Facebook’s first big foray into the financial world raised an immediate question: how deeply will its new digital currency shake up traditional financial services?
Facebook’s vision promises a world where banks and other payment providers are disintermediated by Libra, which would allow instant, near-free international money transfers. If its currency is widely adopted by Facebook’s 2.4bn users, it could hold considerable sway, even affecting the role of central banks.
With the ink barely dry on Facebook’s proposals, bankers, regulators, payments executives, investors and industry experts all said they were busy evaluating the impact, but suggested that there would be many hurdles in Libra’s path.
Regulation came up most often.
Harsh Sinha, chief technology officer of forex payments firm TransferWise, described the lengthy regulatory processes that his firm had to go through to set up a network to move money around the world, including getting approval in every single US state.
“It’s a lot of work,” he said. “You have to do a lot of anti-money laundering checks, fraud checks, making sure you are looking at the source of funds.”
Libra’s backers point to remittances — workers sending money home from abroad — as a key use case, which means approvals from regulators in big remittance destinations such as India and Mexico as well as in the US.
The Libra project will face an added burden because it is also introducing a new currency into the mix, which could make it harder for countries to control things such as inflation and could be particularly problematic in countries with capital controls.
“So far, the scale of cryptocurrency hasn’t been big enough to alarm central banks,” said an official at one eurozone central bank. “The size of the user base of Facebook and the sheer size of the company itself is, of course, something we haven’t seen before.” For now, his central bank is “keeping a close eye on” the project and waiting for more details to emerge.
In the UK, Mark Carney, governor of the Bank of England, said the central bank would approach Libra with “an open mind” but “not an open door”. In the US, regulators were mostly reticent to comment, though the CFTC has said it is talking with Facebook about the plans.
“What Facebook wants to do validates blockchain and crypto and is illustrative of a visionary view of how the world could look and operate, but it discounts for the complexities of cross-border [transfers] and the legal, regulatory and other responsibilities,” said Alex Holmes, chief executive of cross-border payments giant MoneyGram.
A payments executive at one large global bank said there is “so much confusion” on how regulators will deal with cryptocurrencies and executives at several large banks cite the uncertain regulatory environment as one of the main reason they are not involved in the project. No banks were among Libra’s initial backers.
“Banks are obviously by definition more aware of regulatory hurdles in general,” said a fintech executive at a second large global bank on why banks were more cautious on the regulatory outlook than the more than two dozen companies who have lined up to back the coin.
Facebook’s interaction with banks ahead of Libra’s launch is unclear. A person familiar with the situation said the Netherland’s ING was approached but decided against it. Citigroup, one of the world’s biggest payments banks, said it “never had any talks” with Facebook or Libra on the coin. Facebook would not comment on approaches before the coin’s launch.
Adoption was the second major issue cited; the difficulty in convincing merchants, who have been slow to adopt even simple technologies such as chip and pin in the US, to come to agree to accept payment in the form of a coin whose value will fluctuate against the local currency that the merchant must use to pay his taxes and his rent.
“Bringing this to life in 2020 with an association made up of different payment providers and different companies, I think that could prove to be challenging — is gonna take some time,” said Mr Holmes.
“And in terms of practical application for our type of consumer — the two billion or so unbanked and underbanked around the world — I think there’s an interesting question of how long does tech take to trickle down to that level.”
MoneyGram has obvious self interest in raising questions about Facebook’s plans, as do other cross-border payments businesses and banks who question the viability of Libra. TransferWise’s Mr Sinha said his firm and Facebook’s are working “towards the same mission” of getting rid of expensive middlemen and that there is plenty of market share to go around.
But Lex Sokolin, global co-head of fintech at Consensys consultancy, saw challenges. “Facebook is a thousand times bigger, has massive engagement, and got the largest venture backed start-ups to join it in creating a global apolitical crypto money. Facebook is also very good at copying and Ant Financial is in their target crosshairs.
“So absolutely, the B2C fintechs are at risk.”
Additional reporting by Richard Waters and Hannah Murphy in San Francisco, Rob Armstrong in New York and Kiran Stacey in Washington