Libra

Facebook’s new cryptocurrency Libra is not merely about transactions; it’s also about trust to a certain extent, but mainly it’s about world dominance. In this blog, we explain why.

Last week Facebook announced the launch of Libra, a new global cryptocurrency and financial infrastructure built on blockchain technology. It also announced a new digital wallet for Libra, called ‘Calibra’, that will be available in the whole of the Facebook universe. In conjunction with 28 partner companies, Facebook claims it is creating a more “inclusive” financial ecosystem. The Libra mission is to create a financial infrastructure “that empowers billions of people…so people everywhere can live better lives”.

In our book Everything Transaction, we describe two major root causes that need to be addressed to fully benefit from the digital transformation and to realize a truly transactional, financially inclusive economy: trust, and data benefit balance. Libra claims to be aimed at addressing precisely those two issues. But if we take a closer look, it becomes apparent that this cryptocurrency is not really about payments after all.

Libra’s claims:

1) Helping the unbanked
2) Reducing remittance costs for migrant workers
3) Easy p2p payments for Facebookers.

1) Helping the unbanked
Libra sets out to help the unbanked, amounting to 1.7 billion people including <1% of people in the Netherlands and 7% of US citizens. In terms of how Libra could fundamentally help them, let’s not forget that there is a reason why people are unbanked. According to the World Bank (2014), the main reasons are: 1) They don’t have enough money, and 2) They don’t need a bank account. So how will they get money in and out of their Libra wallet? 

On a positive note, a World Bank report indicates that 100 million unbanked people could become financially included if government wages, pensions and social benefits could be paid directly into an account. The same report states that digital payments offer other opportunities to increase account ownership and use; more than 200 million unbanked adults who work in the private sector are currently paid in cash only, as are more than 200 million who receive agricultural payments.

A ‘minor’ detail: in order for these unbanked people to be included, the underlying assumption is that they will all need to have Libra wallets such as Calibra.

2) Reducing remittance costs for migrant workers 
Libra has published a white paper which states that the average remittance cost for tranferring US$200 is 7.01%. Besides the significant differences per corridor, the whole remittance ecosystem committed itself to reducing the average cost to <3% by 2030. In other words, this problem is already being addressed and is likely to be solved, with or without Libra.

It should also be kept in mind that cash is still king in almost any retail business in most developing countries. The underlying challenge is not about the lack of access to a global transaction infrastructure. The biggest and most expensive aspect for all tech/mobile solutions – including Libra – is cash conversion, or the ability to use it as currency within the closed-loop system. Even ‘poster child’ mobile phone-based money transfer, financing and microfinancing service M-Pesa still has over 40,000 local agents to distribute and convert cash. The main raison d’etre for withdrawal networks has less to do with people not having a bank account, and more to do with the dominance of cash on the streets.

Therefore, the bigger problem to solve in order to break this vicious circle is how to ensure enough migrant workers have a wallet. If they don’t have a bank account now, how likely is it that they will pass the ‘know your customer’ (KYC) procedure for Calibra or any other cryptowallet? If the Libra consortium fails to solve this issue, it may even have a negative impact on financial inclusion because besides the unbanked there will also be a new group of ‘non-walleted’ people.

3) Easy p2p payments for Facebookers
But in the considerations above, we’re almost forgetting the ‘Facebook citizens’. This is where it gets really interesting, because you could arguably consider Libra the representation of what we have described in our book as ‘infrastructural trust as the replacement for institutional trust’. The Libra infrastructure is a blockchain-based and therefore undisputable single source of truth that can be used for transactions, but also for exchanging (personal) data and storing your digital identity. Users should be aware that the Libra infrastructure, by design, records all transactions and makes them visible to the entire network – and what a network that is, with around 2 billion active users on Facebook, Messenger and WhatsApp! And last but not least: Libra is an institution, a company which invests the Libra proceeds into liquid assets… fiat and government bonds of selected governments. So another middleman, albeit in a category of its own, with the profits going to the middleman’s shareholders.

Facebook does not yet seem to enforce a direct link between Calibra and a Facebook account. However, it is highly likely that if you want to use Libra for micro transactions within the Facebook universe or want to monetize your personal data, you will have to give your consent to link your Calibra (or any other wallet) to your Facebook, WhatsApp and Messenger account. Only then will you be able to fully benefit from the trust infrastructure that facilitates seamlessly integrated payments and data transactions.

By design, Libra could make peer-to-peer (p2p) payments easy, seamless and safe – but is it worth paying the privacy price? Facebook already knows everything about your non-financial life; now, it gains insight into your financial life as well. There will be believers and non-believers, but one thing is for sure: with this latest development, Mark Zuckerberg is giving the term ‘financial inclusion’ a whole new meaning…

As with many platform solutions in a two-sided market, there is huge potential but that will only be realized after mass adoption. Considering the client base and the consortium partners, they may succeed. But for now it remains to be seen how much – if any – value this innovation adds and how the data benefit balance will look. Without mass adoption, this is not a ‘killer’ finance use case and it is unlikely to succeed, neither in the rich countries nor the poor countries nor within the Facebook universe.

So if Libra is not really about payments, what is it about? Libra is poised to become the world’s largest institution by creating a trust infrastructure connecting people right around the globe, introducing a ‘full reserve tokenized semi-fiat currency’ and taking ownership of digital safety and security.

Libra (through Facebook and its impressive consortium) is the first and maybe only organization to have such immense cross-border power and thus such a big responsibility to combine and leverage both institutional and infrastructural trust at a global scale. Beware: Libra may appear to be a consumer product, but its hidden power may lie in the potential to disrupt existing banking, trade-lane and FX services, and could even be regarded as a potential replacement of the internet. There is clearly much more to it than meets the eye, so INNOPAY will continue to monitor the developments.

For the latest insights into how digital trust and data sharing will impact your ecosystem, don’t hesitate to contact us.

 

Shikko Nijland & Douwe Lycklama

shikko@innopay.com
douwe@innopay.com