Facebook, a global social media giant, has decided to launch a digital currency. This will reduce the cost of transferring money from one country to another, enable billions of people with no access to financial service and help businesses across the world trade more easily. In spite of all the advantages outlined above, the digital currency has grave implications for financial stability, privacy, global governance, cybersecurity, and competition cannot be understated. This is essential as 1.7 billion people are unbanked and 1.1 billion have access to mobile phones.
Regardless of how we perceive the benefits of Libra, its effects on global economic activity and cross border financial flows, pose a significant challenge on legal, regulatory and oversight challenges, which span legally enforced global governance, country-specific payment systems, consumer/investor protection, and tax compliance. A sound legal basis will reduce ambiguous rights and ensure any digital currency is not prone to a loss of confidence.
Moreover, a currency such as Libra, if applied at a global scale can pose grave financial stability risk, further entrench the current and distortionary characteristics of the international monetary system and reduce incentives for fair competition, if at all.
Facebook offers a range of non-financial activities ranging from communication, cloud computing and advertising. It has also connected over 2.5 billion people around the world, allowing entrepreneurs to create businesses and employ thousands, in the fashion company providing apparel, data analyst to the warehouse operator who completes the order. Furthermore, it has facilitated an ecosystem of knowledge sharing, however lackluster, and reduced the cost of trade via digitization and connectivity. The spillovers from innovation cannot be understated, but it is important to place Libra as a digital currency that holds different implications for consumers, businesses and the global 4financial system.
Libra — Facebook’s proposed digital currency — can facilitate cross border and digital payments via its own systems or serve as a platform to facilitate third party payments. Regardless, of the chosen approach, Facebook will play an indispensable role in digital payments on its platform, connecting millions of consumers, businesses and financial companies. A commonly touted benefit of Libra is its ability to provide financial service to millions of unbanked people around the world. The extent and benefit of such a claim are dependent on the extent of mobile phone concentration, internet access, and electricity. In the absence of a concerted effort to provide the above services, Libra will only reinforce the current status quo from which individuals without access to the internet will be ostracised.
Data, dominance, and access to finance can be improved or amplified
Furthermore, Facebook’s data dominance will enable it to provide relevant information for financial companies who require spending, credit and other consumer habits in other to enable determine appropriate levels of interest rates for millions of unbanked consumers. Its ability to collect and synthesize millions of data points ranging from consumer location, preferences, health and shopping information, it will facilitate competition amongst financial companies and ensure better-priced premiums. Although Facebook’s pricing structure remains unclear and opaque as one will expect from a transparent Tech company, it is difficult to determine the extent to which Facebook’s extension into finance will benefit consumers. Furthermore, some people might end up being locked out of the financial system by what will soon constitute “ financial violations” such as late payments, etc. In a world where the insecure and zero-hour contract has become the norm, It is important to note the longterm impact of Libra, which might raise the cost fo finance for such individuals and reinforce or amplify the current distortionary impact of finance.
Billions of the unbanked will come online, at what cost?
Meanwhile, some would argue that millions of the global unbanked population will have access to financial services, even as the recent experience of Microfinance loans warrant caution. Jonathan Morduch (2002) and Ali Usman (2015) have detailed the benefits of microfinance in eradicating poverty, but the challenges which stem from little entrepreneurial might only be amplified by Libra. There is a comprehensive analysis of the adverse socio-economic impacts of microfinance, but it will be incomplete for one to ascribe these to Facebook and its digital currency. Linsey McGoey details the perils of ill-regulated lending and its economically dire effects on households and communities.
As I argue in an earlier article, Libra will undoubtedly exacerbate current trends of inequality globally and global imbalances. This is even more problematic for emerging markets with concentrated banking sectors and light-touch regulation as economic rents will accrue to a few banks and financial institutions. Furthermore, the risks stemming from an increasingly financialised and globalized market place will be transferred from institutions to individuals via higher interest rates and elusively determined creditworthiness. The latter will rely on current models, which are ill-designed for emerging markets where individuals' creditworthiness can be gleaned from their phones as opposed to their lending history or collateral. Meanwhile, the global trend is clear and unequivocal. 40 individuals who will serve as the main nodes for the digital currency, as well as MasterCard, Visa, and Uber, have paid $10 million for the privilege of enforcing payments will see their shareholder’s dividends balloon on the heels of higher stock market valuations. These companies have now left the Libra association s they likely see a more inclusive payment ecosystem as indispensable to a well functioning global market place. Facebook, who prides itself as a social good is to the global economy what coal is to climate change. Detrimental, costly to produce with unparalleled adverse effects on inequality and competition.
