Will Facebook bring balance to the global payments ecosystem with Libra?

(Image credit: Future)

It seems Facebook are rarely out of the news these days. As well as delivering a heavily curated version of it to billions of people every day, Mr Zuckerberg’s social media monster has created its own fair share of front page headlines recently with various data scandals and privacy concerns. It is in the press again at the moment, but for a wholly different reason: the proposed launch in 2020 of a new digital currency called “Libra”, which will form part of a wider digital wallet ecosystem called “Calibra”. 

This new venture will be run by the Libra Association, which is a not-for-profit organisation based in Geneva. The list of corporate participants reads like a Yellow Pages consisting entirely of large multinationals; Paypal, Ebay, Vodafone, Spotify and Uber are just some of the global brand names that are already signed up to become founder members of the association, along with Visa, Mastercard and Stripe from the payment space and a handful of carefully selected VC firms. So, what will the association formed by this United Nations of technology, comms and investment players actually do? In two words: mobile payments.

Now, this isn’t exactly a new idea – WeChat has already staked a claim in the Chinese market with their WeChat Pay app, which boasts 800 million users and over 1 billion payments being processed every day. What Facebook propose to design is something just as ubiquitous, but aimed at a truly global marketplace. The stated aim is to create a digital currency and financial infrastructure that can be accessed by anyone with a smartphone and an internet connection, bringing access to the financial system to the 1.7 billion people on the planet who are currently “unbanked”.  Users buy digital coins through their mobiles, and will be able to exchange these coins instantly via Messenger or WhatsApp, or pay for goods and services from participating merchants.

So far, so crypto. The difference comes in the fact that Libra will be a fully backed cryptocurrency (or “stablecoin”). In other words, for every token you buy, Libra will place an equivalent investment into something like a short term government bond or other low-volatility investment. It claims this will provide both pricing stability and liquidity, as the value of the coin will be pegged against a real basket of saleable assets distributed across the globe. Coins will be created or destroyed as they are bought and sold, with no restriction on supply. This idea has been doing the rounds for almost 50 years in one form or another, but no-one has actually managed to put it into practice yet.

On the face of it, this all seems like A GOOD IDEA. A decentralised payment method that is accessible to all, theoretically compatible with regulation like FinCEN (via the wallet developers who will provide access to the Libra system), governed by a non-for-profit organisation and backed by dozens of the largest corporate entities on the planet to help get it off the ground. Facebook has even helped allay the inevitable fears around them effectively becoming a large Swiss bank (with all the juicy payment-related data that goes along with it) by confirming it will step back to become a “normal” member of the governance council once the currency is up and running, and making the underlying software open-sourced. So, where’s the catch?

Potential disruptor

To the end consumer, there doesn’t seem to be one; they get the ability to send sums of money almost instantaneously across the globe on simple software that they are already using on a daily basis, and which doesn’t require access to the traditional banking ecosystem. For existing retail or central banks, however, it is a slightly different story.

Considering the proposed scale of this venture, this is something that could disrupt the global monetary ecosystem once it is fully “up and running”. Libra will be able to utilise new access points like Uber, Spotify, eBay and Lyft to tap into a huge existing marketplace, on top of the existing WhatsApp / Messenger user base. This alone will give access to potentially billions of users, all of whom could start diverting funds away from existing payment routes and into the new system. As well as draining liquidity from existing retail and high street banks and other payment mediums, it also makes them less relevant, as services inevitably drift towards the new status quo. Ditto the current wave of fintech “challenger banks”, which are making their name with instant transaction times and overseas exchange and transfers – what use is a Revolut or Starling account when you can do everything they can with a single WhatsApp message?

It is interesting to see Visa, Mastercard and Stripe all hitching their wagons to this initiative – it may afford them the chance to transition their existing services into something fit for an internet-based currency (and the economy that accompanies it), but as the value they added to the current chain is mostly around the processing of the payments, it will take some clever positioning on their part to carve out a place to fit into the new blockchain-based landscape. By the same token, there is a notable absence of banks in the list of founding members. It may be the bureaucracy or inertia inherent in the global banking system or just simply a case of the turkeys not wishing to invest in a Christmas-themed party, but either way, it seems like a baffling oversight on the part of “the establishment” (if they were indeed invited at all).

Given that the underlying basket of investments could theoretically be more stable than any one individual currency (the Euro, for example), this also raises the question of how comfortable various Nation States and banking providers will be with the concept of a currency that isn’t underpinned by a central bank somewhere. This is something different – a currency that is invested in currencies around the globe. It possesses a scale that could move markets and the backing of a cohort of the biggest corporations in the world to the (projected) tune of a billion dollars on day one. Just like George Soros crushing the pound back in his heyday, imagine an investment fund that has hundreds of billions tied up in various national currencies, but that isn’t pegged (or beholden) to any of them.

Signalling a paradigm shift

Imagine if Libra was launched five years ago: would the UK pound now be facing being delisted from the Libra “basket” of funds (with the resulting pressure on sterling in the global FX markets) if Brexit ends without a deal? Could the fund become big enough to actually start affecting monetary policy or political decision-making? Does this effectively grant a collection of large corporate entities the means to start influencing monetary matters on a truly global scale, with all the systemic risk that implies?

Of course, another big question will be how exactly this will make money for the parties involved. Looking a little closer, the Association will retain any interest due on the various investment vehicles it uses to underpin Libracoin, very much like the old concept of seigniorage. It will then use this to pay a dividend back to the original investors. Quite simply, Facebook et al will be earning interest off the money sat invested. Now, some of this interest will be eaten up with the running costs of the new network infrastructure, and some will go towards growth and expansion, but considering how many billion could potentially be sat in assets at any one time, that is still a large chunk of change to be carved up 100 ways, even for low-yielding bonds. So, as well as potentially influencing global money markets, Libra could very well start interfering with the ways and means governments have of levying things like inflationary tax on their citizens, by effectively controlling the flow of money into and out of government securities, and the mechanism it is moved with.

For those who would argue that this is just a storm in an internet based teacup and that Libra simply won’t gain enough traction among the middle and later life age brackets, consider this: a recent survey in China of people over 50 showed that while only 59 per cent are able to search for videos online, a whopping 98.5 per cent are comfortable chatting to friends online via WeChat. If Facebook can successfully bring the same simplicity to sending money as it does to sending WhatsApp messages or pictures on Messenger, this could signal a paradigm shift in moving money simply and comfortably for a generation that may not use their phone to surf the internet, but are quite happy conversing with their grandkids through a friendly blue or green interface.

Is the birth of the first true “internet currency” a good or a bad thing? Only time will tell, but make no mistake, if Libra gains a foothold (and there is every reason to believe it will), this will mark a true shift in the global economic framework, with all the good and bad points that will bring with it. As has been noted many times, Facebook has already changed the entire fabric of society once. I wouldn’t bet any Libra against them doing it again.

Ross Denton, Financial Services, Altus