billions of dollars in revenues.79 Critics warn that allowing Facebook to launch Libra amounts to giving the company a license to print money, allowing it to take over the financial sector and replace sovereign currencies.80

It is therefore unsurprising that regulators in a range of countries including the United States, United Kingdom, China, Japan, and Singapore immediately called for scrutiny of the Libra project, expressing concerns that Libra would disrupt international exchange rates and national monetary policy.81 France plans to create a G7 task force to examine how central banks will monitor Libra to ensure consumer protection and money-laundering laws are successfully implemented.82 The question is which jurisdictions will attempt to regulate Libra, and to what end if they conflict.83

In the face of this level of regulatory attention and possible conflict, Facebook may well seek express approval of Libra by jurisdictions that are strategically important to its business.84 That said, it seems far less likely that the company will respond to the equally valid concerns of less powerful jurisdictions. Instead, it is expected that Facebook will use regulatory approval in some geopolitically significant countries to persuade others, especially developing countries, to “wave it through.”85

The immediate concern for regulators is the propensity of a segment of cryptocurrency users to evade the complex web of regulations aimed at money laundering and tax evasion, known as anti-money laundering and know your customer (AML/KYC) rules.86 Facebook promises to offer a solution for the unbanked that complies with these regulations, but does not specify how it will accommodate users who cannot provide proper documentation.87 It seems unlikely that Facebook will be able to devise an innovative solution if governments seek to regulate Libra as they do any other financial institution.

A second concern is the risk of widespread panic and crash, whether as a result of internal or exogenous factors including theft and fraud.88 According to one report, $1.7 billion worth of cryptocurrency was stolen in 2018.89 Libra customers bear the risk of loss from fraudulent activities (as well as mismanagement of funds within the Libra reserve, which could impact the value of Libra as a whole).90 Transactions on the Libra blockchain may be irreversible, and Facebook currently does not have a customer service to assist if money is stolen or transferred into the wrong Calibra account.91

These and other systemic challenges are not new to financial systems. The traditional banking sector continues to struggle with illicit activity and fraud issues, as well as global panics, manias, and crashes.92 Multiple fiscal policy structures and consumer protection laws have been enacted over the years that could be adapted to regulate the way cryptocurrencies are used, sold and exchanged.93 Yet it is also the case that governments face constant challenges in foreseeing risk and designing appropriate responses. The most recent global shock, an admittedly extreme case, comes on the heels of a recent effort of multiple countries to coordinate one aspect of the global fiscal policy picture, namely the effective taxation of global tech-based companies like Facebook. The introduction of Libra serves to further the stakes in that effort, as explored in the next section.

III. Global Tax Implications

As the previous sections demonstrated, Libra has immense potential to facilitate global commerce but also enormous capacity to create systemic and interrelated macroeconomic and social risks. Among the risks are those to the tax system if individuals and firms can easily bypass fiat currency systems in everyday transactions involving multiple countries. This section considers how governments are likely to cope with this kind of fiscal threat by examining recent and ongoing efforts at the national and international level to more effectively tax transactions facilitated by digital technology.

A. Measures Aimed at Libra Users

Any given transaction involving Libra potentially triggers income and sales taxes for individuals in multiple jurisdictions, which may in turn trigger reporting and withholding obligations of buyers, sellers, and perhaps even the platform itself in multiple jurisdictions.94 Experience to date demonstrates that once Libra is in place, tax authorities at all levels of government are most likely to concentrate in the immediate term on familiar individual compliance issues and seek to overcome obstacles to enforcement as they arise.95 This has been the approach of the U.S. Internal Revenue Service, for example, which confirmed in 2019 that cryptocurrencies would be treated as property rather than currency, thus requiring standard self-reporting obligations upon purchase, sale, and other dispositions.96

Reporting taxable income associated with the use of virtual currencies will be challenging, however, and Facebook is not likely to offer its customers assistance in this regard.97 For example, multiple countries will expect Libra users to voluntarily report all their gains and losses on each transaction of Libra for anything else, and some foreign currency exchange gain and loss rules might apply. 98 Most of these rules are in all probability wholly unfamiliar to the average Libra user, and some may even be challenging for tax advisers.99 Since the value of Libra will fluctuate as the value of its reserve of underlying currencies changes, calculating capital gains and losses will be overwhelming for many casual users, especially in the absence of multilateral rules or even common norms. The likely outcome is spotty compliance, and an enforcement quagmire that will grow as Libra expands its reach.

