The Double-Edged Sword of Facebook’s Cryptocurrency in Asia
While Washington is throwing some sand in the wheels of Facebook’s Libra cryptocurrency plan, where Libra could do the most damage is the emerging markets of Asia.
Somchai Thamrongnawasawat, or just “Som” as his friends and family refer to him, is enjoying another lazy afternoon in the climate-controlled comfort of the Grand Hyatt spa in the heart of downtown Bangkok.
As his svelte and gorgeous masseuse kneads away at his unworked muscles, gently stroking his hands which have never seen a day’s honest work in all his 26 years of life, Som relaxes deeper into the plush, leather massage table at the spa.
For Som, life in the humid and bustling madness that is Bangkok, is lived in a well-appointed bubble.
The son of a Thai property scion, Som’s father had made a fortune on cheap dollar-denominated loans and loaded up on Bangkok’s soaring property prices in the booming Thai economy of the 1980s.
As one of Bangkok’s top landlords and real estate developers, a professional management team takes care of the Thamrongnawasawat’s substantial property portfolio, while Som and the rest of his family focus on the finer things in life.
But on this particular afternoon on particularly oppressive summer’s day in Bangkok in 1997, as Som’s non-existent stress was being massaged out of his body, a text message from his father would change Som’s life and that of his family forever.
In the early summer of 1997, as Thailand’s economy was booming, the Thai baht, which had been pegged to the dollar was starting to buckle under a wave of speculative attacks against the currency.
Betting that the Thai central bank did not have the foreign currency reserves to prop up the Thai baht, foreign currency speculators started to sell the baht, forcing the Thai government to eventually relent and allow the baht to be floated in July of 1997, when it eventually ran out of foreign currency reserves to prop up the baht.
The move by the Thai government sent the baht into a tailspin.
Overnight, cheap, dollar-denominated loans suddenly became unserviceable and families such as Som’s were made bankrupt almost instantly.
To make matters worse, Thailand’s till then booming economy ground to an almost immediate halt, with massive layoffs in finance and construction. The real estate market nosedived and the Thai stock market, till then one which had only seen growth, shed 75% of its value, much of it almost overnight.
What started off as a Thai-issue quickly spread to other Asian economies, with Indonesia and South Korea facing the brunt of capital flight and Hong Kong, Laos, Malaysia and the Philippines badly affected as well.
Brunei, China, Singapore, Taiwan and Vietnam were less affected, but all suffered from a loss of demand and confidence throughout the region.
And although the Asian economies which were most badly hit by the Asian Financial Crisis have since instituted broad policy reforms in an effort to prevent a repeat of the events of 1997, their currencies are still vulnerable, but perhaps not in obvious ways.
As an emerging region with a large population of young people, Southeast Asia represents tremendous growth opportunities and potential.
So Many Smartphones, So Few Bank Accounts
And with only one in two people in the region having access to a bank account or banking services, Facebook’s Libra cryptocurrency could be seen as a godsend.
In a region where remittances from foreign workers can contribute as much as 10% of GDP (as is the case for the Philippines) and where remittance fees can go as high as 15%, the ability to send money across borders with minimal friction is an obvious attraction for Libra.
For Facebook and its partners, Libra’s value proposition, particularly in emerging economies in Southeast Asia is compelling. Smartphone penetration in the region is high, bank account penetration is not.
And while using cash to pay bills or send money to relatives is hard enough, buying goods online or transferring money overseas can be almost impossible without paying hefty fees.
But if payments were made possible between two smartphones, life would be made much easier and new commercial opportunities could open up.
To be sure, Facebook is hardly the first company to have thought of serving the unbanked.
Old Dog, Old Tricks
In Africa, Kenya’s M-pesa pioneered the idea of mobile money more than a decade ago. Using Vodafone’s mobile infrastructure, M-pesa was an easy way to transfer money across phones that didn’t even need to be smartphones.
And since then, companies like Apple and Google have come up with their own payment systems and in China, which boasts few bank accounts but hundreds of millions of smartphone users, technology giants WeChat and Alibaba created the now indispensable WeChat Pay and Alipay.
If Facebook’s Libra were to join the fray, unlike WeChat Pay and Alipay, which are hyper-localized payment systems, it would have tremendous network externalities and huge competitive advantages because of its global network.
Because the value of any payment system is in the size of its connected customer base, Libra would be a huge system right off the bat — and it would be international.
With over 1.5 billion users, Facebook’s enormous community and unparalleled network connectivity would allow Libra to generate huge profits from transaction fees as well as hoover up data on the spending habits of its users.
And while Facebook has pledged to keep transaction data separate, whether or not such promises are kept remains to be seen.
Easy is As Easy Does
But Libra doesn’t just promise lower transaction fees on remittances, it promises to make cross-border transactions “as easy as sending a message” — a huge advance over the cumbersome international money remittance system that is currently in place.
And although Libra will be a cryptocurrency, unlike Bitcoin, it will be backed by a basket of major foreign currency deposits as well as government debt instruments — which means that against any one currency, the value of Libra must fluctuate to some degree but as a store of value, is likely to achieve stability over time.
But what’s more, that Libra is backed by existing fiat currencies and government-issued debt means that it provides assured liquidity — something that some emerging market currencies cannot guarantee in times of crisis.
Yet it is perhaps Libra’s defining feature — the ability to facilitate frictionless cross-border money transfers — that could also be the greatest threat to emerging Asian economies, which are generally more open to global financial flows.
For instance, if Thai citizens could switch easily from the baht to a basket of stable currencies (such as Libra) with a simple touch of their smartphones, it could have the effect of a run on the baht during times of actual or even perceived crisis.
Whenever there’s any risk to the baht, hypothetically for example, the Thai government being labelled by the United States as a currency manipulator, Thai citizens could move collectively and cheaply into Libra, a stable currency holding.
And while economic theory suggests that such flows would be self-correcting — as Thais abandon their holdings of baht, the baht depreciates, creating arbitrage opportunities for supporting the now undervalued baht, allowing the baht to return to its previous value — reality is often very different.
Just like in 1997, when capital leaves a country, it goes out the window, not the stairs.
Like a bank run on a currency system, citizens hold their national currency because they are needed for everyday transactions.
But if a depreciation seems imminent, shifting out of the national currency would be smart — and if such a move were repeated across a nation, a disaster for the country.
Clunky For Now, Libra For Later
For now at least, a widespread shift between currencies does not often occur on a massive scale because there is substantial friction, both in terms of time and cost, in international currency transactions.
The spread between buying and selling rates for foreign currency for ordinary citizens is substantial, without even considering the heavy transfer fees.
Ironically, the prevailing inefficiencies, systemic overcharging and substantial red-tape (such as money laundering and know your customer requirements) involved with international currency flows has helped prevent a locally-led run on emerging market currencies.
But there’s no guarantee that such protections will continue to persist if Facebook offers frictionless international transactions to everyone.
With the opportunity to put funds into a relatively stable Libra, capital flow reversals and “sudden stops” that are currently serious but still manageable macroeconomic problems could result in full-blown crises perhaps exceeding the scale of the Asian Financial Crisis of 1997.
Exchange rates in emerging economies are not the result of farsighted analysis, well-founded expectations or stabilizing speculation — instead, trading in emerging market currencies has generally tended to be driven by waves of volatile sentiment and speculation.
And midsize emerging economies such as Indonesia and Thailand, with floating exchange rates, are particularly susceptible to market sentiment.
Against this backdrop, while the discussion regarding Facebook’s Libra is raging in Washington, whether or not Libra is allowed to be rolled out will have substantial consequences on the other side of the world.