The Whatsapp for payments?
“Libra is for everyone.
Moving moneyFrom the Latin word moneta, nickname that was given by Romans to the goddess Juno because there was a minting workshop next to her temple. Money is any item that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular region, country or socio-economic context. Its onset dates back to the origins of humanity and its physical representation has taken on very varied forms until the appearance of metal coins. The banknote, a typical representati... More around the world should be
as easy and cheap as sending a text message.”
Libra White Paper
In the media frenzy around Libra, dubbed ‘a simple global digital currencyThe money used in a particular country at a particular time, like dollar, yen, euro, etc., consisting of banknotes and coins, that does not require endorsement as a medium of exchange. More for all’, we take a look at some of the facts and opinion amid all the noise. Is a global payments industry apocalypse, or worse, upon us? Or is Facebook’s latest brainchild just an idealistic vision facing multiple future hurdles?
On 18 June 2019, Facebook announced its plan to launch Libra, a “stablecoin”, built on a tailored version of blockchain technology and designed to let people shop and make low-fee money transfers globally. Like Facebook’s previous game-changing initiatives that have transformed the way people interact across the globe, Libra is another bold idea aimed at the masses and capturing attention at the top. Tapping into a potential and growing audience of some 2.4 billion Facebook users (almost twice the population of China or India), Libra aims to be the first global peer-to-peer payments network. It also aims to serve the 1.6 billion people in the world who lack easy access to traditional banking. The new currency is tipped to launch in the first half of 2020.
Who’s behind the currency?
Facebook is behind but not fully in control of Libra. The currency will operate under the Libra Association, a non-profit organisation registered in Geneva, that initially includes 28 mostly private sector partners. Among them are established names like Mastercard, Visa and Vodafone. Others include eBay and PayPal, newer companies such as Spotify and Uber and venture capital firms like Andreessen Horowitz. Notably absent are the large commercial banks, government entities and other large tech companies. In theory, each partner will hold a 1% share among 100 target investors (by the launch dateThe year in which a medal or coin was minted. On a banknote, the date is usually the year in which the issuance of that banknote - not its printing or entering into circulation - was formally authorised. More), and each must invest at least USD 10 million in the venture.
Who’s the competition?
Potentially, any traditional and existing paymentA transfer of funds which discharges an obligation on the part of a payer vis-à-vis a payee. More system and the other “disruptor” currencies, including bitcoinBitcoin is commonly said to be a cryptocurrency, a digital means of exchange developed by a set of anonymous authors under the pseudonym of Satoshi Nakamoto, which began operating in 2009 as a community project (Wikipedia type), without the relationship or dependency of any government, state, company or body, and whose value (formed by a complicated system of mathematical algorithms and cryptography) is not supported by any central bank or authority. Bitcoins are essentially accounting entries i... More and altcoin, that have emerged in recent years. Yet Libra has some distinct differences. As a ‘stablecoin’ pegged to a basket of different currencies (US dollarMonetary unit of the United States of America, and a number of other countries e.g. Australia, Canada and New Zealand. More (USD), British Pound (GBP), EuroThe name of the European single currency adopted by the European Council at the meeting held in Madrid on 15-16 December 1995. See ECU. More (EUR), Swiss Franc (CHF), and the Japanese Yen (JPY)), Libra will be backed by “real” government-backed assets from central banks, making it less volatile. But the very basis of this stability is already attracting scrutiny from national and global regulators. And the centralised structure of the Facebook Association is inevitably leading to speculation about its possible ambitions to be a power-hungry pseudo centralised global bank, or even to challenge the status quo of nation states.
Could Libra really disrupt the global payments system?
Some fear that the Libra system, if widely adopted, could shake the global economy and rival national banks. Chris Hughes, a Facebook co-founder has warned of the dangers: “This currency would insert a powerful new corporate layer of monetary control between central banks and individuals,” he writes in the Financial Times.
Christine Lagarde, Managing Director and Chairman of the International Monetary Fund (IMF) has previously warned about the dangers of potential disruptors using distributed ledger technology: “We don’t want innovation that would shake the system so much that we would lose the stability that is needed.”
French Finance Minister Bruno Le Maire sent a letter to officials from the G7 and International Monetary Fund warning that Libra must not become a “sovereign currency,” while Markus Ferber, a German member of the European Parliament, warned that Facebook could become a “shadow bank” and said regulators should be vigilant.
An article about the Libra initiative in the Financial Times exposed an added dimension from the US perspective, quoting Congresswoman Maxine Waters, who said: “It’s not clear who those regulators will be, because the US does not have a regulatory framework for cryptocurrency.”
Nonetheless, if Facebook chiefs were hoping the company would be able to operate without the kind of strict international regulation encountered by banks and other payments companies, they may be in for a surprise. Both the Financial Stability Board (FSB), an international body that monitors and makes recommendations about the global financial system, and the Financial Conduct Authority (FSA) in the UK, have issued warnings. Other commentators have dismissed the scaremongering, emphasising the resilience of central banks.
What are central banks and key regulators saying?
The main concerns for regulators include how Facebook would be able to ensure anti-money laundering measures while protecting users’ data privacy. Global central bankers have largely refrained from regulating digital currencies, concluding that they were too small to pose a risk to the financial system. With Facebook’s new initiative, this position could changeThis is the action by which certain banknotes and/or coins are exchanged for the same amount in banknotes/coins of a different face value, or unit value. See Exchange. More. The Basel-based Bank for International Settlements (BIS), an umbrella group for central banks, has called for greater political coordination to deal with the entry into finance of major tech firms like Facebook.
Thomas Moser, an alternate member of the Swiss National Bank’s governing board was more upbeat: “I think it’s an interesting development and I’m pretty relaxed about it. They have clearly indicated that they are willing to play according to the rules, they have been contacting the regulators.”
Speaking about the new economy that’s emerging due to technology, Governor of the Bank of England, Marc Carney, was also upbeat about Facebook’s plans: “Libra may substantially improve financial inclusionA process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products. While it is recognised that not all individuals need or want financial services, the goal of financial inclusion is to remove all barriers, both supply side and demand side. Supply side barriers stem from financial institutions themselves. They often indicate poor financial infrastructure, and include lack of ne... More and dramatically lower the costs of domestic and cross border payments”. Noting the imperative of transforming payments in general, he also stressed that standards and regulations for innovations such as Libra must be adopted in advance of any launch.
Other European central banks have expressed caution. According to Reuters, several central banks have requested more details on the project and France is using its year-long presidency of the Group of Seven nations (G7) to set up a working group to evaluate the risks of currencies like Libra.