Closely related to compliance and enforcement regarding the use and disposition of Libra itself are sales taxes associated with transactions using Libra as payment. In most jurisdictions, Facebook will be a platform that enables foreign sellers (referred to in tax circles as “remote” sellers) to sell goods and services to local consumers, in the same manner as other online platforms.100 In many jurisdictions, the consumption of such goods and services will be subject to local sales or value added taxes.101 Historically, these indirect taxes depend wholly on the ability to impose withholding taxes on vendors rather than the end consumer.102

The problems attendant with collecting sales or value-added taxes on remote sellers are well-known but not necessarily well-resolved.103 The core problems associated with cross-border transactions include identification that a taxable transaction has taken place and effectively imposing the obligation to withhold on third parties that are beyond the traditional reach of the state, precisely because they have no local assets to seize in case of noncompliance.104 The recent U.S. Supreme Court case of South Dakota v. Wayfair overturned longstanding barriers to state-level sales taxation of remote sellers, but Europe’s compliance and enforcement problems respecting the collection of value added taxes on cross-border sales demonstrate that there are ongoing enforcement challenges even when the necessary jurisdictional matters are resolved.105

These existing issues magnify when many of the relevant vendors are relatively small but the delivery platform is significant (as is already the case for Amazon), and they are likely to multiply with a vast expansion of transactions on platforms using unregulated cryptocurrencies.106 Many tax authorities will simply be unable to protect their tax bases from these phenomena, but others appear prepared to take a more proactive role.107

For example, an enterprising tax authority might consider ways to become a named payee in any Libra transaction involving someone they identify as liable to tax in the jurisdiction, thus replicating traditional withholding mechanisms. This would require a host of identification and verification steps that are likely to be objectionable to Libra’s designers for the same reasons as those associated with applying anti-money laundering and know your customer rules.108

There are currently some exacting technical and jurisdictional barriers to this approach but targeting Libra as part of an overall platform-by-platform tax enforcement strategy might potentially increase compliance. Precedent can be found in the platform-based compliance model for indirect taxes, mentioned in the OECD’s early reports on the taxation of the digitalized economy.109 Some governments have already begun to reap indirect tax compliance gains by forging cooperative tax withholding agreements with Amazon, AirBnB, Uber, and others.110 It is conceivable that the same logic could be applied to Facebook in respect of Libra, even if the technological means to implement a plan for a cooperative compliance strategy is yet to be defined.

In the meantime, to the extent that Libra users connect their digital currency accounts to traditional fiat currency accounts and regularly exchange between them, traditional financial intermediaries will likely be called upon to aid in individual compliance, as it is in the related regulatory area of anti-money laundering discussed above.111 To the extent financial institutions adapt to incorporate and work with distributed ledger technology, they provide a vital link between tax authorities and elusive taxpayers and transactions.112 As such, they may be the best or only hope of governments to cope with a future in which Libra is a main platform for global exchanges of goods and services among local users and remote sellers.113

Even as enforcing existing rules for the income and gains of cryptocurrency and other digital economy users continues to be a work-in-progress for many tax authorities, however, these efforts are only a part of the overall tax picture for many governments. As is by now well documented in the literature, the international tax community has for the past several years turned its focus to the question of whether and how countries should tax tech-based multinational firms themselves.114

The problem identified is that these multinational firms, Facebook prominent among them, are increasingly able to avoid the customary thresholds to corporate income taxation, which, like withholding obligations on vendors, traditionally rely on jurisdictional nexus through physical presence and local activity.115 As such, the global community is in the process of negotiating reforms to corporate tax nexus and income allocation rules that would be practically feasible as well as mutually acceptable across jurisdictions.

B. Measures Aimed at Facebook

Facebook’s ability to interact with users and customers without any personal contact, which is only set to expand with the rollout of Libra, is a boon for global commerce, but it is a source frustration for states that consider themselves to be facilitating a valuable source of income to the company without commensurate taxation.116 The perceived contributions to value creation by such states may be identified as the provision of a fertile customer base, a stable market, interchangeable currencies, and the legal and physical infrastructure that facilitates delivery of goods and services and enforcement of contracts.117 The measure of these contributions under the benefit principle and their justification of taxation have long been a topic of theoretical debate among scholars, but there remains no universally satisfying principle at play.118

