Facebook’s new cryptocurrency, Libra, has drawn criticism from consumer groups and politicians on both sides of the Atlantic. In the first of two articles, Renier Lemmens debunks some of the claims surrounding the controversial new currency.
A few weeks ago Facebook announced the creation of Libra – its answer to cryptocurrencies. Libra purports to create frictionless payments globally and bring financial inclusion to 1.7bn people – all through a blockchain-based solution.
Facebook signed up a consortium of 28 top players in payments, commerce and venture capital and hopes to expand this group to a 100 by the launch date in 2020. Note that so far, no banks are a member of the consortium.
Critics – including the US president – have taken shots at Libra on the basis of privacy concerns, data sovereignty and its potential unintended consequences.
David Marcus, who heads up Libra for Facebook, struck a conciliatory note in his response. He promised that the association plans to work with regulators and other stakeholders in the run-up to its release.
The association, he goes on to state, will be run democratically. Facebook will not have any privileges beyond those enjoyed by the other members. “Bottom line,” he writes, “You won’t have to trust Facebook to get the benefit of Libra.”
You will, however, have to trust the Libra Association and the wealthy, powerful groups who make up its ranks.
Bitcoin functions by adding blocks to a chain of previous blocks to create consensus-based immutable transaction history for every bitcoin in circulation. A key characteristic is that it is ‘permission-less’ – that is, no one is in charge.
Libra neither uses blocks nor chains. And its technology has little to do with Bitcoin or other blockchain based currencies.
Libra sacrifices these aspects for scalability and efficiency. It uses a central database that is administered by the members of the association.
Libra is clearly not ‘permission-less’. There are vague pronouncements on how it will be decentralised at some point in the future.
Libra promises to peg the value to a basket of fiat currencies. Details have not been established.
In principle this is no different to the currencies of small economies pegging to the dollar, or even the gold standard used by banks early in the last century. But the announcements are vague on the specifics.
In effect, customers will need to trust that the association keeps their fiat currency equivalent safely somewhere for them to access – even if there is a global run on the Libra.
Importantly – unlike money in bank accounts in some countries – there is no government guarantee covering the balance.
Controversially, Libra does not plan to compensate customers for money put into the system. Instead, the consortium will invest the collective balance and pay the cost of running Libra from the interest earned.
Consumer interest groups around the world have already expressed concern.
Facebook claims that Libra can bring 1.7bn unbanked people into the financial system. Okay. But how?
In my opinion, Libra brings nothing to the table with regard to financial inclusion.
The offical Libra white paper confused three different issues:
- developed countries under-banked
- developed country unbanked, and
- developing country unbanked
Libra does little to address the main reasons why people in the developed world are unbanked. These include having insufficient funds, banks charging high and unpredictable fees, a lack of convenient locations, and lack of necessary documentation.
And Libra is quiet on how consumers are going to get fiat currency into the Libra system.
But they are going to need to go through a bank or other financial institution, and it’s not going to be free. Same if they want to take money out of Libra, which is the same problem as with Bitcoin wallets.
As long as Libra is not legal tender, consumers will need bank accounts or have to rely on money transfers to move their money in and out of Libra.
Centre for Digital Banking and Finance
Renier is Visiting Professor of Fintech and Innovation at The London Institute of Banking & Finance. He has held leadership roles in a variety of financial institutions in Europe and the USA including GE Capital, Barclays and PayPal. Renier has also held a number of non-executive and advisory positions in fintech start-ups.