Jamie Dimon tossed out a soundbite about Facebook’s Libra cryptocurrency venture at a conference, stating “It’s a neat idea that will never happen.”
Dimon’s zinger was just one of a series of negatives slamming the social media giant’s ambitious digital payment proposal. Within a span of about a month:
- Seven of the most prominent early supporters of Libra, including PayPal, Visa, Mastercard, Stripe and eBay pulled out of the Libra Association, the independent nonprofit entity Facebook set up to govern the Libra currency.
- The European Union announced plans to introduce legislation to prevent Libra from undermining the Euro.
- France and Germany issued a joint statement for Libra to be blocked.
- A G7 (central bank) working group concluded that global financial stability, public trust, and the operation of monetary policy could be at risk from widespread use of stablecoins like Libra.
- The U.S. Financial Stability Board in a letter to the G20 finance ministers stated that global stablecoins must meet the highest regulatory standards and be subject to prudential supervision and oversight. A high hurdle.
“Part of the pushback is that ‘Facebook cannot be trusted’,” says William Mougayar, author and blockchain investor. “The other part is that this is a big undertaking that hits at existing interests, and those interests are connected to politicians.” Others note that many central banks are keen to set up their own digital currency currencies over which they will have much more control.
Facebook isn’t backing down in the face of all the pushback, however. In testimony before Congress, Facebook CEO Mark Zuckerberg called the current financial industry “stagnant” and said that the Libra project could help provide needed innovation. He say, though, that “Facebook will not be part of launching the Libra payment system anywhere in the world … until the U.S. regulators approve.”
Announced in June of 2019, Libra is a digital coin or currency that would be pegged to basket of assets (mainly currencies). That makes it a stablecoin, in contrast to highly speculative Bitcoin, which is not pegged to any asset. Libra transactions would run on a blockchain (shared ledger) system and would allow users to send or receive money or pay for things within Facebook’s social network. Facebook also announced a digital wallet called Calibra that users would use to buy Libra using local currencies.
Not Everyone Gives Libra the Thumbs Down
Mougayar, who wrote The Business Blockchain, does not view all the setbacks as a death knell for Libra. Quite the contrary. “These objections are making the Libra project stronger, as Libra responds to them, by addressing them or fine-tuning their approach.”
Other voices agree that the chorus of naysayers may be wrong in dismissing the project.
One even comes from a politician. In a letter to a constituent company that is a member of the Libra Association, Mike Rounds, a Republican Senator from South Dakota, strongly supported the venture. He acknowledged worries about money laundering and terrorism financing but said that expanding the federal government’s anti-money- laundering jurisdictions to include digital currencies would be a sensible way to resolve these concerns.
That, of course would take time. Libra’s launch date was set for June of 2020, but David Marcus, Head of Calibra, and co-creator of Libra, said the date might slip due to regulatory issues. The original date is still the goal, he told Reuters. But “it’s not entirely up to us.”
Even the Financial Stability Board noted in its letter to the G20 leaders, that “technological innovations can deliver significant benefits to the financial system and the broader economy. Global stablecoins might offer a vehicle for cross-border payments and remittances for a large number of users.”
Mougayar describes the current global and local payment and money transfers system as “messy, expensive and inefficient, no matter how you slice it. Libra is hitting at the very core of this, and proposing to re-wire the world with a more efficient currency and the rails for it.”
Central banks of smaller countries like Sweden will support Libra, Mougayar predicts. For smaller governments, it might level the playing field for them.
Impact of Facebook’s Calibra Wallet
Facebook’s digital wallet, Calibra, an integral part of the Libra announcement, could be where the social media giant gets the most benefit.
“Calibra will have the potential to provide Facebook immense amounts of new data,” wrote Jim Marous, Co-Publisher of The Financial Brand and Owner/Publisher of the Digital Banking Report in an earlier article on The Financial Brand. This will happen if consumers give permission for Facebook data to in be integrated with Calibra for added speed and benefits. Marous also said that the combination of Libra and Calibra allows Facebook to provide loans, credit, money transfer and e-commerce with the simplicity that it currently allows for [personal] communication.
“Ultimately this could become one of the most functional open banking platforms outside of China,” Marous stated.
At the country level, some view that as a good thing.
“If we want America to retain its pioneering edge in the digital space,” Senator. Rounds states, “Congress and our regulators need to look into the mirror and ask ourselves how long we’re willing to wait while other countries run circles around the United States?” He cited China and Africa in particular as areas where digital wallets are widely used by comparison to the U.S. where the numbers are still low.
“Each time we limit Libra and pound Facebook we help the Chinese or somebody else.”
— Richard Crone, Crone Consulting
Alipay and WeChat Pay, the two mobile platforms that together account for 80% of e-commerce payments in China “have teams in every region across the globe working 7 by 24 to gain acceptance at the point of sale and on e-commerce sites,” notes Richard Crone, CEO of Crone Consulting. “Each time we limit Libra and pound Facebook we help the Chinese or somebody else,” he states. Libra would be overseen by a nonprofit organization (the Libra Association) with a 100-member board setting the rules and standards, Crone observes. “That doesn’t happen with AliPay or WeChat Pay,” Crone states.
The consultant makes the point that Libra is not a cryptocurrency. Or at least that it doesn’t need to be. “This is nothing more than a private label, prepaid account like your Target card, your Walmart prepaid card, or your Starbucks card with global reach,” he states. Facebook decided to launch it using blockchain and packaging it as a cryptocurrency, which in retrospect, they didn’t really need to do, Crone states. David Marcus said that Libra can be pegged to anything, which Crone says reinforces the fact that the product is nothing more than a global general purpose reloadable account.
Is Libra/Calibra a Net Threat or Gain for Financial Institutions?
Jim Marous warned that Libra and Calibra could be integrated with other financial products to become a very serious threat.
The Calibra wallet could be a potent force, Crone agrees. “Just as your Facebook page is unique to every person, Calibra will usher in a new era of personalization at the transaction level. It will be user defined.”
But Crone believes there would be several revenue-related reasons for banks and credit unions to be part of Libra if it is launched. One is using it for P2P transfers instead of using Zelle. Right now, he says, a small bank or credit union is paying up to 90 cents per transaction. “If Libra offers nothing more than a low-cost P2P option, they could still make money funding it through their card programs.
Beyond that, Crone says banks and credit unions could gain a portion of the fee for out-of-network cash withdrawals by enabling Libra mobile cash access at an ATM.
The flip side of that is a fee for depositing into a Libra account, similar to the fee used in the credit union shared branch network, according to Crone.
In addition, institutions supporting Libra in these capacities would have the opportunity to open new accounts from people who already have been pre-validated using multi-factor authentication as part of the Libra requirements.
Looking Further Ahead
“Facebook and its fellow Libra members are far from the only major companies looking to cash in on the promise of stablecoins,” writes Coindesk’s Michael Casey. “Freed of Facebook’s reputational baggage, these companies are betting that they’re in a stronger position to negotiate with government authorities.
He points to Walmart as one major U.S. player exploring a Libra-like project. In addition, some of the companies that pulled out of the Libra Association haven’t disavowed its potential.
“It’s not that we don’t think Libra has long-term value, or no longer has merit,” Jorn Lambert, Vice President of Digital Solutions told Coindesk. “It’s that they were asking original founding members to become formal members inside a legal entity, at a time when the regulatory framework is very uncertain.”
And although no financial institutions have announced anything quite like Libra, a retail-focused digital currency, several of them, including Chase and Wells Fargo, are piloting cryptocurrencies for clearing applications.