Monday 21 October 2019

Facebook's breaking the bank

Facebook's Libra currency could take the untapped developing world by storm
Facebook's Libra currency could take the untapped developing world by storm
Steve Dempsey

Steve Dempsey

Facebook has launched its own currency. It's called Libra, not Facebucks or Zuckbucks. Just Libra. It will be controlled by a federation of companies and non-profit organisations through a Swiss foundation.

Companies that want to join the foundation must contribute a minimum of $10m to help the currency gain traction with users and merchants. To date, Facebook has convinced the likes of Visa, MasterCard, PayPal, Uber, Spotify and venture capital firms like Andreesen Horowitz to pony up.

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But what about the punters? How do they get access to Libra? Well, details are sketchy on that front, but it's likely to be distributed on Messenger and WhatsApp at some point in 2020.

Users will store and spend Libra via a digital wallet called Calibra, that will be run as a subsidiary of Facebook.

Is Libra a cryptocurrency? The answer is, kind of.

"If we are to get technical, the Libra network does not conform wholly to the decentralised philosophy of Ethereum or Bitcoin," says Lory Kehoe, managing director of blockchain software technology company Consensys.

"Only a limited net of Libra association members will act as validator node operators who verify transactions, as opposed to the thousands that Ethereum boasts. This makes Libra a 'permissioned' or private blockchain."

So it's a cryptocurrency, but not truly decentralised. It'll also be backed by a reserve, so unlike other cryptocurrencies its value will be pegged to a real asset.

How have the financial powers that be, the regulators and central banks, responded to Facebook and Co muscling in on their turf?

Well, they knew the threat was coming. The IMF's managing director, Christine Lagarde, recently said the following at an event in Japan: "A significant disruption to the financial landscape is likely to come from the big tech firms, who will use their enormous customer bases and deep pockets to offer financial products based on big data and artificial intelligence.

"These developments hold out the promise of accelerating inclusion and modernising financial markets, but raise, in addition to privacy issues, competition and market concentration concerns, both of which could lead to vulnerabilities in the financial system."

As soon as Facebook unveiled Libra, the head honchos of the financial system responded. Mark Carney, the governor of the Bank of England, said Facebook's quasi-cryptocurrency would be subject to international scrutiny.

He said if Libra gained traction "it would instantly become systemic and will have to be subject to the highest standards of regulation". Maxine Waters, the chair of the US House Committee on Financial Services, said given Facebook's "troubled past" it should put the brakes on Libra until regulators give the green light.

And France, which currently holds the presidency of the G7, called for a working group of central bankers and IMF officials to study the ramifications of Libra. What sort of ramifications? There's a long list and it includes financial stability risks, substitution effects, relationship with interest rates, consumer protection and privacy.

Regulators are right to be wary. We're potentially looking at a global currency controlled by a federation with the ethical backbone of Uber, the censorship resistance of PayPal, and the privacy record of Facebook.

But Libra's architects knew that it would be met with this level of scrutiny. The glossy manifesto welcomes oversight and says the world's governments, specifically regulatory and law-enforcement authorities, are essential partners in tee endeavour. Facebook is hoping that regulators will be assuaged by a touchy-feely mission.

Facebook's core mission, remember, is to give people the power to build community and bring the world closer together. The stacks of cash are a secondary by-product. The mission for Libra is to provide financial services to the 1.7 billion people worldwide who lack access to a proper banking system.

This number of 1.7 billion comes from the World Bank's Global Findex database, published by it in 2017. The Findex report singles out China, India, Indonesia and Pakistan as the countries with the biggest shares of financially excluded individuals. The unbanked and underbanked are commonplace across Africa, the Middle East and parts of Asia.

This seems to be the real opportunity for Libra. If widely adopted it could become the financial lingua franca for the developing world. Take India for example. It is WhatsApp's biggest market and it leads the world in remittances according to the World Bank. The Indian diaspora sent $80bn back to the country in 2018. Facebook could offer near zero fee international transfers in India and other countries where the underbanked are charged exorbitant fees for international transfers.

Spotify put its hands up and said this is why it is interested in Libra.

"One challenge for Spotify and its users around the world has been the lack of easily accessible payment systems, especially for those in financially underserved markets," said Alex Norström, Spotify's chief premium business officer.

"This creates an enormous barrier to the bonds we work to foster between creators and their fans. In joining the Libra Association, there is an opportunity to better reach Spotify's total addressable market, eliminate friction and enable payments in mass scale."

So while Facebook has a questionable record on privacy and has been recently lurching from one PR disaster to another, there is a genuine opportunity that Libra could help billions of unbanked and underbanked people and unlock innovation in the developing world.

That puts the ball back in the regulators' court. They need to ensure the technology community wreaks as much havoc on the financial system as it has on democracy and privacy, disrupting without destroying, or in the words of Mark Carney scrutinising "with an open mind" but not "an open door".

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