To some people, the “whitepaper” and “blockchain” are synonymous with “scam”. But when Facebook, the social network giant with 2.4 billion monthly active users, announced its grand plan of a blockchain-backed cryptocurrency with global payments, people seemed to love and hate it at the same time.
Facebook stressed that its solution was aimed first at people from developing countries with limited financial infrastructure. But this is somewhat counterintuitive. These countries are already embracing phone banking and payments systems outside Facebook’s infrastructure, and even though there are hundreds of millions of individuals outside the traditional banking system for a variety of reasons, their total asset and cross-border transaction volume is, in world terms, negligible.
A lower cost of financial services is certainly an attractive offer to lower-income earners, but Facebook will not achieve scalable profitability from targeting this market. Something else has to be at work – but what is it? And how will Facebook achieve its growth ambition by attracting institutions in major global economies?
Cost is a driver of choice, and lower cost is always a selling point, for both individuals and institutions. But the current banking system does not extract real revenue from its global transactions business, so this seems a curious area to attack.
If there is more margin to squeeze out of global transactions, it will be the banks, with their existing infrastructure and relationships, that will have the advantage. But this comes with a caveat: legacy systems.
It may be that Facebook has a real advantage because it is costlier and more complicated to maintain an existing system than to build a new one. Alternatively, Facebook can offer anonymous trading options for institutions, but this unlikely to happen with Libra simply because most anonymous transactions conflict with the interests of major global economies.
Therefore, the best user-case scenarios for Libra would be, for example, an Indian worker in America wanting to provide financial support for his family back in India; or an American who wants to travel abroad but feels reluctant to go through all the lengthy administrative process of foreign exchange services or to bear the high exchange rate offered at the airport. Libra effectively means that consumers can transact outside the system efficiently, anonymously and cheaply.
Old wine in a new bottle
Without the support of blockchain technology, Libra works fundamentally like a corporate bond. The Libra Association, comprising various organisations, borrows capital through Libra for security; and Libra, the “corporate bond” issued by the association, can be used for transactions and settlements.
In the traditional way of bond issuance, Facebook itself, even together with all the other organisations of the consortium, is incapable of supporting the credibility that is required by a global currency for international settlements.
People trade in a particular currency because they trust the sovereignty of the currency, and that an exclusive authority – a central bank – has the ability to control the issuance and retirement of the legal tender. Facebook’s brand and capital reserve mean that it can overcome the issues of trust and capital adequacy. And here is where blockchain technology also becomes valuable. Its transparency and irreversibility boosts Libra’s credibility to close to a sovereign currency, and makes the idea of a global coin possible for the first time since the Romans issued the Aueri in the First Century BC.
A new challenge for retail banks
The rise of WeChat Pay and Alipay in China has been a nightmare for retail banks. They shattered the core framework of electronic banking and the supporting system of bank branches and tellers, leaving banks as the porters of electronic currency rather than controllers of end customers.
Besides, WeChat and Alipay’s vast storage of diversified data makes them better placed to price credit and they are gradually replacing banks as lenders. Similarly, Libra has the potential to out-compete retail banks. Combining blockchain technology with Facebook’s social network brings substantial advantage in data analytics.
The disruption of traditional banks is long overdue. Facebook is poised to enter the new arena of online payments and may quickly become a game-changer. But the recent US Congressional hearings on the likely impact of Libra on global currencies and financial systems suggests a long battle looming between Libra and regulators.
The spirit of decentralisation will inevitably clash with a centralised reality. Blockchain technology is inherently decentralised, but still needs centralised human organisation to regulate the high-level design of the chain.
Perhaps Libra will ultimately be remembered as a strategic ploy by Facebook to boost its share price through the introduction of a new performance indicator: monthly active financial users.
