"Crypto" and "blockchain" are some of the buzzwords which the social media giant, Facebook, used to describe its newest technological innovation in the era of digital transactions.
The name 'Libra,' an ode to the ancient Roman unit of mass, is given to Facebook's vision of a currency that supplements its already-impressive technological infrastructure ranging from Instagram, WhatsApp, and its flagship platform. With 2.83 billion monthly active users, there are warranted excitement that the introduction of Libra would further democratize financing; ultimately reducing the barrier of entry to the international financial system for people in less developed countries to only access to the Internet.
At the same time, one could think of equally pessimistic views on its disruptions that have begun to surface. Central banks around the world fear that Libra would only undermine their current functions, and politicians are a concern on the governance which the so-called Libra consortium would practice.
“Libra-lizing” the International Financial system
A global digital currency would make sending money across the world as easy as texting. It would do away with fees, delays and other barriers to the ﬂow of cash. It might give those in less developed countries access to the ﬁnancial system and a means to protect hard-earned wages against runaway inﬂation.
Lower fees for sending money and faster and more secure payments is not the only selling point which Facebook itself is offering its consumers. It is also financial inclusion.
According to Global Findex Database released in 2017, there are as many as 1.7 billion people who are “unbanked”. Most of them concentrated in developing countries such as China, India, and Indonesia. Yet, these countries have relatively high-valued economies with a significant number of the population have access to the Internet.
Libra would offer small businesses easy access to the international financial system. The ability for small to medium enterprises in transacting will be enhanced as their market would not be limited by those who use their home currency. As long as buyers and sellers are connected through Facebook, exchange rates nor capital flow regulations would, in theory, apply to Libra. It also eliminates the bureaucracies associated with current banking practices.
Decentralization, too, is at the center of the Libra debate discussion. Its institutional heart is at consortium made up of a broad range of organizations, such as financial firms and non-profit groups. They are tasked to oversee the database of blockchain and guarantee the digital currency is backed by substantial financial assets – similar to any other national currencies. On the currency’s launch, this association is supposed to have 100 members, each of which can operate one of the blockchain nodes.
“The internet . . . has given everyone access to the world’s information, and democratized access to free communications, but money has stayed the same,” said the former PayPal executive who is now taking part in the construction of Libra to the Economist earlier this year.
With the banking system being relatively slow-paced in catching up with technological innovation, consumers will probably view holding Facebook's new currency as an alternative to putting money in the bank. As a result, a run on the banks could, in fact, be a foreseeable future to the world's economy. Banks would need to anticipate new policies for such an outcome.
The authority of central banks would also be challenged. Because Libra – and many other cryptocurrencies – is relatively under-regulated, this would mean for an economic system that is liable to volatility. Libra is a digital currency that has been said to be pegged by not only the US dollar, but also with a basket of other fiat currencies such as euro (18 percent), Japanese yen (14 percent), British pound (11 percent) and Singapore dollar (7 percent).
So if you buy a unit of Libra with one US dollar, there is no guarantee that it will have the same value the following week as it will also be affected by the other currencies or bond prices in the basket.
Then there are consortium dynamics. Facebook will hand over its authority to 99 Libra consortium members consisted of private businesses and civil organizations – with 28 founding members will be backing Libra's assets.
The issue of corporate control has also arisen since the consortium did not consider putting those who represent the consumers themselves. If Facebook advertises Libra as a tool to "democratize" the financial system, decision-making should at least include elements of democratic processes.
When she asked if the founding members were democratically elected, one of Libra’s executive in the US Congress responded with a “no,” then mentioned more buzzwords like “proper oversight” and “regulatory” before the senators ended their session.
In fact, during the process of writing this commentary, five members of the consortium, Mastercard, Visa, eBay, Stripe, and Mercade, had announce their withdrawal. Though the official reason for such premature exit has yet to be released, the intense judicial scrutiny in the US and abroad might contribute to consortium members’ reconsiderations of their positions in the years to come. Yet, I would caution reading this as an end to Libra’s fate.
One thing is for sure. The fostering of good governance is paramount as it has the possibility of impacting the economic activities of a transnational pool of both creditors and borrowers. Facebook needs to learn from the history of information technology that is littered with initiatives that collapsed under the weight of internal conﬂict.
Editor: Anaq Duanaiko
Read another article written by Fikry Ghibran