Competition should be protected by ensuring diversity in the payments system.
Facebook is in a unique position, its model is designed to create millions of data points via interactions amongst consumers, businesses in countless locations. Its network effects enable it to glean real-time data on consumer habits and preferences, which is an invaluable commodity for any business in the 21st century. As such, market concentration is an understatement of Facebook’s dominance and monopoly over the digital space. More worrying, is its ability to charge exorbitant prices to businesses for consumer data it collects at no cost.
As such, start-ups with a mildly successful business model can be easily priced out of the market in exchange for those who manage to raise seed capital earlier. Not only does this cause a misallocation of capital on the platform and the economy at large, but it also provides Facebook with an unfair advantage that reduces overall employment as companies as higher barriers to entry unfairly push otherwise successful companies out of the market place and prevent financially constrained companies from growing and expanding into new markets.
The new regulation will have to integrate privacy and data concerns as well as cybersecurity
Facebook’s data monopoly will, however, enable it to provide a unique service to finance companies. It will favor its own products and charge higher margins to businesses on its platform for prospective clients. Facebook will likely outsource the regulatory burden to which banks are subject, but rather data analytics and AI to categorize consumers based on affordability. Admittedly, the benefits to banks cannot be understated, exposure to Facebook’s 2 billion users are an untapped market that could insulate profit margins in an environment of low-interest rates. One could, therefore, argue that financial stability risks currently latent in our debt-fuelled economy will become increasingly digital. The challenge for financial regulation will be seeking a balance between Facebook’s activities, privacy, and cybersecurity.
Facebook will argue the potential systemic risk posed by its financial activities is more than compensated by better priced financial products, insurance premiums and interest rates on credit. The latter will be determined by consumers’ willingness to access credit-related services and Facebook is unlikely to design its algorithms to ensure the lowest rate is charged to consumers. Furthermore, consumers in the UK have a range of fin-tech services such as Monzo, Revolute and TransferWise for cross border payments. It is, therefore, unclear why Facebook’s Libra constitutes a viable innovation in a market that should be preserved for genuine competition from challenger banks.
Unlike countries such as Singapore with a highly digitized financial sector, where fin-techs support banking activities, retail payments by consumers in the rich world are increasingly done using cashless means. The trend in most advanced economies might not be similar to that of Norway where less than 10% of payments are made using cash while 80% of payments in Sweden are cashless. In Norway, cash is only used for small item transactions and its use is becoming rarer by the day, particularly due to various cash apps such as Vipps, Fitbit Pay and Facebook Messenger. Some would retort that WeChat, China’s equivalent of Facebook supports digital payments, but Chinese banking and regulation are encompassing, and its less democratic rule suggests a more rigorous enforcement mechanism than can currently be anticipated in the West.
As privacy and data protection become increasingly relevant, the question we must contend with are as follows;
1) How much should Facebook be allowed to charge for marketing and digital services? Its cost structure must be cogent, clear and unequivocally transparent if it is to restore trust amongst consumers following the Cambridge Analytica scandal. By understanding Facebook’s cost and pricing structures, lawmakers can attempt to better understand anticompetitive practices, protect new market entrants and give consumers better agency over their data.
2) Should consumers be compensated? Some will argue that Facebook is a free service and its role as a middle man between businesses and financial institutions are a net positive for the global unbanked. Nevertheless, consumers must be able to easily access a full list of the companies to whom their data is being marketed to. A page should be automatically generated and updated for every user on the platform. In the absence of this, lawmakers or Facebook executives must take full responsibility for how data is used to finance Facebook’s anticompetitive and distortive practices as well as take full responsibility for any data breaches relating to companies who are, or linked, to paying customers.
Facebook’s lurch into financial services will enable it to leverage its network effects to better serve financial services and consumers. It would be unwise to ignore the precedent set by the company’s handling of consumer data as well as the vital role played in election interference in both the UK and the United States.
One cannot ignore Facebook’s ignorance, which has seen it bypass lawmakers and begin discussing a regulatory regime with financial regulators. The same misguided confidence saw Mark Zuckerberg refuse to answer the U.K parliament’s question following the Cambridge Analytica scandal. It did, however, respond to several hours of questioning in the United States and goes to show how other governments will struggle to get answers.
The same trend appears to be occurring with its decision to Launch Libra, its digital currency. It must answer sufficiently to all lawmakers around the world and send a representative to respond to lawmakers’ concerns on the socio-economic implications of its attempt to become a central player in finance. Meanwhile, the Treasury Select Committee and competition authorities must get a better understanding of Facebook’s Libra and financial activities from financial regulators and policymakers to make an informed decision on whether, and if at all, Facebook’s innovative gains outweigh the cost.
