What’s not to like about Libra? Quite a lot, if you are a regulatorby Paul Wallace / June 22, 2019 / Leave a comment
First the pound and then the dollar: global currencies are usually centuries in the making and reflect the clout of the nation state underpinning them. Now Facebook plans to short-circuit that historical and economic process and to create from scratch an instant world currency. Its Latin-based name, libra, from which the £ symbol is derived, hints at the vaulting ambition of the project. Mark Zuckerberg, the founder and driving force of Facebook, looks set on trying to create a new monetary domain to rival the Roman empire.
Libra is not the first attempt to create a new digital currency based on the “blockchain” technology to secure and validate transactions through a common digital ledger. That honour goes to bitcoin, launched a decade ago. The first cryptocurrency’s rollercoaster ride showed that it failed to satisfy the three crucial functions of any money, namely providing a stable store of value, an effective means of exchange and a unit of account. Bitcoin is in effect a speculative asset rather than a meaningful currency.
Unlike bitcoin and other wannabe cryptocurrencies created in its wake, libra does have a realistic chance to become a new money that is widely used. For one thing, it will use an initially centralised version of the blockchain technology (which for some subverts its very point, which is to distribute authority). Unlike bitcoin it will not require massive computational power and use of electricity to validate transactions.
As important, libra will be backed by assets in the shape of bank deposits and short-term government securities. That reserve held in a basket of national currencies will come mainly from the users of libra through the money they pay to purchase it. This should provide ballast for the value of libra, avoiding the wild lurches of bitcoin, though it will still fluctuate against the dollar and other national currencies.
As well as offering a relatively stable digital currency, libra will have the backing of a wide range of stakeholders other than Facebook. An independent not-for-profit body will govern and manage the new currency. Based in Geneva, the Libra Association will draw its members from non-profit organisations as well as global businesses.
Twenty-eight outfits including Facebook have already pledged to become founder members, each making an investment of at least $10m. These include financial firms such as PayPal and Visa, online services such as Spotify and eBay, telecoms companies such as Vodafone, and non-profit organisations such as Kiva and Mercy Corps. Notably, no bank has yet joined. The hope is that there will be around 100 members, each with one vote, by the time of the launch in the first half of 2020.
Most important of all, libra will be able to tap into Facebook’s global network of 2.4bn monthly users. Although it will face competition, Calibra, a new subsidiary of Facebook, looks likely to dominate access to the new currency. Calibra will provide a “digital wallet” that customers can use to save, send and spend libra. Together with other providers of such wallets, it will work with “authorised resellers” (such as cryptocurrency exchanges) that will allow users to change their money into libra.
Facebook aims to slash if not eliminate the cost of making payments across frontiers. One big potential market for such low-cost transfers is the remittances sent by migrants to their families. Those sent to low- and middle-income countries amounted to $529bn in 2018 according to the World Bank, which estimates that the global average cost of sending $200 to such economies was around 7 per cent in the first quarter of 2019. Facebook also hopes that the service will serve the 1.7bn around the world who lack access to a bank, creating a “more inclusive financial system.”
Despite such worthy-sounding ambitions, Facebook has a hard-nosed commercial rationale to set up libra. Mixing payments and advertising has been a successful model for WeChat, the Chinese “super app” that started as a messaging service but now provides much more besides. Although Calibra will not generally share account information or financial data with Facebook or any third party without customer consent, some customers may indeed give their permission. Even if they do not Calibra will reinforce Facebook’s appeal to its existing users while luring more in.
Facebook’s battlecry was once to move fast and break things. The company may have dropped that motto but it now looks intent on smashing the old monetary order. The new currency is a challenge to central banks and regulators as much as to payment providers. Facebook has taken on a formidable bunch of adversaries which are likely to turn the launch of libra into an obstacle course.
The plan for Libra talks grandly about “working with authorities to shape a regulatory environment that encourages technological innovation while maintaining high standards of consumer protection.” Not so fast, they will respond: you will have to follow the same rules as other financial institutions. Calibra will apply for money-transmission licences, but this may not be enough. If libra is categorised as a security it will come under the Securities and Exchange Commission in America; and regulators elsewhere are likely to muscle in, too.
Already the G7 countries are on the case, setting up a new working group to examine wider risks to the financial system. A particular worry is that the new currency could become a vehicle for money-laundering. Regulators around the world will want to ensure that this does not happen, and are likely to demand compliance with obligations such as “know your customer” which will increase costs. Mark Carney, governor of the Bank of England, said in his Mansion House speech on Thursday that the central bank “approaches libra with an open mind but not an open door,” arguing that if the new currency fulfilled its ambitions it would be “systemically important.”
At the least, Facebook is likely to find that the proposed launch of libra in the first half of 2020 could be grounded for some time to come. Zuckerberg is used to getting his own way but this time he may find that he has reached too far.