Facebook executives are defending its blockchain project in conversations with U.S. regulators and policymakers, but the harder battle for the Libra cryptocurrency could be the international skepticism over the viability of a borderless and currency-backed crypto-asset.
Central bankers from around the world appear to be cautiously approaching Libra, the “low-volatility” cryptocurrency unveiled by Facebook (FB) in a white paper in June. As proposed, Libra would be backed by short-term government securities and fiat currency, which users would deposit into the reserve when they exchange their money for units of Libra.
“The idea behind Libra is that sending money should be as easy and secure as sending a message,” Facebook CEO Mark Zuckerberg told Congress on October 23.
But more broadly, Facebook hopes Libra will gain scale internationally. As planned, users of Libra would be able to also avoid expensive transaction fees and foreign exchange costs by sending money across borders.
Some central bankers say that similar technology has already existed in their countries for years. For example, Mexico has already launched a real-time payments system called the Sistema de Pagos Electrónicos Interbancarios (SPEI) that allows for instantaneous electronic payments.
Mexico’s central bank now wants to expand on that platform with a system, called Cobro Digital (CoDi), that would facilitate payments between users and merchants using a QR code. CoDi launched officially on Sept. 30.
Speaking at a central banking conference on October 20, former Bank of Mexico Governor Agustin Carstens said innovation is already happening.
“You don’t need Libra to face competition,” said Carstens, now the head of the Bank of International Settlements. “The incentives for you to perform and do your job is there. Everywhere, everyday.”
Kenya and Thailand
Facebook Chairman and CEO Mark Zuckerberg arrives to testify at a House Financial Services Committee hearing examining "Facebook and Its Impact on the Financial Services and Housing Sectors” on Capitol Hill in Washington, U.S., October 23, 2019. REUTERS/Yuri Gripas
In some countries, private players are already providing frictionless digital payments as well.
In 2007, telecom giant Vodafone launched mobile-based payments system M-Pesa in Kenya. Using the Safaricom network (which Vodafone has a stake in), M-Pesa has built up a base of over 25 million users as of the end of 2018.
M-Pesa’s rise was not without controversy; a year after it was created the Kenyan finance minister ordered an audit of the system to make sure depositors were safe. Despite heavy lobbying from traditional banks in an effort to shut M-Pesa down, the central bank ultimately allowed M-Pesa to continue growing.
Central Bank of Kenya Governor Patrick Njoroge said at the conference that as a regulator there was no precedent in how to approach setting guardrails on fintech companies like M-Pesa.
“When we moved ahead on M-Pesa and other products that we were working on, we couldn’t look to other countries,” Njoroge said. “We had to create the role ourselves.”
In Thailand, the government partnered with the private sector to build its own real-time payments system. With the help of Vocalink, a Mastercard company, the Bank of Thailand was able to expand its interbank payments provider to create PromptPay. As of the end of 2018, the service reportedly had more than 46 million users.
Veerathai Santiprabhob, the governor of the Bank of Thailand, said at the event that its faster pay system caused “a lot of tension” among the traditional banks in Thailand, noting that income fee-based transfers were a “huge cash cow” for banks.
“We had to decide on the proper market structure to ensure continuing competition that would lead to further innovation,” Santiprabhob said.
“Everything is okay”
David Marcus, the head of the Libra project, was also present at the conference and called out the central bankers for believing that “everything is okay.”
“I’ve spent a considerable amount of time talking to the very people we hope to serve and they really disagree,” Marcus said. “I view the financial infrastructure in the United States as outdated.”
In the United States, a real-time payments infrastructure is well behind the likes of Mexico, Kenya, and Thailand. The Federal Reserve has said it plans on creating its own real-time payments system but not until 2023 or 2024.
Facebook would counter that none of these domestic real-time payments systems get at Libra’s core goal of creating a global “stablecoin.” As proposed, Libra would facilitate low-fee money transfers from a mother in New York sending money to her daughter studying abroad in Prague. That transaction, sent in units of Libra and received in Libra, would also theoretically come with low foreign-exchange costs if the money is then accepted by a merchant (like Libra Association founding members Uber or Spotify) in units of Libra.
With a user base of about 2.7 billion people, Facebook has some central banks worried that the Libra reserve (comprised of a mix of currencies, mostly U.S. dollars) could get large enough to usurp the international monetary system, which is currently dominated by the U.S. dollar. Fed Chairman Jerome Powell has said Libra could “have systemic scale” because of its massive user base.
In an interview on October 15, Marcus told Yahoo Finance that it would “take a while” to on-board Facebook users to a level where it would present systemic risk to the financial system.
“That being said, we should assume that there is a chance that this could have a systemic risk and design it in a way that it cannot become a systemic risk,” Marcus said.
Marcus also told Yahoo Finance that “nothing has changed” with the Libra project as planned. But at the central banking conference Marcus entertained the idea of a blockchain that does not universally use Libra, but digitized versions of each currency.
“We may or may not have benefits and drawbacks from having a synthetic asset in the middle of all of this and we could definitely approach this with having a multitude of stable coins that represent national currencies in a tokenized and digital form,” Marcus said.
Libra hoped to launch in the first half of 2020 but Zuckerberg assured Congress on October 23 that it will not launch “anywhere in the world unless all U.S. regulators approve it.”
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.
