Libra’s June announcement for a new cryptocurrency looks straight out of the payments industry playbook: build a network of Founding Members and then establish governance that allows control and operation. But a global currency aimed at the unbanked, really?
The announcement quashed the enduring speculation about Facebook’s next strategic move – but also raised questions about the scope, timeframe and motives behind the project.
The first application is a stand-alone digital wallet, Calibra, offered by a Facebook subsidiary powered by a new global currency, Libra coin, and expected to launch in 2020. The stated objective is to bring low or no-cost payments to the unbanked.
For some time, many analysts have suggested that Facebook has been compelled towards payments because it is lagging behind the two rival Asian digital giants WeChat and Tencent. For example, today WeChat offers you the convenience of microservices – you can send and receive money, purchase travel and entertainment, pay bills, consume tailored news and book medical appointments. This is all possible through what is essentially a mobile phone application. Plus, of course, the existence of digital identities enabled by leapfrog technology and consumer acceptance.
Facebook is still a long way off this vision but is currently playing catch-up with the launch of WhatsApp payments in India and other emerging markets. Governments in these regions are encouraging cash users to switch to digital payments, and Facebook, with 400M WhatsApp users in India, has a real chance of becoming the leading digital payments player, pushing the market leader Paytm aside.
So why launch a new global currency based on blockchain technology for the unbanked with all the attendant risks?
For regulators, and perhaps even many of the Founding Members that today operate regulated global payment systems, the real risk seems to lie in the creation and use of the Libra global currency. The introduction of a single global currency at the expense of domestic fiat currencies is simply a step too far for central banks. Ceding control of financial services and payment schemes to a Fintech association is seen by the IMF Head and others as putting the stability of our financial system at risk.
For the unbanked in developing markets, access to cash is fundamental in day-to-day life. Cash is seen, trusted, hoarded, counted and used. Launching a new currency that ironically today has no way of getting cash in – or cash out – seems a very challenging proposition. There are even more hurdles to persuade governments and employers to opt into Libra as a funding source for its citizens and workers, when there is no closed ecosystem or easy way to spend it. For Libra, perhaps targeting the unbanked is a pathway to get regulatory approval.
Analysts have speculated there is another use case. For Facebook, finding a conduit away from the challenges of privacy and regulated data by offering microservices could be the winning application. Under the model proposed by Facebook, there would be no need to convert into different fiat currencies or use fiat at all. The killer benefit could be migrating users to sell their data to Facebook – paid in Libra coin – thereby liberating Facebook from the troublesome regulatory burden created by personal data issues. With Facebook’s current business model generating 95% of its revenue from advertising, securing access to data sources is a key priority.
Time will tell what the true motives are. Meanwhile, judging by recent reactions, there is a mountain to climb in securing regulatory approvals for a launch in the second half of 2020.