Few things change our daily life and habits as rapidly as technological innovations. The way we work, communicate, travel, socialise and make payments is constantly evolving as a result of these changes. In the last few years, Big Tech companies have changed how we make payments by providing cashless payment solutions in the form of credit cards and apps. With this in mind, one might say that the next logical step for Big Tech was to launch new currencies. But doing so might be quite controversial.
Unconfirmed rumours circled for a long time before Mark Zuckerberg finally announced Facebook’s plans for their own cryptocurrency in June this year. The currency, which was planned to launch in 2020 was given the name Libra and would be moved through Calibra, a digital wallet. Market leaders such as MasterCard, Visa, PayPal, Uber, Vodaphone and Spotify among others, were already onboard. Mark Zuckerburg stated that he “believes it should be as easy to send money to someone as it is to send a photo”. Libra intends to make that possible, and provide the unbanked with a payment solution.
Cryptocurrency without the instability of Bitcoin
Most people only reference or primary reference to cryptocurrency is Bitcoin. Libra could not be more different. Where Bitcoin is a decentralised digital currency with a specific number of coins available, Libra will be centralised and backed by a basket of currencies. Anchoring Libra to fiat currencies will ensure that it does not fluctuate more than the currencies it is anchored to. The idea is to enable the user to buy or sell Libra using any currency without risking a 15% rise or fall in value overnight.
It might be caused by the summer heat, vacation mode or high median age, but the news of Libra seemed to pass under the central banks’ radars, or at least the immediate reactions I was expecting did not come.
After reading the Libra announcement my initial response was an ironic “good luck”. I nearly expected politicians, regulators, central banks and the entire financial industry to throw their full weight around in stopping Zuckerberg & Co’s new venture. It took a bit longer than expected, but lately Libra has been the object of criticism and even a bill by the Democrats in Congress for what has been dubbed the Keep Big Tech out of Finance Act, which if passed, will explicitly ban large platform companies from providing banking services. Libra’s critics fear that it might be more useful to criminals than to legitimate users and undermine the regulatory requirements which have been imposed on the financial industry in recent years and that it might undermine the role of central banks.
Monetary policy under pressure
10 years after the turmoils of the financial crisis, established truths in macroeconomy are turned upside down. Zero and negative interest rates combined with quantitative easing worth trillions have landed the economy safely on its feet, but the cost of these measures are states and individuals immersed in debt, inflated asset classes and central banks who are running out of traditional measures.
In a time where historical factors indicate that a financial downturn is approaching, control over monetary policies will be crucial, and the central banks’ biggest fear is probably that alternatives to sovereign fiat currencies could render their monetary policies without effect when needed the most.
Central banks can apply measures such as increasing the money supply or set negative interest rates in order to stimulate the economy. Such measures will be a lot less effective if a substantial part of the population’s assets is placed in a currency outside of the control of the central bank.
Account-holders and consumers who fear for the safety of their assets due to the risk of a 2008 scenario or who fear negative interest rates will be imposed on deposits, may be tempted to move their money to Libra if it presents as a safer option.
The regulatory aspect — a long way to go
It is hard to predict the impact of Libra, but I find it hard to believe that the financial industry and its regulators have not seen this coming. President Trump recently joined Libra’s critics and tweeted (unsurprisingly) that companies who wants to be banks has to apply for a banking license and thereby be subject to the same regulatory requirements as traditional banks, such as anti-money laundering and measures to combat the financing of terrorism, including KYC (know your customer) (Several people have joked about the last mentioned, saying that KYC might not be a problem for Facebook since they probably know more about its users than the users themselves do).
Libra will probably see the light of day, but…
If I am to play the role of psychic, I picture a rocky road ahead for Libra and I will not be surprised if the endeavour is postponed and resurfaces as a leaner and less comprehensive service than initially announced. If you were looking forward to sending money via Messenger next summer, I’m afraid you will be disappointed.
Probably just the beginning
Those who have the most to gain from the announcement of Libra at this point is probably the established cryptocurrencies Bitcoin and Etherum, in addition to those who might follow in Libra’s attempted path after it is paved by new regulations and regulatory practice. Being first is always hard and I’m convinced that the rest of Big Tech is following Libra’s development closely.