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Libra : what is it ?
During the 2018 spring, Mark Zuckerberg, founder of Facebook, has announced the creation of a blockchain dedicated business. David Marcus, former President of Paypal and former boss of Facebook Messenger, took the lead.
Beginning of 2019, Zuckerberg stress the importance of messenger payment as a strategic key trend for their services development. So, a new project started. Its target is to solve the existing issues of using crypto currencies, meaning being able to execute payments with :
– low transactions costs
– high transactions volumes capacities
The goal of the Facebook ‘Coin’ (Libra) is to being used by messengers apps Whatsapp and Messenger for on-line payments and money transfers. Libra is willing to offer a basic access to a stable coin to emerging countries where most of people are unbanked. Of course, the group is also targeting clients synergies, thanks to the 2.3 billion messengers apps users (and Instagram users).
A payment functionality is already available on Messenger but this service have problems with the traditional banking players. With Libra, the process is supposed to work on real time and should replace standard banking offer.
Backed by a basket of ‘fiat’ currencies, Libra is similar to a «Stable Coin»,( a mix of US dollar, Euro, Yen and British Pound), Libra relative value should be stable in some extent.
In June 2019, Zuckerberg has given more details about the project and has indicated that Libra will be supported by a private blockchain for settling payments. Libra will be able to be acquired by any fiat currency and will be available to support on-line payments as available for any ‘hard’ shopping places.
The currency will be issued by a Switzerland based foundation located in Geneva.
28 partners have been associated to the project of which the main payment sector players as Mastercard, Visa, Paypal, Stripe and some other Internet and e-commerce players as Uber, Lyft, Spotify, Ebay, Vodafone, Booking , Iliad and some others.
Supporters and project partners :
At the launch, each of the 28 first partners contributed by investing $10 million as an entrance ticket within the foundation.
Each member became therefore responsible for the currency governance and can run a ‘node’.
Due to several political pressures, especially coming from authorities that appear panic by this new competing currency and its universal adoption, 6 of the initial partners (especially the big global payment players) decide to withdraw from Libra in october 2019.
There are Paypal and Mastercard, Visa, Stripe, Ebay , Booking and Mercado Pago
What are the issues ?
The market of money transfers and messenger payments is buoyant. Indeed, in numerous emerging markets, it is very difficult for many people to open a standard bank account or to do on-line shopping. The coming Libra as a new medium of payment is a new way to propose access to a bank account to citizens who were unbaked up to now.
China is clearly taking the lead on this new issue. Payments by messengers work well for a while through WeChat of Tencent or Alibaba’s Alipay. The mobile app Wechat allows internet users to chat on line,to buy public transport tickets or cabs tickets and to do shopping. But unlike to the Libra solution, WeChat is under the control of the Chinese Government.
Even if Libra is not supposed to be a ‘store of value’ but instead to become a global medium of payment with low fees, it is easy to understand the rising strong competition of Libra as a new tool that will be soon used by millions of people. Facing many official criticisms triggered by this project, it seems quite obvious that Libra would be a great success. The main criticisms are the followings :
– Respect for Privacy : Big Internet players as Facebook are charged on the subject of respect for privacy. Libra, as a new medium of payment dedicated to Facebook would increase risks on respect for privacy by monetizing personal datas.
– Specific risk linked to the launch of a new global use ‘stable coin’: Systemic impact ?
The needed currencies counterparts for managing Libra could create a destabilizing impact on financial markets Libra foundation will be transformed as a central banker. Therefore, participants will be responsible for a monetary supply that will be originated by transactions on Facebook messengers and for which the Calibra* wallet will be directly integrated. But all those operations are not under any States control.
– Regulation, money flows and taxation : some officials (J.Dimon CEO of JP Morgan and François Villeroy de Galhau, governor of Banque de France for instance) have been recently involved in the debate and said about Libra that they fear a lack of transparency and underline the issues of money laundering, terrorism financing and generalization of illegal activities And it is true that the Facebook’s crypto will be easily used through your smartphone.
– Endanger the States sovereingty : the recent statement of Bruno Le Maire, French Ministry of economy, is explicit enough, stressing Libra project « With the Libra project, money sovereingty of the States is involved. Under such conditions, we cannot allow the development of Libra in the European soil ».
As mentioned, the latest official statements have been really bitter and clearly against the Libra project.
In the US, the Congress Financial services Committee Chairwoman asked for the project suspension until the Congress and regulators scrutinize it and call the projects initiators to come for Congress hearings.
Face to this rejection statements (as the money sovereignty is endanger at the same time as ultra accommodative monetary policies are in place and are questionable), more and more states are willing to create their own central bank digital currencies (CBDC). But those cryptos will be obviously centralized and under the countries control.
In this hostile context, it is not surprizing to note that the main payments sector players that were intially Libra foundation partners have recenlty given up and withdrawn.
Despite those defections, the Libra foundation has really been founded and a first meeting recently took place, by gathering players that are convinced by the project relevency and its future success. But official pressure is strenghtening. Zuckerberg is coming for hearing at the Financial Services Congress Committee october the 23th. Some partners are also fearing that investigations on Libra spread out to their other own businesses.
Given those points, and while the network deployment has been initially planed for the first quarter of 2020, Facebook has announced that the launch will be postponed and will take the needed time in order (and respect) to reply to all the questions asked by the regulators.
To be followed
* Calibra is 100% Facebook subsidiary. Its app will allow to couple a crypto wallet natively compatible to Facebook messengers, to organize transfers and payments and to buy products of the group’s partners.
About the editor…
A passion : Economics, behavioural finance and emerging digital assets
Yves started his career in the asset management in 1986 where he worked at different positions as manager of equity funds and diversified funds. at Crédit Commercial de France and later, at Barclays group in Paris. In 1998, he took the lead of equity funds and diversified funds, then of the whole fund management business at the French team of the Dutch Robeco group before joining Natixis Asset Management in 2012 as Director of the Equity Investment business unit. Yves left Natixis AM in 2018 to start as an independant player for professional investors and corporates (advisor and fund raiser).
He likes to engages in sports that test his endurance like running and swimming, Yves is also fascinated by social sciences, and more specifically by history and economics. But this is the economics mechanisms behavioural aspect and the markets behavioural analysis that are a constant source of thought and discussion. Since few years, the blockchain issue and emergence of crypto assets is a new field of passion and opportunities for him.
Financial markets and asset management
Financial markets and asset management