Where Facebook Libra Got It Right And Where It May Not
A review of Facebook Libra White Paper and how Africa can plug-in
About The Author
Opeyemi Praise is a Saïd Business School (University of Oxford) trained FinTech enthusiast. He studied Electrical/Electronic Engineering at the Obafemi Awolowo University. He has many years of experience in ICT/Telecoms. His interest in Finance and FinTech drove him to write CFA Level 1 which he passed in January 2019. He is also trained in Financial Modelling and Valuation Analysis. He is an MBA Candidate of the University of Illinois, Urbana-Champaign. He can be reached at ope.praise@yahoo.com. LinkedIn: https://www.linkedin.com/in/opepraise
Introduction
On June 18th, 2019 Facebook officially announced its crypto-currency (called Libra) which is projected to be operational by 2020. Libra combines the strength of the legacy crypto-currency and firmed-up their weaknesses. The weaknesses of legacy crypto-currency are in their ideology; which is anti-government and anti-financial institutions/big corporation. The founding fathers of Crypto-currency hated the control of the government and the schemes of big companies. The strong aversion of legacy crypto-currency for financial institution (owing to the same aversion for capitalism) is an undoing. Facebook Libra embraces all the advantages of legacy crypto (Blockchain, Cryptography, Security, Transparency, etc) in one hand and openness to governmental control, big corporations, and collaborations on the other hand. This makes Libra a tool for commerce (cross-border or “in-border”) with low volatility.
Features Of Libra And Why It Is Different From Other Crypto-Currencies
Libra has a number of good attributes that make it very robust, reliable and acceptable. We will evaluate briefly each of these attributes.
· Asset-Backed. Libra will be backed by historically stable securities like low-volatility government securities; this makes Libra low-volatility crypto-currency, unlike Bitcoin that derives its value from an undulating wave of sentiments. See below the volatility of Bitcoin in five years. The value of Bitcoin is very unstable and easily affected by the slightest sentiments.
Ayokunle Ojo, CFA (Director at an international bank) said,
“The Libra White Paper is quite interesting. They (the consortium of big corporations) are more likely to get it right. They are replicating the gold-to-paper currency model template; rather using paper-currency-to-Libra model”.
· Governance Structure. Libra will be governed by the independent Libra Association. There will be 100 members; 27 of which are already Founding Members — these are successful global corporations.
· Accessibility and Trustworthiness through Collaborations. Governments of nations had concerns with Bitcoin. It was feared that it will be used to aid money laundering, buy illegal harms and can be used as means of payment for transactions in the under-world (especially the dark web). These are valid reasons to fight crypto. And it turned out they were right; Silk Road proved so. Silk Road was an online black market and the first modern dark-web market founded by Ross William Ulbricht (pseudonym Dread Pirate Roberts) and was investigated and shut-down by FBI in October 2013. Crypto-currency became the means for settlement on the dark web.
Libra, on the other hand, seeks to collaborate with governments of nations, financial regulators and big corporations.
France Finance Minister, Bruno Le Maire requested that Facebook provides guarantees that Libra will not be used to fund terrorism. There will be challenges but they definitely do not outweigh the benefits Libra brings to the 21st-century peoples of the world.
Benefits And Impacts Of Libra
· Cheaper and Faster Transactions. Cross-border and “in-border” trades will be cheaper. Bitcoin did a great deal in facilitating this but Libra will do much more as it is projected to have a bigger and wider acceptance. Facebook leveraging on its social media platforms which currently are subscribed by 2.7 billion people will give a major push. Libra will scale much more than Bitcoin, Etherium and other Altcoins, all combined.
· Growth of Cross-Border E-commerce. Lack of universally acceptable currency has been one of the challenges of cross-border e-commerce transactions. The advent of Libra will help facilitate those transactions. E-commerce business will be able to scale faster and become global in little or no time. This will cause the growth of the e-commerce companies in their countries of operations and also bigger growth for logistics companies in countries of delivery.
· Growth of Crypto-currency Remittances Industry. Crypto-currency remittances industry is currently being powered by Bitcoin. Companies like BitPesa should begin to plan to migrate to Libra, leveraging on its acceptance and stability.
· Restructuring of the Financial Services Sector. Bank will have to collaborate with FinTech companies and take advantage of Blockchain technology. Regulators will have to be open to FinTechs and redesign regulations that drive openness, security, and prosperity of every person.
· Smart Contract. Libra is not just a crypto-currency but also a platform for smart contracts. The contract between two parties can be scheduled and clauses can be triggered by actions or inactions of either party. Bills can be paid automatically, service can be bought unmanned. Robo-advisor services companies can also leverage Libra’s smart contract.
Concerns! And Yes, We Need Answers.
There are a number of concerns that potential users of Libra, regulators, and government of nations have. Some of them are as listed below.
