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Will Facebook’s new crypto-currency ignite the final payments race?

By John Schlesinger, Chief Enterprise Architect, Temenos

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John Schlesinger – Chief Architect, Temenos

Facebook is soon to launch its cryptocurrency called Libra, through its subsidiary, Calibra. This is the latest development in its expansion beyond social networking and a move decisively into the e-commerce and global payments arena.

We have been waiting for this type of move from Facebook for a long time. So what are we to make of it? Now we know what type of payments Calibra will be making, the banks know what areas they have to start developing. They now know what they may need to replace and what can be merely improved. Facebook has recruited 28 partners in a Geneva-based organisation called the Libra Association, which will administer its new digital coin. It plans to launch in the first half of 2020.

Calibra, will offer digital wallets to save, send and spend Libras. Calibra will be connected to Facebook’s Messenger and WhatsApp apps, which already boast one billion users. Facebook is almost certainly looking to replicate the success of the third-party transactions and payments which are mushrooming on Chinese social apps like WeChat Pay and AliPay.

While Facebook is looking at some continuing consumer backlash over its attitude on privacy and regulatory barriers, it could make headway among the 1.7bn unbanked people across the globe. Yes, others are providing these payments. However, Facebook will likely benefit through its mobile user base, adapting quickly to a new form of payment. It has already made it easier to befriend total strangers, and its users are used to rapid change on the Facebook platform.

For many people internationally, even the most basic of financial services are out of reach. According to Facebook itself (1) : “…approximately 70% of small businesses in developing countries lack access to credit, and $25 billion is lost by migrants every year through remittance fees.” This looks like being the battleground. For instance, in Pakistan an estimated 75% of the population is unbanked but 90% have mobile phones, albeit not all smartphones.

It is no real surprise that Facebook has gone for the unregulated world of cryptocurrency. The last thing it would have wanted to do would have been to launch a financial product into a highly-regulated arena. Since Bitcoin was originally launched in 2008, thousands of alternatives have sprung up, and Facebook is just one of many companies pottering about with the underlying technology. However, its status as a Silicon Valley big beast, used by billions of people has caused a fuss and a lot of interest in Libra’s long-term potential.

Maybe the best way to think of Libra is as a global, crypto implementation of the highly successful M-Pesa initiative in East Africa. Last year M-Pesa deals were equivalent to half Kenya’s Gross Domestic Product. The big difference is that M-Pesa agreed with the Kenyan regulator to use a bank for M-Pesa accounts, before launching, unlike Facebook which is now facing a regulatory backlash.

Note that M-Pesa works on feature-phones even with no internet connection. Libra will most likely require a smartphone with internet – yet only 10% of Pakistanis have internet access, and only 10% have smart phones.As usual, Facebook is shooting for the Moon – these plans are nothing if not ambitious. Will Facebook’s new crypto-currency jump-start another innovation race in payments? “From the beginning, Calibra will let you send Libra to almost anyone with a smartphone, as easily and instantly as you might send a text message and at low to no cost” says Facebook. This is already possible using your mobile banking app, in many European countries, but only for domestic transactions. But there has been little take up of this so far, unlike in China, as the public are used to card or bank payments.

Facebook continued: “And, in time, we hope to offer additional services for people and businesses. Services such as paying bills with the push of a button, buying a cup of coffee with the scan of code or riding your local public transit without cash or a metro pass.”

However, issuing currencies could be a step too far for government officials, who worry about the effect on their own sovereign money.

French finance Minister Bruno Le Maire told Italian newspaper Corriere della Sera that: “The red line for us is that Libra must not transform into a sovereign currency.” Ahead of this week’s G7 meeting in France, Le Maire said he was concerned that tech companies are creeping onto governments’ turf, according to Reuters: “These digital giants are turning into private states – states over which citizens have no control and where democracy has no place,” Le Maire said. (2)

“We cannot let companies, which are serving private interests, gather all the attributes of sovereign states. We must act,” he added.

John Detrixhe, writing in QZ.com, spelled out the fears of governments a few weeks ago: “Now, at least a few government leaders are concerned that their own powers to print money could be undermined. Libra, it’s worth noting, is meant to be tied to a basket of sovereign currencies, like the dollar and euro, meaning it would inherit monetary policy from large central banks instead of set it. Facebook says it will distribute governance of Libra to as many parties as possible over time.”

Their concern is that Facebook has more than 2 billion users around the world, representing a systemic risk if the cryptocurrency is successful. If it were to become popular for global internet commerce, particularly on Facebook, but elsewhere as well, it would start to have its own economy. There are also questions about Libra’s potential impact on volatile currencies of smaller countries, which could lose control of policymaking if a monetary alternative were easily accessible (this already happens when consumers switch from their local currency to the US dollar) said Quart.com.

Banks which want to ramp up their payments systems need to put their thinking caps on now. Facebook has a big enough user-base for many millions to use Libra, and it is already targeting Africa and its still-growing mobile payments industry. Whether it will work in the long-term is anyone’s guess but there is one thing to be sure of – to make progress in the payments battle banks will have to innovate as creatively as Facebook and take equally big moves and risks. Now is the time to make payments a key arena – this is a Gladiatorial battle to the end.

1 https://newsroom.fb.com/news/2019/06/coming-in-2020-calibra/
2 https://qz.com/1668070/french-finance-minister-says-facebooks-libra-cannot-become-sovereign-currency/

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John Schlesinger – Chief Architect, Temenos