The Capital
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The Capital

Libra: Economic Implications Of Global Cryptocurrency

By Sofie Blakstad on ALTCOIN MAGAZINE

We welcome the space that Libra’s opened to the discussion of digital assets as serious contenders in the world’s monetary system. But the governance and design need significant change to avoid terrible impacts.

Banks And Other Industries Embracing Blockchain

Away from the hype and bluster about Bitcoin and ICOs, most global banks have been quietly experimenting with Distributed Ledger Technology (DLT) for several years now — R3 Corda has been around for a while, sponsored by a consortium of banks, although it’s fading in popularity, is processing trade finance for a small consortium of banks, and most big banks have also developed some kind of internal payment token. JP Morgan and Barclays are some of the first to hit the news with public announcements about their coin or payment/settlement asset, but they’re far from alone. Even the World Bank’s issued a blockchain-based bond and both debt and equity are getting the blockchain treatment.

Banks are, on the whole, a conservative bunch, because of the level of scrutiny they’re under and their responsibilities to the shareholders and their customers. Having been on the inside, I can say with confidence they wouldn’t be adopting this technology unless it’s got demonstrable benefits and they believe it’s going to be important. Central banks are experimenting with Central bank-issued digital currencies in areas like real-time gross settlements, and for many areas of commercial banking and capital markets, it’s going to become increasingly important.

Crypto assets are being used to manage payments transfer and provide value chain traceability across multiple industries now — from land registry to shipping to mining to art to food and agriculture, you’ll find examples where the technology is being applied. Like the banks, industries are embracing technology because it’s useful.

And now Facebook has announced it’s planning to launch its own global “stablecoin”, Libra. So why have it riled lawmakers and many industry experts?

When Is e-Money Not e-Money?

Well, first, because Libra — and the Libra Association— aren’t commercial or central banks. Central banks can issue money, are (largely) responsible for monetary policy, and their goal is to maintain stability. Commercial banks are licensed to issue money under fractional reserve rules and are heavily regulated to ensure they comply with monetary policy. Facebook is not, and has never been, a bank is not regulated as a bank and doesn’t have any expertise in banking — it did acquire an e-money license in Ireland a couple of years ago, but this is limited to holding client funds and making payments on their behalf. I’ll get back to that…

So central and commercial banks, to date, have been the ones issuing new money that is officially recognized by governments (i.e. you can pay taxes with it).

Obviously, other types of money are being issued all the time, from Airmiles to Bitcoin to the Brixton Pound, but on the whole, you can’t pay taxes with them because they’re not officially recognized by governments as currency. This means they may have value, but they’re only useful as far as they are recognised and accepted.

Where digital money is issued that’s equivalent to a unit of currency — such as dollars in your Starbucks wallet, or a payments card — it will be issued under some form of e-Money, Mobile Money or Payments Service provider license, depending on the jurisdiction, which allows the provider to hold your funds on their behalf and make payments. This is fundamentally different from a bank’s ability to create new money, because e-Money providers can only hold money and spend it on your behalf, and on the whole, it’s a pretty safe model.

The e-Money licensing system, however, was designed with the assumption that no entity holding the license would ever overshadow the traditional banking system — under e-Money, the assumption is that your money comes from the traditional banking system in the country that issues the money. e-Money providers aren’t supposed to be able to change the money supply. Hold that thought.

The Mobile Money Giants

Some Mobile Money or e-Money suppliers, however, have got bigger than banks. From MPESA operating under a special license in Kenya to AliPay in China, they’ve acquired more customers than any traditional bank, without having a full banking license. While they can’t directly issue money, their economic clout is such that they can influence economies — in China, for example, AliPay’s lending portfolio has released capital to millions of small businesses who wouldn’t otherwise have had access to finance.

Private companies with reserves this significant are able to invest and create wealth on a massive scale, as well as for deciding how to use those reserves — that may not technically be “creating money” but it’s altering the balance of capital that they hold, which is something that was never intended under e-Money rules. Without full banking regulation, licensing is being done on a case by case basis through discussions with government and central banks in the countries where they operate, but it represents a shift towards private companies which are not regulated under banking licenses, having the ability to impact economic and monetary policy.

However MPESA and AliPay are monopolies only within country boundaries — although both have made a play for international markets, their home markets are where they have the most economic significance. They’re in a position to have to listen to national government and regulators, despite their size.

MPESA grew organically, and very fast, in Kenya, because of its utility — it gave access to electronic payments to people who couldn’t get access to a bank account. It didn’t matter that it wasn’t bank-issued money, because it was commonly accepted and Safaricom, the telco which created it, guaranteed exchange to fiat. Now, when MPESA goes down, the Kenyan economy takes a hit. Facebook has more customers today than the population of any nation. Libra has the potential to transcend — and possibly ignore — national currency regulations. Governments, especially in developing economies, may be forced to accept it if it reaches a certain level of saturation. That could have catastrophic implications for less stable national currencies.

