Libra (or Facebook crypto) – why should you care?

What is Libra?

After a long period of speculation, Facebook finally has announced that its Libra cryptocurrency will be launched in 2020. Libra aims to ’enable simple global currency and financial infrastructure that empowers billions of people’, supporting payments and ability to send money between people and countries.

Initially, Libra will focus on providing financial products to the unbanked and while the first focus markets are yet to be announced, they are likely to be developing countries. Given Facebook’s immense user base and the plans to integrate Libra support into WhatsApp and Facebook messenger, the long term implications and possibilities of Libra are endless. Not to mention that all one would need to use it is a mobile phone.

Libra will use Blockchain technology to ensure that all transactions are recorded consistently and the “Libra Association” will be formed to operate Libra’s infrastructure. Key participants that have been announced include Visa, MasterCard, PayPal, Lyft, Uber, Vodafone Group and many others across Blockchain, Telecommunications, Payments and Venture Capital firms. Each of the association partners will operate an independent network node (a server) that will support transaction validation and share the transactions throughout the network.

Unlike Bitcoin, which is not backed by any real world assets, Libra will be fully collateralised by a basket of currencies and short term debt obligations. While this means that Libra’s value may fluctuate as foreign currency rates change, by design it is intended to be fairly stable to enable payments and remittances. Still, this is one thing that makes it different from any other digital form of money available today (e.g. Paytm in India, WeChat and AliPay in China) as Libra will derive a value from several fiat currencies rather than represent a single currency digitally (effectively what our bank accounts currently do). Furthermore, from the Libra user perspective, they will be less exposed from one single currency volatility, present lower counterparty or settlement risk and as a result benefiting from discounts. For developing nations this will be a serious contender to enable the population to access the financial systems (micro-credits) and implement trust by reducing settlement risk. It will also enable cheaper and easier payment options with the convenience of using familiar mobile applications (like chat apps).

Aside from user uptake, one of the biggest challenges Libra is likely to face lies in the realm of regulation, with a number of major jurisdictions (US, EU) already expressing concerns or being off-limits due to existing rules (China, India). Libra is aimed to be regulator-friendly by design, leaving sufficient room for the KYC/AML requirements across jurisdictions. At the same time, some governments may see it as a threat to financial stability or an over-reach by a company that has not had the best track record of trust lately.

Libra in 3 sentences

Think of it like any corporate digital currency but provided by Facebook, easily available for its 2.4B user base to send to each other and pay for things with all around the world. There are few comparable examples, like the JP Morgan Coin (used to settle inter-firm transfers) or Singapore Airlines’ KrisPay (loyalty points used as payment mechanism with other merchants or other loyalty points providers).

Is Libra the same as Bitcoin?

No. Bitcoin is the most famous cryptocurrency with its key differentiator being a fully open (permissionless) network – meaning anyone can join and validate/submit transactions. Complex “proof of work” cryptography is used to ensure that transactions are processed correctly and as such no one has to trust anyone (also known as a consensus mechanism). Libra will be operated by the member organisations (Libra Association) and therefore will not need complex validation (but you will have to trust them). This makes Libra more centralised, but much more performant and suitable for mass adoption and usage.

Why should we care?

While traditional cryptocurrencies have not yet become a mainstream payment medium, Facebook’s efforts bring a perfect combination of user access, device presence, technology prowess and innovative spirit to truly transform payments and remittances as we know it. Not to mention the sizeable “war chest” that Facebook can access to engage the best minds to help them execute on this vision.

Given the regulatory climate and the maturity of the payment infrastructure (NPP), it may take a long time for a new currency like Libra to be accepted in Australia. For our government, understanding what digital and crypto currencies mean from regulatory, taxation and financial system perspective will be of interest. “One should expect a response from the world’s major central banks. If Libra begins to take off, expect issuance of the digital currencies that many major central banks have been piloting.” – writes Ross Buckley.

What does the future hold?

