I am Christelle Bure, a founding member and active director with Metatrans. I am currently concluding my Master’s in Blockchain and Crypto-currency, and as my Thesis, I have elected to research Facebook’s LIBRA coin, the setup of their blockchain, Calibra, the LIBRA Association, and what this means for potential consumers of the service.
The research sections I will cover as part of this series, are:
- Introduction to Libra coin
- How will we use Libra?
- Who owns Libra and what does that mean for us?
- How will our Privacy be managed?
- How will Libra navigate regulation and compliance?
- What does this mean for traditional banking?
Libra is a permissioned blockchain digital currency proposed by Facebook. The project, currency and transactions are to be managed and cryptographically entrusted to the Libra Association, a membership organization founded by Facebook’s subsidiary Calibra and 27 others across payment, technology, telecommunication, online marketplace, venture capital and non-profits. (En.wikipedia.org, 2019)
IBM divided modern banking into four models:
Model A, a digital bank brand: leveraging infrastructure from their parent banks;
Model B, a digital bank channel: these firms often resell a real bank’s products and must redeposit customer funds into a real bank’s insured accounts;
Model C, a digital bank subsidiary: New back end systems allow innovation at the product level; and,
Model D, a digital native bank: full-fledged banks that build their core value propositions around digital technologies.
According to a study done by the World Economic Forum (2015), Bitcoin and Blockchain were expected to hit the tipping point by 2025. This was before the anticipated launch of Libra (or anything similar).
The Bank for International Settlements brought out a special report with their 2019 Annual report, where they mention three things worth considering around the entry of large technology firms (“big techs”) into financial services:
- First, it holds the promise of efficiency gains and can enhance financial inclusion;
- Second, Regulators need to ensure a level playing field between big techs and banks, taking into account big techs’ wide customer base, access to information and broad-ranging business models; and
- Third, Big techs’ entry presents new and complex trade-offs between financial stability, competition and data protection.
Taking into account the current exposure that Facebook, Whatsapp, Instagram and Messenger have, the impact, should they succeed, of their Libra coin will be felt throughout the world’s financial system.
How will Libra be used?
The first section of my research will centre around how Libra will potentially be used by us as consumers. I have looked toward the three traditional qualities of money for guidance
Assessment of Libra as a medium of exchange
The Libra White Paper claims that Libra can easily be sent to anyone, anywhere, using their wallet (Callibra) via one of their messaging platforms, and exchanged into local currencies.
Assessment of Libra as a store of value
“Libra is designed to be a stable digital cryptocurrency that will be fully backed by a reserve of real assets — the Libra Reserve — and supported by a competitive network of exchanges buying and selling Libra.” (Libra.org, 2019)
Assessment of Libra as a unit of account
Calibra will convert any local currency, at an exchange rate which is known to the consumer at the time of transfer. This is applicable to their on- and off-ramps. Based on their collection of assets, this exchange rate is as fickle as any foreign currency, but should not be subjected to many fluctuations. By implication, Libra will should well as a unit of account.
Calibra and the Libra Association
The next point which begs further research, is the players in the Libra coin process, their goals, and what that means for us?
Calibra, Inc. is a subsidiary of Facebook, Inc, and has allegedly been set up as a regulated provider of financial services, and as a token of financial data separate from Facebook’s social data. It has registered as a money services business (MSB) with FinCEN, but will further need to obtain money transmission licenses in each of the states and countries that it operates in. Even with the money transmitter licenses Calibra may not be allowed to invest in securities. (The Block, 2019)
VP of product for Calibra, Kevin Weil, says that if the wallet is a success, Facebook could move into other areas, like credit.
Libra Association Members
Libra Association is based in Geneva, Switzerland, and consists of 28 founding members, who all join and pay their $10 million minimum. Their share of the total tokens translates into the proportion of the dividend they earn off of interest on assets in the reserve, and stipulates their node/voting rights.
The current members of the Libra association are:
- Mastercard, PayPal, PayU, Stripe, Visa Inc. (Payments);
- Booking Holdings, eBay, Facebook’s subsidiary Calibra, Farfetch, Lyft, MercadoPago, Spotify, Uber (Technology and marketplaces);
- Iliad SA, Vodafone (Telecommunications);
- Anchorage, Bison Trails, Coinbase, Xapo (Blockchain);
- Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, Union Square Ventures (Venture capital); and,
- Creative Destruction Lab, Kiva, Mercy Corps, Women’s World Banking (Nonprofit and multilateral organizations, and academic institutions).
