Given the hostility of US legislators, the suspicions of central banks and financial markets regulators across the rest of the world, and obstacles in China and India, Libra, the cryptocurrency through which Facebook aims to move into payments and financial services, may never get off the ground.
But if it does, then watch out. The outcome looks likely to be binary: it either fails completely or it succeeds on a massive scale and perhaps disrupts the entire global financial services business – regulators, central banks and banks alike.
Banks have paved the way for Libra thanks to their high charges, particularly for cross-border payments, including gouging customers with hidden and egregious foreign exchange rates, and slow processing.
At least banks have woken up to this. Instant payments are already here in domestic currency and Swift gpi aims to broaden this to close to real-time international payments at low cost.
New fiat currency solutions have emerged for cross-border payments through cards and online and mobile offerings such as iDeal and Swish.
In China, Alipay and WeChat Pay already have more than 500 million and 900 million users, out of a population of 1.4 billion, and now process 94% of China's mobile payments, according to analysts at UBS. Meanwhile, in the US last year, the biggest mobile payment firm was Starbucks.
Libra is a challenge to banks and to central banks on two levels: as a new digital global currency and as a new payments method that may benefit from the vast network effect.
Its payment services can be embedded in existing Facebook accounts, including WhatsApp, Messenger and Instagram, and may thus be easily accessible to vast numbers of prospective users, as analysts at Deutsche Bank point out. And while users must forgo interest on fiat currency when they transfer their funds into Libra, the Libra Association clearly aims to invest its seed capital in client-acquisition measures, such as rebates or bonus points, which banks themselves have popularized in the battle for primary accounts.
As we write, both the Federal Reserve and the European Central Bank face mounting pressure to cut interest rate, while an unannounced war to devalue global currencies seems set to break out.
When users transfer their fiat funds into Libra for the ease of use, they may have no interest to forego.
In Europe, rates may go further negative. On their second-quarter earnings calls, European banks were hinting once again about ways to pass these costs on to certain account holders.
James von Moltke, chief financial officer at Deutsche Bank, lays out a number of offsets for lower-for-longer rates, which might include “the implementation of fees against accounts that no longer essentially pay for themselves based on the liabilities, or doing so by client segment, where there is more opportunity to pass on negative rates to clients.”
Might this prospect make Europeans more likely to use Libra?
“Unprecedented lax monetary policy is punishing traditional forms of saving in euro very openly,” say analysts at Deutsche.
Even though it has long been possible for private persons to hold foreign currency accounts at banks, administrative hurdles and fees for foreign currency transactions still pose considerable obstacles.
Individuals might thus be tempted to transfer cash and savings into a stable Libra, which could outperform the euro if the latter falls on deeply negative rates and be a more reliable store of value during periods of resurgent inflation.
In doing so, might customers move away from banks, depriving them of a vast traditional source of stable and cheap funding?
Details remain to be worked out on exactly how the Libra Reserve, which backs the new currency, will invest in high-quality securities – presumably government bonds – and deposits. Will these be bank deposits? Could they even be central banks deposits? And how will the reserve be weighted to different fiat currencies: on measures of global GDP; on financial market size; or on users’ preferences as determined in flows transferred out of their originating fiat currency?
There are aspects of the Libra Reserve that represent a vulnerability for Facebook. It looks like an enormous money market fund and so, arguably, tokenized holdings should be subject to the full panoply of securities laws and regulations.
If regulators and legislators determine that it is indeed a money market fund, then the project may falter. If it goes ahead, the financial world could eventually flip on its head.
The Libra Reserve could even become one of the biggest suppliers of funding to banks, who now see it is a dangerous competitor in payments.