Sponsored: Facebook’s Libra - the digital currency of the future?
Deloitte’s Richard Miller assesses the opportunities and challenges following the launch of the social media giants new play into digital wallets and currency.
Facebook’s Libra is a potentially disruptive proposition that has garnered considerable media and regulatory attention since its announcement. While there are many open questions about how it would actually work in practice, there are several things that make this proposal quite different to the analogues we’ve seen before:
This is not a go-it-alone solution. In fact, the partnerships established could provide for massive scale. Facebook has assembled a remarkable collection of 28 partners and erstwhile competitors including Visa, Mastercard, PayPal, eBay, Uber, Spotify and Vodafone, with a target of 100 partners by the launch scheduled for 2020.
These partners are investing up to $10m each and can provide access to technology, payments and regulatory expertise and most significantly, near immediate scale. Just the partners announced last month have over 10 billion individual customers (aggregate figure, obviously overlapping). We have rarely seen a global cross-industry collaboration of this nature in payments before. What is perhaps most notable is that the list does not include any banks, although that may change if Libra proceeds.
Obviously a big challenge for a new payments proposition is the two-sided market challenge of user adoption and merchant acceptance. Getting people to sign up to a new digital wallet and fund it will be a hurdle. But with Facebook’s 2.4 billion active user base and Visa and Mastercard apparently committed to enable Libra for their 50 million+ merchants, the preconditions are there. It just needs to be easy enough for both sides to adopt and use in practice.
This is an explicitly global play. So while it may be less immediately relevant to customers in markets with diverse alternatives, it could be very relevant for the world’s two billion unbanked population. Secondly, the real-time, low-cost ‘borderless’ nature of the proposition, makes it potentially very attractive for all international payments, which currently incur significant costs (~2-10 per cent). So it is potentially important from a B2B and C2B perspective, especially for SMEs and individuals making remittances.
It’s worked in China: Even though Libra may not address as acute a need in developed markets, WeChat’s low-friction integration of payments capability into its ecosystem helped China achieve over 80 per cent mobile wallet penetration. So if Libra’s payment flow and integration of digital wallet services allows it to remove the friction of having to enter your credit card details for many electronic payments transactions, the offer could be relevant to any customer anywhere.
One of the biggest challenges in payments today is that most nations’ payments infrastructures have essentially grown up as independent systems loosely connected by the correspondent banking network (ie, SWIFT), which can be comparatively slow and high-cost.
The technical details are still not finalised, but Libra seems to promise a low-cost, near real-time and fast (1000tps vs. Bitcoin’s 7tps) global payments infrastructure. This is why many got excited about blockchain/Bitcoin in the first place. If the proposal is able to deliver safe borderless clearing and settlement, this could be transformational, even if at its core it is just a new payments infrastructure.
This is not Bitcoin:
It is designed as a permissioned crypto system to enable secure global clearing and settlement capability. But unlike other solutions the underlying token it not free-floating (like Bitcoin) or pegged. It is instead a 100 per cent collateralised stable coin based on a basket of currencies and securities. This means that the value of Libra will not fluctuate wildly like Bitcoin, effectively removing FX exposure for users and making acceptance much more palatable for merchants.
This is where perhaps the biggest initial challenge lies. The Libra white paper clearly recognises the importance of compliance and indicates that the endpoints (e.g. the wallet providers) will be incentivised/required to address the Know Your Customer / Anti-Money Laundering (KYC/AML) legislation. But there is a tension between compliance and making it easy for potential users to buy into the ecosystem. We’ll need to see how this works out.
One could imagine a graduated model with different limits and levels of ID and KYC required for different markets, transaction values and usage. Not unlike all our other payments mechanisms. But there have also been concerns raised about issues such as privacy, consumer protection and the potential of Libra to become a privately-issued alternative currency. The US Congress has gone as far as to ask for a moratorium until politicians can assess it.
What should help assuage some concerns is that Libra will be open-sourced and governed by the Libra Association, which includes trusted and experienced financial service providers (e.g. Visa, Mastercard, PayPal etc.). Governance arrangements are such that each member can only have up to one vote, mitigating concentration of power.
Security and privacy:
Facebook has also set up an independent, regulated subsidiary (Colibra) to manage its services, promising there will be no intermingling of user data to protect privacy. Security will be a key focus, but having experienced providers playing key roles and by setting Libra up as a permissioned, pseudonymous system where participants need to meet a high bar (e.g. >$1bn in market value, $500m in assets and/or 20 million customers) will help to mitigate this. Much will depend on how channel partners and wallet providers ultimately handle KYC compliance and customer/transaction/merchant data.
Libra presents many opportunities but has potential challenges to manage. It is too early to tell if they will be successful, but clearly Facebook and their partners are betting big on being able to do this.
Opportunities and challenges
If the association can navigate the regulatory hurdles, a global low-cost, low-friction, payments system that integrates easily into various channels and platforms could be the result.
This would pose a competitive challenge to the correspondent banking system and possibly disintermediate banks (much like WeChatPay and AliPay have done in China).
But financial institutions could also play important roles such as validating transactions, providing digital wallets, or ensuring regulatory compliance. Libra could potentially also support a global digital identify or KYC framework, which would aid banks and regulators with AML/CTF compliance.
And beyond providing the unbanked with access to electronic payments mechanism, it could also be a means for people in countries with volatile currencies to more easily protect the value of their financials assets. Libra as an alternative currency has raised concerns about central bank control of money supply, but if regulated and managed correctly any issues could be outweighed by its benefits as a payments system.
Whatever the actual outcome - be it confined to in-app purchases or extend across borders – the Libra proposition is different from similar plays that have come before and has the potential to completely change the dynamics of digital value exchange.
Richard Miller is the Payments Practice Leader at Deloitte Australia