· Data Privacy and International Data Hosting. Regulators in many nations have regulations that discourage hosting citizens’ data outside of their geographical territories. Although Calibra has
been said to help handle data privacy issues of Libra, the international data hosting issues must also be looked at.
· AML/CFT (Anti-Money Laundering/Countering Financing of Terrorism). Libra will have to synchronize with all the different AML jurisdictions; this will eliminate Bruno Le Maire’s fear of funding terrorism with Libra.
· Undermining Bitcoin and Other Legacy Crypto. Libra should facilitate integrations with other crypto-currencies. It is not yet clear how this will pan out but Bitcoin with a market capitalization of $191 billion sure has a place in the FinTechs.
· Downplaying African Market. PayPal was restrictive of the African market at the inception. Libra should learn from this. African companies and nations should be well represented in Libra Association. Libra should lash on the opportunity of reaching the unbanked in Africa. Africa has an appreciable mobile network and low cost of smartphones which will drive Libra penetration in Africa. Africa should have several validator nodes.
Let’s Bring It Home. How Can Africa Position Itself For Libra?
How can the nations in Africa take advantage of Libra? It is suggested that Facebook considers the frontier markets for the Libra project as revealed in its social media video adverts. However, the following points underscore practical ways we can take advantage of Libra.
· Africa Crypto Exchanges (NairaEx. etc) need to form a coalition to negotiate for validator nodes and seats in Libra Association. This will help to have a common front in discourses especially the ones that affect Africa.
· African FinTech Start-ups should leverage Libra; Bitcoin-powered remittance solution will soon be powered by Libra; BitPesa and another start-up in the remittances space should position themselves for the coming change. It might be a co-existence of both Libra and Bitcoin or a total takeover of Libra.
· African Regulators should be open to adopting crypto-currencies. Africa should not always be laggards. We can be early adopters. We don’t have to get late to the party and settle for leftovers. There will be a total revamping of regulatory policies so as to accommodate the burgeoning Libra crypto. Regulatory gaps should be closed out so as to prevent crimes and also not kill a winning idea.
With Russian Central Bank considering its own Central Bank Digital Currency (CBDC) that is gold-backed, the dynamism of crypto-currency is fast changing. And it is not only Russia that is considering having its own crypto; England, Sweden, Uruguay, and Spain are also taking it seriously. Where is Africa in all of these? With this being the trend, it will soon be unheard-of to hear the government of any nation stifling the use of crypto-currency at the regulatory level.
· Big Telco should not be left out. Vodafone Group is one of the 27 founding members with a seat at Libra Association already. The big Telcos in Africa must not be left out. MTN, Airtel, Econet, Liquid Telecoms, Glo, etc must form a strong coalition to have their places in Libra Association; especially because many Telcos in Africa are now divesting into FinTechs. Central Bank of Nigeria has put up-regulation, procedure and licensing for Mobile Money (Payment Service Banking {PSB} License). MTN Nigeria and other telcos have secured their licenses for Mobile Money.
References
1. Cover Page Image Credit: https://www.france24.com/en/20190618-facebook-launch-global-libra-cryptocurrency-internet
2. Libra Association Members, “An Introduction to Libra”, Libra White Paper, accessed June 23rd, 2019, [https://libra.org/en-US/white-paper/]
3. Satoshi Nakamoto, “Bitcoin: A Peer-to-Peer Electronic Cash System”, Bitcoin White Paper, accessed June 23rd, 2019, [https://bitcoin.org/bitcoin.pdf]
4. John Isige, “French Minister Bruno Le Maire is asking Facebook “for some guarantees,” regarding Libra”, Web Content, accessed June 23rd, 2019, [https://www.fxstreet.com/cryptocurrencies/news/french-minister-bruno-le-maire-is-asking-facebook-for-some-guarantees-regarding-libra-201906181132]
5. Wikipedia, “Central Bank Digital Currency”, Web Content, accessed June 22rd 2019, [https://en.wikipedia.org/wiki/Central_Bank_Digital_Currency]
6. Daniel Palmer, “Russia’s Central Bank Is Considering Launching a Digital Currency”, Web Content, accessed June 22rd 2019, [https://www.coindesk.com/russias-central-bank-is-considering-launching-a-digital-currency]
7. BitPesa Team, Web Content, accessed June 22rd 2019, [https://www.bitpesa.co/]
8. Central Bank of Nigeria Team, “Guidelines for Licensing and Regulation of Payment Service Banks in Nigeria”, Web Content, accessed June 24th, 2019, [https://www.cbn.gov.ng/Out/2018/FPRD/OCTOBER%202018%20EXPOSURE%20PAYMENT%20BANK.pdf]
Wikipedia, “Silk Road (marketplace)”, Web Content, accessed June 26th, 2019, [https://en.wikipedia.org/wiki/Silk_Road_(marketplace)
