Fintech makes the world go around

Jun 26 2019   9:48AM GMT

Scepticism and the challenges beyond for Facebook’s Libra

KarlFl40 Profile: KarlFl40

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So Facebook has announced plans for its cryptocurrency project, known as Libra.

According to Facebook it will “enable a simple global currency and financial infrastructure that empowers billions of people”.

But to get there will be anything but simple.

Overcoming the scepticism facing the project will be the first hurdle.

Some welcome the project as an attempt to fix the problem of almost two billion people not having access to a bank account. “It’s great to see Facebook and large tech partners talk about financial inclusion. There are still 1.7 billion unbanked, and everyone needs to be on deck if we want this number to go down to 0 by 2030,” one contact told me.

But one senior IT professional  in the banking sector was more sceptical about whether Facebook was the right organisation to drive a project like this.

He said: “Bearing in mind Facebook has now been shown to act unlawfully and cannot be trusted with user data, my hope is that financial regulators around the world keep a close eye on this. If it goes ahead and many millions of people start using it, the scope and impact of any issues could be widespread. I have lost faith in the moral compass of big tech and I think more people are reaching the same conclusion.”

And even if this type of view is overcome there will be many more hurdles to overcome.

I caught up with a contact of mine who is an IT expert in the payments industry. He holds a very senior global role.

He gave me his thoughts based on early information, so at the time there’s a number of details (in particular on the technology) that remain unknown.

He asked me not to name him at this point but this is what he said:

“The positioning of Libra at the moment is primarily on cross border transfer of value. This is a market with well-established players already (crypto-based players or more traditional ones). It’s clear that Facebook counts on its huge installed base of users as an argument to prevail in this market. At the same time, the incumbents are more knowledgeable about the market in general and remittance corridors in particular and will give Facebook a challenge.”

Facebook seems to be focusing more on transactions related to Facebook usage (as opposed to money transfer operators) which again can be a great argument for their user base. They position Libra as a transaction currency, directly usable by end users. This is quite different from money transfer operators that position their product as a currency-to-currency transfer, and several use a cryptocurrency as a transport currency essentially invisible by end users. This positioning avoids the pitfalls of on-ramp and off-ramp from Libra to national currencies, which requires an infrastructure of agents that acts as on/off ramps (and which requires fees to make this a commercially viable activity). At the same time, this requires Facebook to actively build a network of acceptance points for Libra (cash-in, cash-out, merchant), something that requires huge market power which Facebook and their partners may have.

It’s also great to see a general openness that Facebook brings –
– open source approach
– the market for Libra wallet providers is open (albeit Facebook with their Colibra will obviously be the gorilla in the room)
– the association is open to other partners in the future”

Facebook and the association will face some key challenges

“Cross-border market offerings are subject to very important regulatory pressure pertaining to preventing money laundering etc. While some of the players in the association are familiar with this (e.g. PayPal), it’s clear that the association will need build muscle in this domain to lobby and succeed. Banks, the most traditional players in this space, have been struggling with this and actually retiring from certain markets (de-risking.)

“As the products become available for use in many countries, Facebook and the association will face regulations regarding money transfers specific to these countries and markets. PayPal is a good example of this where the offering of PayPal can be quite different from country to country based on local regulations (for example in many countries a PayPal user can accept a payment from abroad, but can’t send money abroad). Achieving uniformity of Libra offering across markets will be a huge endeavour.

“Another aspect of global and local regulations is the KYC requirements for customer onboarding. Facebook states that the Calibra wallet will respect all local and global KYC requirements, which is again a huge endeavour. At the same time, Facebook also mentions that they will not supervise the other Libra wallet offerings, which may backfire – if certain wallet offerings don’t abide by the local regulations, the entire Libra may face a challenge from the regulator even if other wallets do abide.

“To overcome these challenges, Facebook and the association will need to be open and listening to a number of players who understand these regulations on a global and local scale.

“From the financial inclusion perspective, Facebook will need to prove the value of Libra in the following situations:
– onboarding poor and remote people without the required documents to obtain financial services
– the pegging of Libra to other fiat currencies is great. At the same time, many countries have stringent regulations about the possession of foreign currency by citizens. In such countries there’s a risk of a secondary and predatory market for Libra
– availability from simple (non-smart) phones
– availability of cash-in/cash-out points close to the target population, with low or zero fees to transform local cash into Libra
– transacting in local currency at low or zero fee
– interoperability with exisiting players such as banks and mobile money providers
– interoperability with local merchant networks
– openness to local application providers

“It will be interesting to see if the size of Facebook and partners will allow them to build today’s vision of a worldwide widely available currency or whether they will have to adapt this vision to local and global circumstances that will reduce this vision to offerings that pretty much exist today, or to a business currency usable purely on Facebook (like airline miles).”

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