In a well-publicized move, Facebook had announced the launch of Libra, a digital currency that will be tethered to several major currencies and managed by a consortium of large companies, NCOs and some academic institutions.
The stated goal of Libra is to give 1.7 billion people in the world without bank account access to one, at no or low cost. The focus of it is going to be on cross-border peer-to-peer payments.
The creators of Libra learned lessons from bitcoin and lesser currencies: Libra’s volatility is curbed by linking it to a basket of fiat currencies, the network of validating nodes is not open to all, but limited to a set of parties that are required to pay a table stake to join, and, finally, there is a mechanism to dispute a transaction.
This is not the first time Facebook tries P2P payments – formerly launched local services in UK and France were officially shut down earlier this year due to lack of traction. In effect, Facebook has re-built its’ peer-to-peer payment mechanism on different rails, bigger, better, open and modern.
And with backing of Facebook and other giants (Uber, Visa, MasterCard and PayPal had all joined the fun) it seems that we are looking at a major new payment method posed to take over the online commerce.
Except that it has a major flaw. It cannot solve the problem it is stated to solve (unbanked population), and for the problem that it can solve (peer-to-peer cross-border payments) there is fierce competition with many existing solutions – including local incumbents.
The majority of unbanked population lives in third-world countries. By now, in all of them except, perhaps, North Korea, there is a functioning cashless payment mechanism that does or does not depend on possession of a bank account. While AliPay and WeChatPay wallets in China do require a local card or bank account (because the government told them so, more on it below), in Africa prepaid mobile balances were used as a payment method for more than a decade.
If the “make banking inclusive” motto is even remotely true, Libra will have to compete with these incumbent methods while trying not to annoy local regulators and penetrate markets it hasn’t approached before – of all countries with large unbanked population Facebook (and WhatsApp) possesses large user bases in India and Brazil and that’s about it.
The biggest issue with digital currencies is that they require conversion to fiat currencies every once in a while. In online ecosystems (in particular, dark web), a cryptocoin amount exchange hands multiple times, but as people do have to eat, eventually the user will need to pay for food in store. And vice versa, if you wish to pay with Libra, you need to convert your dollars, euros or shekels to it.
Which is where another issue arises in form of three three-letter words: KYC, AML and CFT. KYC is “Know Your Customer”. By law in many countries an institution (bank or otherwise) must identify the customer and make sure, at least, that the customer isn’t on a government sanction list or another black list. AML is “anti-money laundering” and it refers to the corresponding duty of a financial institution. Money laundering involves three steps – placement, layering and integration – and the act of paying with or trading in cryptocurrency can be used in all three of them. Finally, CTF is “counter financing of terrorism” – another activity that a licensed bank, for example, must engage in.
It may seem that these are very old-school, rigid and irrelevant acronyms which only apply to old-school, rigid and now-disrupted incumbent banks. However, regulatory rules and local laws that demand KYC, AML and CFT are there for a reason: where and when they are not present, illegal activity, money laundering and terrorism financing usually happen.
Of course, prophecy has been given to the fools. However, I do believe Libra will eventually fail. It will boast huge figures in process (after all, it is enough to give a fraction of a coin to each Facebook user to reach an astronomic number of transactions, albeit only once) but won’t get anywhere near the ambitious goals it set at launch.
Is it good for the Jews?
During the recent FinTech Junction event, Avner Ziv, the CIO of Bank of Israel, came on stage to speak about open banking and faster payments. He also brought up Libra, mentioning that Bank of Israel is aware of its existence, is watching this development among others and will decide what to do with it once it becomes substantial (or if it becomes substantial).
It is inevitable that many tech-savvy Israelis will try to use Libra for cross-border payments. It is doubtful this method will become mainstream inside the country: after all, for peer-to-peer payments over Facebook rails we already have mobile apps like PayBox or bit, sharing payment links via WhatsApp.
However, if the interest in Libra is substantial and won’t fade, it is likely that the regulator (that’s already working on liberalization of the payments market in the country) will implement additional steps to simplify cross-border payments over a less risky infrastructure. After all, intra-EU, US and UK bank transfers are fast and cheap, and there are no unsurmountable reasons payments to and from Israel in at least euro, dollar and pound won’t be, too.
So is Libra good for Israeli market? My bet is, it won’t gain a smallest foothold here, but it can push the law and regulation in Israel towards cheaper, more efficient cross-border payments into markets of our largest trading partners.
In other words, Libra is irrelevant, but not completely useless – it can be a bad example.