Mobile banking, digital wealth management, and other tech-powered services are only some of the ways financial institutions innovated customer experience. Why not throw into this mix a cool new digital currency to replace government issued paper money? Facebook’s announcement of Libra has sent ripple effects across the financial world’s players, many of whom are concerned about what Libra means for customers, economies, and the future of this industry. In this article, we explore Libra’s potential impact.
“Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people” – the Libra whitepaper said.
According to the paper, there are 1.7 billion adults who are “unbanked”, yet 1 billion of these adults own a smartphone. Simply put, Facebook’s Libra is offering financial services to those who haven’t had access to it before.
Scott Galloway, Professor of Marketing at NYU Stern School of Business said “the Libra coin is simply brilliant”, and he added: “Facebook is in a unique position to facilitate these transactions with a user base of 2.4 billion people on a soon-to-be encrypted network. In many countries, Facebook is the internet.”
Facebook proposes Libra as a digital currency that offers stability, global acceptance, and fungibility. To the untrained eye, this might be a novel idea, but financial pioneers have thought about a global digital currency before, but none of the projects had such backing as Facebook. With this brand, however, one must suspect that strings are attached. Libra is raising serious concerns among many of you in the finance sector. Its social, ethical, economic, and even criminal implications are under heavy scrutiny – and for good reasons.
New competition on the block
The finance sector is already in the midst of a civil war: traditional banks vs challenger banks and fintechs. The industry is finding new ways to co-exist with its digital disruptors, but Facebook’s Libra is a whole other competitor with a unique advantage that even challenger banks couldn’t stand a chance against.
“Facebook is Uberizing life expenses”, People Not Tech Co-Founder and CEO Duena Blomstrom wrote. “The same way in which the famous driving service has taken the payment out of the equation for transport or home deliveries, Facebook can take it out of everything from buying tickets for events to purchasing any product, or to getting a loan or a mortgage – all from the same timeline.”
The convenience of Libra is its strongest selling point. However, the US based company is facing many roadblocks to establishing a globally accepted digital currency. Japan has a more relaxed attitude towards cryptocurrencies and therefore Facebook’s Libra. The Monetary Authority of Singapore (MAS) is open to the idea of Libra, especially if it brings value to customers, but the issues around its “features, use cases, and governance arrangements” need to be worked out. The Reserve Bank of India strictly bans cryptocurrencies in the country, so Libra is unlikely to take root there. Meanwhile, the People’s Bank of China is nearly ready to launch its own digital currency with which Libra would compete, and US policymakers and EU regulators remain sceptical, TradeAlike’s Senior Trading Analyst Faisal Khan reported.
Seasoned finance experts are also concerned about the impact of the Libra currency might have on global and regional economies. Citing Nicolaus Copernicus, Alexander Lipton, CTO of Sila, noted in an interview that “when new currency is issued, the old must be demonetised and withdrawn from circulation, and that’s not what happens when Libra is issued”. The reason for demonetisation is of course to avoid inflation. With two valid currencies in circulation, Libra could be a catalyst that collapses economies and pulls economical power to itself – away from governments.
“The popularity of Libra could cause a drain on local currency deposits in the banking system, which is sure to provoke capital control measures from the authorities”, Stephen Perrenod, Partner at OrionX, commented.
Libra: a democratic cryptocurrency or a digital currency?
Facebook’s Libra is met with even more criticism from the crypto community who are advocates for other cryptocurrencies’ ability to foster ideologies based on trust – something that Facebook has been notoriously lacking.
Novum Technologies CEO Patrick Tan wrote: “Built upon the ethos of access and decentralisation, Bitcoin is the embodiment of unadulterated democracy — where any entity, criminal or otherwise, may avail themselves of access to the cryptocurrency and use it accordingly. […] Facebook’s Libra on the other hand was always intended to be accessed and utilised within a walled garden […] Its pursuit of regulation [is] simply the veneer of credibility and to legitimise its wider commercial and corporate interests.”
