Facebook’s Libra – the next big thing in digital payments?

27 Jun 2019

  • Facebook will launch its global cryptocurrency, called Libra, in 2020. This digital currency will be built on Blockchain technology;

  • Facebook’s new subsidiary, Calibra, will create a digital wallet that will store the Libra cryptocurrency. It will be integrated into both Facebook Messenger and WhatsApp, and will also have a standalone iOS and Android app.

 

Point of View

 

Facebook has announced it will launch its global cryptocurrency, called Libra, early next year. According to the white paper released by Facebook, Libra is comprised of three key components:

 

  1. It will be built on Blockchain – this will enable open access designed to maximise participation;

  2. It will be backed by a basket of assets - the currency will be fully backed by a reserve of real assets including bank deposits and government securities designed to manage the volatility of the digital currency; 

  3. It will have a separate governance model - Libra will be governed by the Libra Association Council, a non-profit, independent organisation managed initially by Facebook and 27 other organisations to oversee Libra and its development. These include MasterCard, Visa, eBay, PayPal, Spotify, Uber and Vodafone. The aim is to grow membership to 100 members who will serve as “initial validator nodes” of the Libra Blockchain.

 

Another less developed but explicit goal is for Facebook to tackle digital identity, conveyed in the following statement in its white paper: “an additional goal of the association is to develop and promote an open identity standard. We believe that decentralized and portable digital identity is a prerequisite to financial inclusion and competition.”

 

Rocky Scopelliti, from Optus described Facebook’s entry into payments as "an inevitable move, due to the role that social media is now playing throughout our lives."According to Calibra’s ‘Customer Commitment’, the digital wallet is designed with a strong commitment to protecting customer privacy. It states that “we believe that customers hold rights to their data and should have simple, understandable and accessible data-management tools.”

 

Facebook has faced much scrutiny since its Cambridge Analytica privacy breach when it was found that the company had failed to prevent the personal data of up to 87 million users from being harvested without their knowledge or consent. The privacy scandal contributed to and saw calls for tighter regulation of tech companies’ use of data. This resulted in Facebook’s involvement in an antitrust probe by the US House of Representatives Judiciary Committee, which is trying to determine if tech giants have become so powerful that they have the power to stifle competition and harm consumers. 

 

Some commentators have suggested that Facebook will need to address their current trust deficit in order to successfully broaden their reach into financial services. As stated by Aurelie L’Hostis, a senior analyst at market research firm Forrester, “the Cambridge Analytica scandal has exposed the social network’s lapses of data privacy and security and the news of Libra comes at a time when Facebook is under intense pressure from regulators, shareholders and users to address privacy shortcomings.”

 

Now that Facebook is reaching out to financial firms and payments service providers to join the Libra consortium to help them launch their cryptocurrency-based payments system, she notes that “we can expect regulators and governments to raise questions regarding Facebook’s financial data collection and management process, and whether that system meets all legal and regulatory requirements.”

 


Implications

 

There are a wide range of views about the potential impact. Consideration of Facebook’s move through the lense of three drivers of change may help bring clarity about the opportunity and likely impact.

 

Customer pull

 

Robert Milliner, Chairman of the Australian Payments Council, commented that "non-financial institutions are looking to leverage their user reach and technology capability to drive into a range of services, including financial services, based on lower cost and easier accessibility.”In Australia, recent data shows that there are now 15 million active users on Facebook, which is approximately 60% of the total population, with 50% of the country logging onto Facebook at least once a day. Figures also indicate that the number of Facebook users in Australia is expected to reach 11.23 million in 2020, up from 10.59 millions users in 2017.

 

With Calibra integrated into Facebook’s Messenger and WhatsApp, it will have access to over 2.3 billion users worldwide. There are already many Facebook users who can send money using Venmo, PayPal or even Facebook Messenger’s built in peer-to-peer transfer feature. However, this requires users to have a credit card or a bank account, a financial tool that is not accessible to approximately 1.7 billion people. Facebook says it is hoping this new payment system can help bridge the gap, providing access to those globally who are cut out from the banking system. The biggest test is likely to be whether people will trust the social networking giant enough to start converting fiat currency into Libra coin.

 

Technology push

 

By building Libra on blockchain, Facebook is hoping to create a decentralised form of governance, where no single entity controls the network, and which promotes financial inclusion for the unbanked. The white paper describes Facebook’s vision of “a new global currency,” indicating that the Libra blockchain will be “a decentralized, programmable database, designed to support a low-volatility cryptocurrency that will have the ability to serve as an efficient medium of exchange for billions of people around the world.”

 

With its integration into Facebook’s platforms, Libra could offer an alternative to the existing banking system, with the ability to transfer money seamlessly and instantly, just like sending a text message.

 

Regulation

 

It is often observed that regulation trails innovation and as noted by Morgan Stanley, “the success of Afterpay, Zip, PayPal and others demonstrates that the current regulatory settings are pushing innovation in payments outside the regular bank and credit card channels." With Facebook facing intense scrutiny around the world over its privacy practices, the creation of a digital currency will likely raise new concerns for governments, with the RBA’s Governor, Philip Lowe cautioning that Libra may not attain mainstream usage in the near future, “there’s a lot of water under the bridge before Facebook’s proposal becomes something we’re using all the time [...] There are a lot of regulatory issues that need to be addressed and they’ve got to make sure there’s a solid business case, so we’ve got to be careful before we jump to conclusions.”


It was announced that Facebook registered the Libra Networks LLC in Geneva, Switzerland, which has a history of global neutrality and a light-touch approach to regulation and an enthusiasm for digital currency not shared by officials elsewhere. According to Sven Korschinowski, a partner at KPMG, “Switzerland’s regulation is much lighter than in other European countries when it comes to cryptocurrencies…it made sense for Libra to come to Switzerland.”Needless to say, Libra has come under intense scrutiny by European regulators, who have raised concerns whether the project is sufficiently regulated. French Finance Minister, Bruno Le Maire commented that Libra must not “become a sovereign currency…it can’t and it must not happen” Similar concerns were raised by a German member of the European parliament, who stated that Facebook was at risk of becoming a “shadow bank” and that companies “must not be allowed to operate in a regulatory nirvana when introducing virtual currencies.”

 

In Australia, it was reported that consumers will have to provide driver’s license credentials to Facebook to use its digital currency. Although this requirement is common amongst most organisations when opening bank accounts, it has since created a stir amongst regulators given Facebook’s volatile history with privacy. Additionally, to comply with Australia’s strict anti-money laundering legislation, Facebook could also be given access to electoral data to verify addresses if it is approved as a financial services provider. Providing the company with details of millions of users could prove to be controversial given its previous disregard for the protection and careful use of customer data.

 

AUSTRAC has warned that criminal groups will attempt to exploit technologies for money-laundering purposes, and that “businesses that exchange digital currencies need to consider their obligations under the Anti-Money Laundering/Counter Terrorism Financing program.” ASIC is also reportedly “actively watching developments”.

 

Facebook Libra may have great potential to bring more people from emerging nations into the economy. However, regulators will need to be satisfied that the Libra Association has sufficient cybersecurity and user privacy protections, and that the network has the ability to handle expected transactions volume and screen out potential money laundering. As noted by Dr Iwa Salami, a senior lecturer in financial law at the University of East London, “at the moment, there are doubts as to giving a group of largely blue-chip private companies, whose interest is really profit-making rather than global financial and monetary stability, total governance control over a currency that could be potentially global."

 

The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.

 

 

 

 

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The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.

 

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