If successful, Facebook’s efforts can truly transform some industries well beyond of what is currently imaginable:

  • Widely available non-central bank currency – while bitter regulatory fights are likely to follow, the Libra experiment may be one of first major efforts to create a currency not issued by a government or a central bank. Even though, Libra relies on central-bank fiat as a proxy for stability (its reserve is a basket of currencies), value of money is based on trust. Once trust is established, organisations or governments can issue new currency without fully collateralising them (“printing money out of thin air”). While Facebook is not a bank, this is something that can be easily addressed.
  • Programmable money – Libra’s implementation makes it programmable from day one, which means money can now be easily conditioned to perform when certain circumstances occur. In its simplest form think of allocating funds to be used for a specific purpose only, where purpose is encoded in the payment. In more complex use cases trade, transaction clearing and settlement may change completely.
  • Introducing new consumers to global supply chains – While some may view the lofty goals of giving access to financial products to the unbanked with cynicism, there is no denying that a product like Libra makes it much easier to enter the global financial ecosystem. One only needs to see at examples like M-Pesa’s success in Africa. We are likely to see growth of industries that are enabled by broader community of those with payment methods, empowering local economies, peer to peer transactions and growth in developing and developed countries. Furthermore, factoring in that emerging economies will grow 75% faster that developed one and that these emerging economies will be double the size of the G7 economies by 2040 (source: University of Sydney Business School), we appreciate the strategy that Facebook is deploying with this initiative.
  • Innovative financial products – Libra’s digital nature is likely to unleash a stream of innovation globally. From banks that will strive to defend against disruption, to start-ups who will try to capitalise on the new opportunity. One thing is for sure – there will be plenty of innovations in remittance, payments and digital apps that support them.

While there are several aspects of Libra that have not been disclosed or designed for as yet (like the user experience, how to actually access Libra, in-commerce digital channels, accessibility etc.) these are all part of the journey of delivering on a vision that is intended to create a step change and challenge the norms of financial services as we know them today.

Should you wish to understand more about this topic, the implications for your industry and strategy, KPMG has invested in the development of a cross-functional expertise that looks at emerging technologies and its implications from business, legal, organisational and technology perspective. We are here to help.

Photo Credit – Robert Scoble/Flickr

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2 thoughts on “Libra (or Facebook crypto) – why should you care?

  1. Absolutely brilliant article Laszlo and Max.

    Of course, one of the precepts of blockchain technology’s existence is “transactions in a trustless environment”… having a central authority (even if it’s a conglomerate) negates that completely. Facebook/group can of course still use crypto / blockchain, but it then becomes an academic exercise around choice of technology… facebook have openly said they will only get one vote in the conglomerate, but there’s a lot that i think is intentionally left unsaid… for example, who the developers will be and what control they will have around the codebase and updates… we know from experience even things like Bitcoin are not truly decentralised… collusion between the developers, the miners and the exchanges brings about whatever fork they want (or sometimes need) – eg. The SegWit2x fiasco!

    Facebook has by enlarge lost the trust of society; their initiatives such as internet.org have been condemned (and in fact banned in certain countries) as initiatives that try to zero-rate data (to give the perception of giving access to the poor) whilst creating a walled garden where that access comes at the cost of facebook knowing *absolutely everything* and in fact, in most cases, i believe also being able to *control everything* that the people who get “free data” would see and do.

    My fear is that they might succeed, as they are preying on the poor by giving them a facility they did not have, but demanding their soul in return… it’s a bargain with the devil… my only ray of hope is that facebook have been “caught out” for their real motives (based on their actions as opposed to their speech) so hopefully countries will just ban Libra; what Libra will do is perhaps force others to come up with innovation that is not too dissimilar, so that’s a good thing 🙂

    My ultimate view… it’s a fantastic idea, but “Libra” (as opposed to the concept; which they aren’t the first at coming up with anyway) will have a hype-cycle for a year or two, and then die the death of a thousand cuts!

  2. Fantastic article Laszlo and Max! This is an incredible opportunity for those in developing countries to have access to a broader infrastructure and financial stability that is needed for sound investment and spending decisions.

    One question I have is in the use cases for ‘programmable money’ and how this may be used (or imposed by the associate partners)? I think this is critical to prevent any coercion within the system such that it may limit the freedom of users.

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