The association hopes to grow to 100 members with an equal vote, with Facebook maintaining a leadership role through 2019.
Incedentally, By August 2019, three listed members were considering leaving the Libra Association, as they were concerned about the degree of regulatory attention upon Libra.
Facebook’s history with Consumer Privacy
With the recent Facebook/Cambridge Analytica debacle, Facebook has had its reputation severely tarnished when it comes to consumer privacy. Although Facebook assures that the management of Libra is outsourced to the Libra Association Council, and that it would keep its users’ social and financial data strictly separate, the question still remains: if it has mishandled social data in the recent past, can it be trusted with people’s financial data?
Potential impacts of financial data combined with social data
Brittany Kaiber said that her experience inside Cambridge Analytica opened her eyes to the tremendous risks that this unregulated industry poses to privacy and democracy. Facebook states in the Libra Whitepaper that Calibra is being designed with a strong commitment to protecting customer privacy.
They do, however, state that they will share Calibra customer data with “managed vendors and service providers — including Facebook — that support our business” Furthermore, Calibra will use Facebook data “but will first obtain customers’ consent”.
Regulation and Compliance
Global Regulation of Libra
More than ever before, the need has been highlighted for global regulation of banking services for individuals. This goes beyond Libra, and impacts all aspects of modern money. The fact that capital is mobile across national boundaries, creating the threats to democracy, makes it difficult for individual countries, especially smaller ones, to install the more rigid financial regulations that would be required from a perspective of justice. Just as with many other questions of global justice, we see a failure of coordination between countries.
Calibra aims at collaborating and innovating with the financial sector, including regulators and experts across a variety of industries, to ensure that a sustainable, secure, and trusted framework underpins this new system.
The regulatory landscape needs to change to address the new multi-faceted issues of how core regulations inter-operate with big tech in finance. The BIS looks at it from three perspectives:
- Financial regulation,
- Competition regulation, and
Individual regulators are not best suited to covering these factors when they’re combined in one package in big tech. Further research will unpack these factors further.
KYC & Anti-Money-Laundering
Libra has committed to a process where a government-issued ID will be needed to open an account. With the obvious huge implications Libra/Calibra have around anti-money laundering, how would they authenticate the information provided? Calibra have committed to a due diligence and risk profiling to assist with this aspect on the basis of guidelines issued by the Financial Action Task Force (FATF), as well as applicable regulators. It is hoped that this risk assessment will identify the threats and vulnerabilities of Calibra and craft a global compliance and risk-management program to fulfill its applicable obligations.
Does Libra leave space for competition?
To give perspective to the potential impact of Libra: Facebook has 2.41 billion monthly active users as of the second quarter of 2019 (Statista, 2019), while WhatsApp has 1.5 billion users in 180 countries, Facebook Messenger has 1.3 billion users (Facebook Business, 2019). Especially if Facebook leverages its relationship with 7m advertisers (Statista, 2019) and over 90m small businesses (Business of Apps, 2019). Libra is likely to be global in a very short space of time. This has serious implications for global financial stability and systemic risk.
The entry of large technology firms (“big techs”) such as Alibaba, Amazon, Facebook, Google and Tencent into financial services, including payments, savings and credit, could make the sector more efficient and increase access to these services, but also introduces new risks, the Bank for International Settlements (BIS) writes in its Annual Economic Report (Bis.org, 2019)
Tech companies as banks
In banking, there are two views on the subject of competition:
- Good – because they challenge incumbents, increase inclusion and lower costs, or
- Bad – new entrants undermine financial stability because they don’t have the experience of capital buffers incumbents do.
The BIS says that, when the new entrants are big tech companies with data analytics, with network externalities and interwoven activities, new entrants bring less competition. In that context, the BIS continues, “the traditional focus of competition authorities on a single market, firm size, pricing and concentration as indicators of contestability is not well suited to the case of big techs in finance.”
If this is a topic that interests you, I invite you to connect with me on LinkedIn, and I would love to engage, debate and learn from you.