The launch of Facebook’s cryptocurrency, “Libra”, on June 18, 2019, is an ambitious attempt by Facebook to diversify its business and move into financial services. One has to admire the scale of the move, but one also has to wonder if Facebook can pull it off, and what it will mean for banks. Because, if it works, it’s going to eat the lunch of every consumer banking operation in the world, according to analysts. “It could turn into a shadow bank,” warns German member of the European Parliament Markus Ferber.
Zuckerberg: “send money as easily as messages”
The initial objectives for Libra are ambitious enough, although no mention is made of banking in the announcement by Facebook CEO Mark Zuckerberg.
Libra’s mission is to create a simple global financial infrastructure that empowers billions of people around the world. It’s powered by blockchain technology and the plan is to launch it in 2020.
Being able to use mobile money can have an important positive impact on people’s lives, as it limits the neccessity for cash, which can be insecure, and tranfer fees are avoided. This is especially important for people who don’t have access to traditional banks or financial services. Right now, there are around a billion people who don’t have a bank account but do have a mobile phone.
Zuckerberg says that he wants Facebook users “to send money on Facebook as easily as they exchange photos and messages.”
Sensitive to his company’s poor image following several major data protection scandals, Zuckerberg explains that Facebook will not ‘own’ Libra; there will be a Switzerland-based non-profit Libra Association with 100 corporate and not-for-profit members at the outset. 27 major companies, including Mastercard, PayPal, Uber and Spotify have already signed up for a trial membership in the association, although none have reportedly yet paid the $10 million subscription fee. Mastercard’s executive vice president Jorn Lambert told Reuters that if the project experiences too much regulatory pushback “we might not launch.”
Facebook has already set up an independent subsidiary called Calibra to provide online wallets where users can keep their Libra coins – it is notable that the company has promised that no data used with Calibra would be used by Facebook for targeted advertising, its only other source of revenue.
Libra is not bitcoin!
Libra is nothing like bitcoin, or Ethereum, or other cryptocurrency. Libra is what is technically called a ‘stablecoin,’ meaning that it is pegged to a basket of assets. So the price of Libra will not fluctuate; it will always have a fixed value (unlike bitcoin and the other cryptos). Libra will also not be traded on exchanges. The stablecoin idea has existed for some time, and several major investment banks have created them, because they offer the stability of a fixed price with the electronic advantages of a token.
Cryptocurrency is technically not money, despite its name. It is actually a new class of asset, similar to a commodity, like gold, that people may use for payments or savings. Because cryptocurrency is on the blockchain, it can do many things that euros and dollars cannot, and it can do them automatically, without any danger of human intervention.
What’s more, transactions made in cryptocurrencies are kept safe on a special computerised and distributed ledger which is virtually impregnable to hackers. This is why Facebook can offer its 1.56 billion daily active users the use of Libra, and can manage the enormous volume of small transactions it will generate – who will resist paying for their Uber with Libra?
Libra is not a bank…yet
It should be made clear that Libra is not a bank. The Swiss Association cannot obtain money from any central banks in the way operating banks do. But if Libra succeeds in attracting billions in exchanges of national currencies, the temptation for it to provide banking services will be difficult to resist. Facebook has already stated that credit services may be the next offer on Libra’s agenda.
But even if Libra never becomes a bank, it will undoubtedly soak up lots of money from people who would otherwise have put theirs in banks. It will also provide virtually free payment services, and banks and fintech companies make a lot of money from payments. Obviously, Libra will also enable Facebook to compete with Apple and Google Pay, and other financial services provided by tech companies.
Will Libra work?
For now, financial analysts are lining up to praise the Libra project. For example, Douglas Anmuth of JPMorgan said Libra would help Facebook diversify its revenue sources “while also empowering billions of people.” Investment bank Canaccord Genuity analysts say that Libra could disrupt and markedly change consumer financial services.
And Libra has already attracted the notice of regulators around the world, and their reaction could affect Facebook’s chances of success. While the project does not differ in principle from other cryptocurrency stablecoin platforms that are already in operation, Libra could be destabilizing, given that more than a billion Facebook subscribers could take it up. Certainly the announcement has helped to push up the prices of bitcoin and other ‘altcoins’ and is expected to support the cryptocurrency industry overall.
Will Libra eat the banks’ lunches? Jamie Dimon, chairman and CEO of JPMorgan, has warned that a great threat to banks was bound to emerge from giant tech companies. Maybe this is it – but we’re not yet certain.