Comparisons between Libra and Bitcoin were probably inevitable. The announcement of Libra actually gave bitcoin a significant surge, but as Tan illustrated, the differences can be striking. Libra is backed by a basket of fiat currencies, but because of that, Libra represents debt, rather than an asset (like Bitcoin), Perrenod explained. This also means that calling Libra a cryptocurrency might be misleading, placing Libra much closer to products like WeChat Pay and AliPay, Vladimir Petrov, PhD research fellow of Marie Sklodowska-Curie initiative BigDataFinance at the University of Zurich, told us. “I view the whole scheme like a money market fund, not really a currency, since it is a fund of fiats. But one in which all the dividends are kept by the money market sponsor”, Perrenod commented.
Facebook is hardly the first to come up with the idea of a global digital currency. In 2018, Alexander Lipton, Thomas Hardjono, and Alex Pentland published the research article Digital trade coin: towards a more stable digital currency, which suggests that supranational digital tokens are now possible, thanks to the evolution of distributed ledger technology.
“In the DTC (digital trade coin), we propose to develop a trade-oriented asset-backed digital currency, aimed at facilitating international trade and making it as seamless as possible. This currency will be based on a proprietary framework combining the most recent advances in blockchain and distributed ledger technology, cryptography and secure multi-party calculations, together with time-tested methods for preventing double spending”, the paper proposed.
Again, the idea behind developing DTC was to offer “a transactional tool for a large pool of potential users, including small and medium enterprises and individuals” – a democratic notion that also eludes to cryptocurrencies’ anonymous/ pseudonymous nature. Libra, however, comes with strings attached.
Ethical controversies and contradictions in the wake of Libra
(Another) one of the reasons why policymakers and regulators are hesitant about Libra is because of Facebook’s troubled history with users’ data.
“We could talk about how it works, but to me, the big question is trust. In any currency, trust is central, but will the market trust Facebook, given other reputational issues surrounding privacy and so on?”, Glenn Hubbard, Russell L. Carson Professor of Finance and Economics at Columbia University, said in an interview.
Following the Cambridge Analytica scandal, Facebook users’ trust in the company plummeted to 27% – a 66% drop! Hubbard later added: “The trust issues are real. […] WeChat Pay and AliPay are associated with firms Tencent and Alibaba […] But there is a clear demarcation, and one of the things Facebook would have to do is to draw a very bright line on what the use of data would be and whether there would be any commercial fallout or benefits for Facebook when running this business. Failing to do that, the business can’t get to scale.”
Libra’s interests are still unknown, Ligia Catherine Arias-Barrera, Ph.D. at the University of Warwick, reminded us, which is another question Facebook needs to address.
Adding fuel to the fire that is Facebook’s trust issues, academics and finance professionals are concerned about the link between the social media giant’s content regulation and Libra. For example, if a Facebook user expressed an unpopular opinion on the social media platform, and subsequently get banned, what happens to their Libra accounts? Will Libra users need Facebook for the service?
The line – a metaphorical manifestation of trust in Facebook – becomes even blurrier as we consider the testimonial that Chris Brummer, Williams Research Professor and Faculty Director of Georgetown’s Institute of International Economic Law, gave in front of the House Financial Services Committee.
“The Libra white paper fails to inform people in unambiguous terms that they [could] lose their money, and that runs on the coin are possible. Instead, [it] routinely suggests and doubles down on the idea that Libra will virtually always provide stability in terms of the purchasing power of the new currency,” Brummer said.
Rob Sharpe, Senior Associate at Clifford Chance, agrees that the Libra whitepaper fails to clarify that users will face currency risks.
“Because the reserve will be effectively backed by a basket of fiat currencies, the exchange rate of Libra against any particular fiat currency (e.g. the Libra/GBP rate) will inevitably fluctuate as those underlying fiat currencies fluctuate”, Sharpe explained.
Libra is still in its infancy, but Facebook intends to launch this service in 2020, which doesn’t leave much time to address the concerns above. Ultimately, it is the people who will decide whether Facebook’s Libra will take off or not. After all, the company is addressing 1 billion people with smart phones who don’t have access to banking. There is clearly an untapped market where products like Libra can make a huge difference in people’s lives. Facebook just happens to be the mover with the highest chance to succeed in this demographic.