Even with a fierce regulatory battle ahead, Libra is a watershed moment for the future of finance. Already backed by 27 influential businesses from payment providers, tech brands, crypto custodians and VC funds, with a pre-existing audience of 2.38 billion Facebook users to tap into and a planned US$1 billion fund to kickstart it—the scale of the project is unprecedented.
Facebook’s much-hyped digital currency was officially unveiled one month ago, and it is already stirring up a storm inside government walls due to the threat it represents to central banks, and the status quo for a lot of businesses.
There's also debate around Facebook's true motives in launching Libra, beyond the humanitarian mission of developing a fairer, more accessible financial system for all. It has a long race ahead in securing the regulatory go-ahead for Libra's planned 2020 launch. And the first place it will turn its attention to is Asia.
So what exactly is Libra?
Libra is not a true form of cryptocurrency and does not follow the classical definition of a blockchain; instead it has borrowed the best features in the market, and sprinkled its own updates in.
“They have analysed and assessed every single part of the current blockchain environment, identified all the weaknesses and put together a solution which addresses every single one of these issues,” says Colin Miles, director of blockchain company NextID.
“If Bitcoin is Napster, Libra is Spotify,” he quips.
The user proposition is simple. Anyone can cash in a local currency to get Libra and spend it like they would any other currency, provided the merchant accepts it. But unlike other traditional currencies, they won’t have to pay big transaction fees for spending or sending money abroad. The fees will be basically negligible.
People will be able to spend Libra using third-party wallet apps or Facebook’s own Calibra wallet that will be built into WhatsApp, Messenger and its own app, thus allowing money to be sent as easily and frictionlessly as a text. A person’s real identity is concealed when they spend Libra to protect privacy, and they are free to cash out at any point.
That’s the crux of it, but behind the scenes it’s a bit more complex.
Libra is a ‘stablecoin’ rather a true form of cryptocurrency, because it is pegged to real assets. In Libra’s case, it is hedged across a basket of currencies from “stable and reputable central banks”, such as the dollar, euro, pound and yen. This makes it less volatile than something like Bitcoin, which isn’t pegged to anything. And it means when someone cashes out from Libra, the value they get back should be roughly the same amount of a given currency over time.
When money is paid into Libra, that money goes into the Libra Reserve and an equivalent value of Libra is given back. Interest earned off the reserve is divided among members of the Libra Association, a non-profit governing body based in Geneva, Switzerland.
While Libra is initially focused on the exchange of payments, the white paper Facebook released on it refers to ‘programmable resources’, so it could enable the exchange of other digital goods and smart contracts (like loans or insurance) in the future.
What’s the relationship between Libra and Facebook?
Libra is Facebook’s vision, but the social network will not directly manage the currency.
It created the Libra Association to alleviate any antitrust or privacy concerns (for which Facebook does not have a great track record). Each member of the association will operate a node on the blockchain, while overseeing changes to its code and managing the reserve. Each member, including Facebook/Calibra, will only get up to one vote or 1% of the total vote in the Libra Association council.
Facebook has also made the Libra Blockchain open source, so anyone can build their own wallets to integrate Libra. Facebook has created a new version of the Move programming language for developers to write Libra applications.
Calibra, the digital wallet that will store the currency, will be set up as a separate subsidiary that will not be allowed to share financial customer data with other divisions of the company.
It can’t be purely altruistic...
So what’s in it for Facebook and the Libra Association members? While Facebook will not be able to use financial data from Calibra to build more valuable ad targeting, it can derive value in other ways.
David Marcus, the head of Facebook's digital currency project, explained last month how Libra could translate into greater revenue for the company: “If more commerce happens, then more small businesses will sell more on and off platform, and they’ll want to buy more ads on the platform so it will be good for our ads business.”
There are currently more than 80 million small- and medium-sized businesses that are active on Facebook’s platforms, of which only 7 million advertise. Instagram alone has 25 million business profiles, of which 2 million advertise.
Forrester’s view is that Facebook is masquerading the real purpose of Libra behind a veil of financial inclusion.
“Libra’s financial inclusion vision is a compelling one," says analyst Meng Liu. "But let’s be clear about the real intent: with this initiative, Facebook is essentially looking to go beyond social behaviour data and get its hands on consumer financial data.”
However, Miles believes the “cast iron guarantee” that Facebook has made to not share financial data within its own walls undermines any claims that Libra is a “smokescreen”.
“People are seeing so many snakes when they should be looking at all the positive scenarios that could be affected by the mass adoption of wallets as a way of managing financial transactions between family members and businesses in areas which have been hitherto hard to make happen,” he says.
Brands joining the Libra Association want access to scale
It’s clear looking at the founding members that access to scale is one of Libra’s key differentiators. Payment companies Visa, Mastercard and Paypal are all founding members, despite the fact that digital currencies directly rival their business.
“They obviously don’t think they can get the scale they want on their own so are joining the party,” Miles suggests.
