What it means for Facebook's Libra to lose PayPal

Facebook's Libra cryptocurrency project has lost its first major ally.

PayPal — where the head of Facebook's Libra project once served as president — has cut its ties. As a founding member, PayPal was expected to drive the payment-specific part of the cryptocurrency initiative.

Amid an almost constant stream of regulatory and political pressure, one of the main challenges for Facebook is keeping Libra's allies on board. There have been rumors for months that the regulatory heat was worrying the non-Facebook members, and as recently as this week there was word Visa and Mastercard may drop out of the project. PayPal's departure was hinted at on Thursday when word leaked it would not attend a Libra meeting in Washington.

Chris Ratcliffe/Bloomberg

Facebook's scale and large user base make Libra a potential force, though it has also drawn attention from regulators globally, including the U.S., Europe and Asia. PayPal is not the only company to reportedly have doubts, as other members have hedged. Visa CEO Alfred Kelly earlier this year noted the members' participation is nonbinding, suggesting it would wait to see how Facebook handles the regulatory storm before making a final decision.

David Marcus, who is leading Libra for Facebook, has defended the project, saying Libra's stablecoin structure would not result in the creation of new currency.

PayPal has about 300 million users, so it’s sizable, said Raymond Pucci, director of the merchant services practice at Mercator.

“But other payment players are getting cold feet,” Pucci said. “So no one but Facebook right now has skin in the game. Not much in the win column for Libra right now.”

PayPal, which already collaborates on payments with Facebook, was one of five payment-specific companies that were part of the Libra initiative's founding 28 members, the others being Mastercard, Visa, Stripe and PayU; so losing PayPal in effect removes one-fifth of Libra's payments bench. Libra's members are split into companies and firms in payments, technology, telecommunications, blockchain, venture capital and nonprofits.

The roles of Libra's members have not been defined in detail, though the Libra Association says the members are responsible for strategy, implementation and governance. PayPal and the other payment companies have experience and scale in running international payment networks, providing expertise in compliance, security, technology and digital transaction services.

In a statement, PayPal's public relations office said the company as decided to "forgo further participation in the Libra Association at this time and to continue to focus on advancing our existing mission and business priorities as we strive to democratize access to financial services for underserved populations."

But PayPal also left open the possibility of collaborating in the future, saying it's "supportive of Libra’s aspirations and look[s] forward to continued dialogue on ways to work together in the future."

In an email, Dante Disparte, head of policy and communications for the Libra Association, said: "This journey to build a generational payment network like the Libra project is not an easy path. We recognize that change is hard, and that 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."

The departure raises the stakes for the first Libra Council meeting, set for Oct. 14 in Geneva. Disparte said that the association would have more updates after the Libra Council meeting and that about 1,500 entities have expressed an interest in participating. The nonprofit Libra Association is based in Geneva and oversees the project.

In its media statement, PayPal noted it will continue to collaborate with Facebook in other areas.

Facebook uses Messenger to support invoices and P2P transfers. Messenger is also part of Facebook's overall payment strategy.

The social network's earlier attempt to build its own currency, Facebook Credits, failed in part because of a relative lack of payments and financial services. Facebook has since added payments functions and services for retailers. It has also hired payment experts such as Marcus, the former PayPal president, and added payment experts to Facebook Marketplace.