I doubt this will hurt Facebook. I don't believe regular users on the whole care about privacy. Especially if you compare the value of Facebook (all my friends, photos, events, chat) vs privacy cost.

One interesting implementation they could strive for is rather than expecting users to host their own server, ask them for an AWS key and use that - that way Amazon handles all billing, uptime, etc.

Also the name blows, and they're self professed nerds - generally terrible at making a user experience for regular users.