SMEs could use Libra as a more efficient way of managing daily customer payments, in place of PoS systems or bank services, while for subscription brands it has the potential to open up a whole cohort of customers that are currently unreachable.
“For brands like Spotify, they could offer micro payments through Libra for access to one song or an album, so you can have a very low barrier for people who want to pay for content but can’t afford a full monthly subscription,” Miles offers.
Brands can also build their own Libra wallet and offer incentives to those who pay their bills through it, pumping more money into the reserve, and increasing the interest accrued.
For members of the Libra Association, which each paid a minimum of $10 million to join, Libra has the potential to deliver lucrative returns.
Will it really help democratise the financial system?
Facebook’s stated goal for Libra is to build “more inclusive financial options for the world”. The white paper opens with a detailed ‘problem statement’ that pokes holes in the existing financial system, and discusses how technology can help empower those who have been historically left behind.
It claims that 1.7 billion adults globally remain outside of the financial system, with no access to a traditional bank, even though 1 billion have a mobile phone and nearly half a billion have internet access.
The proliferation of mobile has driven down the cost of devices and connectivity. Globally, more than 5 billion people have mobile devices, and over half of these connections are smartphones.
Consequently, banks, fintech firms, ecommerce giants, social-media platforms and more see mobile as the key frontier in converting the unbanked.
But the growth in mobile technology to date has not been equal, according to a Pew Research Center report, and can actually accentuate class and cultural divides.
Unsurprisingly, the penetration of smartphones in advanced economies is higher than those in emerging economies. For example, a median of 76% across 18 advanced economies surveyed have smartphones, compared with a median of only 45% in emerging economies. Ownership is lowest in India, where only 24% of the population report having a smartphone.
The report also finds that in emerging economies, technology use is still much more common among young people, the well-educated and those with higher incomes. So while currencies like Libra can democratise the financial system for some, they can also widen the gap for others.
That said, there are ways to provide a “short term fix” for those without smartphones, or living in remote locations, Miles says.
Payments nowadays can be made by SMS like Singapore’s PayNow, or even through bluetooth or mesh grids and satellites. It’s even possible to have a physical rendering of a digital currency, as seen in bitcoin cash kiosks and ATMs that spit out paper slips with a bitcoin address printed on.
The currency also has the backing of Mercy Corps, Women’s World Banking, and Kiva—non-profits founded to promote financial inclusion. These social impact partners are not required to pay the $10 million minimum to be part of the association, their role is to maximise the social impact that Libra can have on underrepresented groups.
In targeting the unbanked, Asia will be a key market for Libra
The majority of the unbanked population that Libra is targeting resides in Asia. China and India claim the highest shares of the global unbanked population—due in part to their sheer size—with 225 million and 190 million adults without an account, respectively, according to the Global Findex database. This is followed by Pakistan (100 million), and Indonesia (95 million), Nigeria, Mexico, and Bangladesh.
In Southeast Asia only 47% of the population has a bank account, despite it representing one of the most rapidly developing regions in the world. This gap is highlighted particularly in the Philippines, where a staggering 77% of the population is unbanked, according to a recent survey by the Bangko Sentral ng Pilipinas. A similar magnitude of people are unbanked in Vietnam and Indonesia at rates of 65% and 52%, respectively.
But like with many markets, Libra is already facing significant regulatory hurdles in Asia. There are two key reasons that Libra has been met with a cold reception: the regulatory framework is playing catch up, and central banks are feeling threatened.
A government legal expert in Thailand told the Bangkok Post that Libra could face difficulty entering the country because the digital currency does not fall under the Bank of Thailand's Currency Act, which defines currency as a banknote or coin having value in baht.
The currency could fall under Singapore’s Payment Services Act, designed to cover new payment products and services, but Singapore senior minister Tharman Shanmugaratnam, who is in charge of the Monetary Authority of Singapore, has said it is too early to make an assessment.
“It is in the early stages of development, with a number of issues to be worked out around its features, use cases, and governance arrangements,” Shanmugaratnam said in a parliamentary reply.
US president Donald Trump has been more outspoken about his disapproval of Libra, claiming it threatens the status of the dollar. And he could be right.
“A cryptocurrency being used by 2.7 billion people across the globe would be a threat to national sovereignty and disruption of their ability to coin money. China, Indonesia, and Pakistan have already banned Bitcoin and other cryptocurrencies due to similar threats,” says Forrester’s Liu.
In other countries, Libra could accelerate the creation of central bank digital currencies, Miles suggests, a proposition that is being explored in China and Japan, among other countries.
But Facebook has a track record of taking out competition, and even though regulators have been chipping away at its business, its dominance is showing little signs of waning. If it manages to convince the major banks to become part of the Libra Association's 100 members, its scale will be difficult to ignore. Even the Winklevoss twins are coming round to the idea. The future of finance is Facebook, it seems.