Why Facebook’s Libra cryptocurrency has banks and regulators scrambling to respond
- The cryptocurrency could massively disrupt the existing system, by undermining government sovereignty over local currencies and allowing capital flight, even threaten half of banks’ turnovers
Why are established companies moving into new industries? Modern communications technology has made automation essential for firms to retain their competitive edge. Any product or service with a digital component, no matter how regulated, is fair game for new entrants, new market structures, and new rules of competition that may require new regulations to keep the playing field level.
Regulators have not yet decided how to regulate platform companies that no longer merely sell widgets but instead form, and benefit from, new markets that their platforms facilitate. These companies connect consumers to third-party sellers, to one another, and often to advertisers by reselling consumers’ data. Mobile operators embraced the first iPhone via exclusive resale deals and customer contracts to subsidise handsets in return for subscriptions to operators’ service. Both Apple and mobile operators profited from such arrangements.
Now Facebook is disrupting again by copying the best attributes of cryptocurrencies, blockchain platforms and decentralised systems. To keep from getting disrupted, Facebook’s centralised operation is developing its own decentralised platform with a consortium, including payments companies and telcos. The move is a gentler version of the “kill zone” that big internet players used for years to acquire or smother start-ups that could challenge their dominance.
China floats idea of ‘Hong Kong style’ digital currency in response to Libra
To protect the supply of foreign reserves, less developed countries limit the amount of foreign exchange their citizens can buy. Even China, with the most reserves in the world, puts a US$50,000 per-year cap on individual residents’ purchases. Libra coin would let such people buy the digital equivalent of a foreign exchange, but few governments in less developed countries are likely to allow that without limiting the amount of permitted transactions. Otherwise, they risk capital flight.
Cryptocurrency is an uprising against today’s flawed financial system
Libra will offer no interest to holders of its coin. Instead, the consortium will earn interest on invested funds from Libra buyers. In the US alone, every 1 per cent of M1 currency – the most liquid part of an economy’s money supply including cash – that Libra displaces would amount to US$37 billion, and 2 per cent interest on that equals US$740 million per year – a hefty return for a targeted consortium investment of US$1 billion.
Banks are now where telcos were a dozen years ago, facing disruption from digital competitors. Losing payments to Libra would put 10-15 per cent of revenues at risk, but a Libra consortium with a retail banking licence could threaten half of banks’ turnover. No wonder regulators and banks are rushing to respond.
Paul Ulrich has a background in financial economics and technology. His views do not necessarily reflect those of his employer, the GSMA, nor of its members or associate members