The Big Idea: The Libra Association
THE BIG IDEA
Thursday, 28 May 2020
Throughout the year, we’ll be offering a deeper look at some of the biggest trends we see shaping fintech now and in the coming decade. This week, we’re taking a look at the Libra Association, the controversial international payments group backed by Facebook. As always, if you have any ideas for us, or there’s anything you’d like to know more about, drop us a note at fintechupdate@gmail.com.
Last year, Facebook announced an ambitious plan to reshape the global cross-border payments space. The social media leviathan set up the Libra Association, a global consortium based in Switzerland, to oversee Libra, a new cryptocurrency with a value based on an underlying basket of sovereign currencies. Since then, Libra has been beset by regulatory challenges, failed partnerships, and, most recently, a complete re-working of the Libra token. But Rome wasn’t built in a day, and Libra is still alive, so this week we’re taking a closer look and asking ourselves, What’s the big idea with Libra?
Libra-ation philosophy?
In mid-June 2019, Facebook released its Libra White Paper, finally dropping the bass on a not-so-secret project that had observers everywhere trembling with crescendoing anticipation. The White Paper outlined a vision for an easy-to-use, stablecoin-like digital currency that could be used to make instantaneous payments and transfers to anyone… around the world… for free. The response was fairly immediate:
Some observers hailed Libra as the next big thing in payments, offering a faster, lower-cost solution to incumbent remittance options, as well as a new option for settling cross-border payments that didn’t require signing up for traditional wire transfer services.
Others were less enthused. Following Libra’s June announcement, U.S. lawmakers demanded that its development be halted, rivals spoke out against it, and national and transnational regulators warned that it posed risks to the global financial system. If anyone in the world could use Libra as an alternative to traditional financial services and national currencies, they wondered, what would that mean for monetary sovereignty, financial stability, and global anti-financial crime efforts?
What initially seemed to be a PR win for the founding Libra Association members quickly turned into a circus. The Zuck was hauled in front of Congress, regulatory scrutiny increased, and major backers like MasterCard, Visa, eBay, PayPal, and Stripe decided to… back out.
As it prepares to launch anew, Libra looks a lot different than it did when it first appeared last year. Most significantly, “Libra 2.0” no longer will be a synthetic currency backed by a basket of sovereign currencies and government debt. Instead, it will be a more traditional stablecoin, allowing users to transact digital versions of individual currencies (think “Libra euro” and “Libra dollar”). Libra still hopes to offer a “multi-coin currency,” but it’s not the übercoin that was outlined in 2019.
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Why should I care?
Despite the setbacks, Libra appears on track to hit your local app store by the end of 2020 as it tries to assuage regulatory concerns and reassure policymakers, customers, and partners that the Association’s product can work within the bounds of the global financial system.
The revised approach includes a new White Paper; a new CEO (former HSBC chief legal officer Stuart Levey); a new General Counsel (former head of OFAC and FinCEN Robert Werner); and formal communications with regulators, like its recent application for a payment system license in Switzerland. Libra continues to present itself as a novel financial instrument and a unique force for global financial inclusion, but the chastened Association now also promises “support [for] public sector innovations” on the Libra network.
Although the current iteration of Libra looks decidedly more limited than the original design, it is still true that it may meaningfully alter the ordinary consumer’s exposure to digital currency as a store of value and medium of exchange.
Are you ready for that, or for Big Tech’s further incursion into your (digital) wallet? Time will tell. But it’s worth noting that even this stripped-back Libra is drawing criticism from U.S. lawmakers, who greet Facebook’s involvement with continued skepticism.
What should I look out for?
Regardless of its success, the Libra project has already helped launch a boom in global stablecoin development, particularly among central banks. In fact, it seems increasingly likely that the first winner in the race to build a large-scale digital currency may be a state rather than a tech firm.
Facebook remains firmly in the crosshairs of regulators and policymakers around the world, none of whom will be satisfied by a refreshed white paper alone. Meanwhile, a number of countries, including China, Sweden, the UK, and the U.S., are all in some stage of central bank digital currency (CBDC) development. China’s digital yuan may even beat Libra to launch, with pilot tests already underway in major Chinese cities.
Moreover, plenty of questions remain about Libra: The Association has indicated that its coins will be backed 1:1 by sovereign currency and cash equivalents, and that it will maintain a capital buffer, but it hasn’t indicated the size or funding source of the buffer. Further, the latest white paper doesn’t indicate how Libra will compete or cooperate with other tokens, how it will manage the challenge of negative rates, or whether it will charge transaction fees.
As the Libra team has discovered in the past year, it’s difficult to build (i) a ubiquitous, (ii) frictionless (iii) digital currency that (iv) delivers what it promises (v) without running afoul of global regulators. Compromising on elements (i)-(iv) for the sake of achieving (v) seems like something of a Pyrrhic victory, but at this point it appears Libra just wants a W.
So, keep your eyes on Libra in the coming months. Having pulled itself off the mat (Libra is dead, long live Libra!), we expect it to keep its promise to launch in 2020 with a production-ready blockchain, Financial Intelligence Unit, and necessary regulatory go-aheads, bringing stablecoins to the masses and Facebook-adjacent data mining to your transactions. Get ready.
More broadly, keep an eye out for the advent of state-backed stablecoins in the coming years, which may well be the real legacy of the Libra project 10 years down the road.
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