It is important for the Facebook executive to realize that green light from U.S. lawmakers gives it legitimacy in the United States and not the rest of the World. It will be slightly concerning if a U.S. approval resulted in the global adoption of its novel services. Countries around the world must understand what Libra means for tax receipts, evasion, terrorism financing, and socio-economic inequality.
Financial stability should be considered prior to Libra…
Absent a global digital currency, individuals have no recourse to financial services such as savings, investment, credit, and insurance, which impede financial inclusion and (Coeur 2019). Furthermore, the adverse impacts of absent technology or payment systems are further entrenched. Facebook will need to hold reserves to prove liquidity, this will need to be verified on a daily basis. Furthermore, as individuals substitute fiat for Libra, it might reduce the money available to the financial system, to lend and borrow.
Facebook might make designing and enforcing monetary policy more problematic as the pass-through from policy rates to the economy have been impeded by negative rates. This explains why unemployment is at the record in the U.K and the United States but inflation remains well below the central bank’s 2.0% target. Facebook will further amplify this trend, making it increasingly challenging for Central Bank to stimulate the economy in the event of a crisis.
Facebook as a central bank, but also a financial institution
As such, it will difficult to influence the rate of increases in prices and therefore render monetary policy important. More importantly, issuers of the digital currency will constitute a “Digital Central Bank” charged with ensuring the value of the currency across countries. A period of stress could see the significant sale of the Libra, which could reduce households’ net worth and reduce confidence in the financial system. The Central Bank will ultimately seek to return inflation to its mandated targets, but the socio-economic ills that have resulted from Libra will undoubtedly persist under such a system.
Libra as an investment bodes ill for the economy
Despite the advantages of Libra, individuals might see it as a viable investment, reducing monetary policy sovereignty in countries whilst amplifying the adjustment from political uncertainty or macroeconomic stability, for instance. Furthermore, Libra will allow facebook to determine the price at which t hopes to lend to banks. This will reduce the available pool of capital and the cost will undoubtedly be passed on to consumers, absent rigorous competition. Regardless of how the Central Bank seeks to mitigate the adverse impacts from such outcomes, businesses and smaller financial service providers could see the cost of financing balloon. This is especially true as the deposits from Libra will be funneled back into the economy via higher interest to fund the needs of financial institutions. This bodes ill for any new entrants who are poised to receive funding to compete against incumbents.
Finally, it should be stressed that the advent of private-sector innovations to payment arrangements does not mean that public authorities will cease their efforts to improve the current system. Finance ministries, central banks, standard-setting bodies such as the CPMI and relevant international organizations should continue their efforts to promote faster, more reliable and less costly payment systems for both domestic and cross-border purposes, using new technology where appropriate, and in a globally consistent and coordinated manner. How do we justify them being natural monopolies who are likely to facilitate harmful data arbitrage whilst overstating the benefits of innovation?
Facebook’s Libra and regulatory challenges
The difference between crypto coins such as Bitcoin, Litecoin is their properties such as their ability to act as a store of value. Furthermore, they constitute speculative assets with large swings in prices and governance as well as regulation of illicit activities which is easier to comprehend under Libra.
These risks can partially be addressed within existing regulatory, supervisory and oversight frameworks, but there may be regulatory gaps to address as well. Regulatory and policy frameworks are expected to remain technology-neutral and not hinder innovation as long as it does not conflict with public policy goals, including monetary sovereignty. what’s the public policy goal, to improve the effectiveness of cross-border flows, facilitate trade at the expense of reducing and addressing structurally driven inequality. Or allowing the latter to become further entrenched
Approval should be contingent on additional regulatory requirements and adherence to core public policy goals. In my view, the only condition is for FB to guarantee a competitive ecosystem with at least four payment system providers in every country, the data from consumers must be shared with all providers rather than monetized by Facebook, and consumers must decide how their data is shared and to whom. Furthermore, facebook’s terms and conditions should ensure consumer data is shared with all educational institutions to facilitate research into stable coins as their macroeconomic impact. This should complement the user’s sale of data to third parties and Facebook can finally begin acting as a public good.
- Analysis of the Effects of Microfinance on Poverty Reduction, Jonathan Morduch. 2002. NYU Wagner Working Paper №1014. Issued June 28, 2002
2). Analysis of the Impact of Microfinance on Poverty Reduction, Journal of Poverty, Investment and Development, Vol.13, 2015. Ali Usman
3). Investigating the impact of global stable coins, Committee on Payments and market infrastructure. G7 2019.