The coordinated response of the global community to highly digitalized firms has been to attempt to forge a new global consensus to adjust some of the core international tax assumptions to the contemporary economic reality.119 This work is mainly being carried out at the OECD, although the European Union has undertaken its own coordinating efforts and has had a strong influence on the direction of the OECD’s work.120 According to the OECD’s work program promulgated in 2019, the goal is to forge agreement on a “new taxing right” that would allow jurisdictions to impose taxes on highly digitalized businesses, but still prevent double or multiple levels of taxation across jurisdictions.121

Facebook has been a major target of global policymakers’ work in this regard, but it is not clear whether and how the planned measures would extend to Libra, especially given the complications posed by the autonomous governance of the Libra Association.122 The basic framework of the current plan for taxing highly digitalized firms comprises three parts: a threshold rule, a new nexus rule and a new income allocation computation.123

The threshold rule is perhaps the simplest aspect of the plan to understand: it leaves undisturbed the current rule structure for firms whose annual revenues are less than a prescribed amount, likely 750 million euros.124 How to measure revenues for this purpose remains an open question, and it is not clear how the measurement would apply to the Libra Association, Facebook, both, or neither.125 If revenues are to be measured with respect to the Libra Association independent of Facebook, it is not clear whether the threshold should be measured in terms of returns to Libra reserves, or total transactions undertaken in Libra, total revenues earned by those transacting in Libra, or something else.126 If return on reserves was the measure, it seems unlikely that the threshold would be met in the near term. Total transactions do not seem to be an appropriate measure since they would reflect multiple exchanges rather than revenues.127 On the other hand, measuring total revenues earned by those transacting in Libra might be beyond the capacity of the Libra Association to administer.

If the threshold is surpassed, the next piece of the digital tax picture would be determining the jurisdictions in which the Libra Association or Facebook, as the case may be, could be said to have a non-physical nexus with respect to Libra’s use and exchange.128 Again it is not clear whether Libra would be incorporated within the overall analysis for Facebook, as a division thereof, or as a wholly separate entity.129 The OECD Secretariat’s unified approach points to two possible bases for nexus: revenues from local advertising and number of local users.130 Either of those measures is complicated by the as yet unresolved relationship between Facebook and the Libra Association.

Finally, assuming that Libra would have a non-physical presence leading to taxable status in multiple jurisdictions, it is difficult to guess how its revenues would be measured and then allocated amongst the relevant jurisdictions. In the OECD Secretariat’s unified approach, the first step is to make a distinction between routine and non-routine profits, and then to make a distinction between non-routine profits that should be reallocated and those that should not.131 Both of these prospects seem virtually impossible to apply to a nascent cryptocurrency system. Determining routine profits for even the most conventional industries, goods and services is an art rather than a science given the dearth of reliable comparable transactions.132 Doing so for a highly speculative innovation like Libra is inherently an exercise in conjecture.133

The foregoing are all highly speculative observations, given that the taxation of the digitalized economy remains in the negotiation stage and there are multiple procedural and substantive dimensions still in flux. While the OECD’s work program and proposed solution have garnered much debate, there is very little mention of the specific challenges attending to the rise of cryptocurrencies. Compared to the focus on well-established issues such as remote sellers and more recently disruptive innovations such as social networks, little attention has turned on the structural challenges to the tax system that will arise if a large proportion of the global economy were to suddenly divert to cryptocurrency-based platforms and payment systems.

Conclusion

The current global economic turmoil makes for an uncertain future in all respects, potentially pushing arcane tax rules out of scope as policymakers attend to more pressing needs, especially emergency spending measures. The international tax system is sure to be a major source of attention in the post-crisis reconstruction period, however. It is clear that in the period of rebuilding, lawmakers around the world will urgently need to forge a coordinated strategy for taxing high tech firms and innovations in ways that up until now have seemed politically challenging if not impossible. The urgency to act will be especially acute for firms that not only survive the current fiscal crisis but indeed manage to realize soaring profits.

Facebook is likely to feature prominently in that group. Having always been a subject of interest in the discussion surrounding the taxation of the digital economy, the company is poised to become even more central to the discussion as Libra comes into being. Facebook’s aims for Libra, its design of Libra’s technical and governance structures, its attention to macroeconomic as well as individual privacy and data management issues, and its monolithic nature, all constitute reasons for intense public scrutiny in the months and years ahead. When Libra launches, the host of unresolved regulatory challenges described herein, and no doubt others yet to be realized, will come into sharp focus, with the international tax policy implications of a massive private global cryptocurrency order high on the list. To date, measures aimed at taxing high tech firms do not seem adequate to the task. Whether governments are willing to make more fundamental reforms as the current fiscal crisis develops remains to be seen.