No Risk Equivalency

Libra’s proposed model is a “stablecoin” backed by a basket of stable currencies — but not pegged to any one currency. All of the proposed currencies are from developed economies, with no risk equivalency to the currencies of countries where financial inclusion is most problematic. What this means for those countries, is that as well as being forced to accept Libra (assuming a certain level of saturation), there’s a strong motivation for businesses and individuals to transfer wealth from unstable local currencies into Libra. Today, people in countries with unstable currencies hoard dollars or Euros — Libra would take over that role — but as a currency with much greater supply, accessible via mobile apps, and one that can be used to pay for local goods and services, it could supplant and further destabilize national fiat.

I use inverted commas around stablecoin when applied to Libra because a stablecoin is pegged to a single national fiat currency. Libra isn’t; it’s using a basket of currencies and this means it will be deciding its own rules for evaluating exchange and equivalency between the currencies in the basket, over international exchange rates. That’s pretty normal for any financial institution managing cross-border payments, but with the value likely to be in Libra’s basket, that puts Libra in a position to influence exchange rates and currency valuation, even for those relatively stable currencies in its basket.

Governance And Decentralization

Libra’s reserves will likely be big enough for them to influence currencies, and with these reserves, to create wealth in the billions of dollars, from interest rates, lending or investments. Where will this wealth go? Is it going to be channeled back to their customers or to the Association’s stakeholders, who have a responsibility to their shareholders to generate wealth?

The Libra Association has a $10 million entry ticket, restricting membership to large corporations who can make a clear business case for membership, with a sprinkling of NGOs and blockchain companies. It’s hard to understand where some of those blockchain companies got their $10 million from until you examine relationships between them and some of the VCs and corporates on the committee. The NGO members doubtless have good motivations, but at 4 out of 28 members, that’s less than 15% of the votes — and as has been well documented, any group with less than 30% of a voice in a committee has little chance of swaying decisions. There are more VCs than charities on the committee at the time of writing.

And although Libra has stated they’re planning to move to a fully decentralized model, there’s no guarantee and no roadmap for that. More to the point, there’s no motivation to do that. Why would a consortium of private companies rescind control of a money-making machine this big? It wouldn’t be in their shareholders’ interest to do so, or in theirs. While we have seen rare instances of private companies generating public goods, at this scale and with a broad consortium of members mostly from US-style Corporate backgrounds, it looks unlikely that the turkeys would vote for Christmas.

There is some very positive rhetoric coming out of the Libra team, however, the leadership team itself is homogeneous — all-male, all US-educated, very like the 60% US Corporate governance alliance. There are some very bright guys who’ve achieved some impressive things, but designing for global customers, especially those in cultures very different from the US, requires a diversity of thought. We’ve learned to work with social finance structures in Africa, for example, rather than trying to impose an Occidental view of how finance should work. I don’t see anyone on the Libra team who will ask the right questions for these and other markets.

Identity And Social Capital

Lastly, and possibly of most concern, is where this will lead. Facebook already has a monopoly on social data and already knows more about its 2.4 billion customers than any other commercial entity. Many commentators have speculated that Libra is a gateway to an identity play, and this seems like an obvious next step. Given recent events, on top of the lack of regulation, should we be handing over control of identity to Facebook, with implications for exclusion and demographic discrimination?

Beyond identity, though, is the even greater opportunity of creating a value system based on social capital. With Libra in place, Facebook would be uniquely placed to release such a system, dwarfing the Chinese Social Credit system and penalizing or exploiting the most vulnerable and excluded — the very people Libra’s proposing to support with financial inclusion.

It’s Not All Bad

Blockchain-based currencies, especially stablecoins, are useful tools in supporting money flows, reducing cost and risk, and helping financially excluded people. They’ll help develop new capital flows into small businesses, especially in hard to invest places where risk is high. New value systems are evolving and will continue to evolve, and on the whole, that’s a good thing. Alternative value systems will help the financially excluded to transact, hold onto their wealth and build more sustainable businesses, in ways they can’t today because of the high cost of being poor. Blockchain and DLT is an important enabler for some of these systems.

Value systems based on social and natural capital also have a place — for example, carbon trading has had some impact on how markets respond to sustainable investment, and there’s a lot of headroom there for further benefits. Social capital systems can help financially excluded people to build reputation and wealth, while natural capital will become increasingly important in trade and capital markets. These are positive evolutions happening in international financial systems, and while regulators and commercial banks may have a bit of catching up to do, represent some of the positive outcomes of technical and economic developments in recent years.

The Libra announcement has opened up the space for other institutions, especially banks, to announce and expand the use of their DLT programmes for commercial customers, and will lead to wider acceptance of DLT based value systems, which is extremely useful for us as a business at hiveonline, especially in Africa where our model is based around a Stablecoin. It’s fantastic for our research, where we’re promoting progressive applications of DLT to capital markets instruments to expand opportunities for sustainable investment.

Our issue with Libra is with governance and design. Both of those are things Libra has an opportunity to address before releasing it. This is a huge opportunity to do something genuinely useful, which could have a positive impact on billions of people. I hope that the right decisions will be made towards that outcome.

Sofie Blakstad is author of Fintech Revolution: Universal Inclusion in the New Financial Ecosystem (with Robert Allen, Springer, 2018)




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Sofie Blakstad

Sofie Blakstad

CEO and founder of hiveonline, helping small businesses thrive, advisor to UN & G20, author Fintech Revolution, cyclist, opera nut and fake Dane

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