Ever since Facebook announced its Libra project whitepaper in June, it has encountered opposition from authorities and regulators. The Facebook-sponsored digital currency is striving to get approval from the European regulators in 2021. The social media company aims to get the green light in spite of the many issues raised by the European Union finance ministers.
The deputy chair of the Libra project and head of policy, Dante Disparte, said:
“We share many of the concerns that are being raised. But, the political sentiments towards the project are, in many respects, completely unfounded.”
Disparte was speaking in Brussels earlier in the week where he met EU officials and participated in an event hosted in the European Parliament. In June 2019, Facebook introduced a digital currency backed by the “best performing independent currencies”. Libra is designed to offer cheap and fast means of payment to users.
Since its whitepaper was launched, decision-makers and regulators worldwide have warned that this project poses severe risks to financial stability. Additionally, they questioned countries’ monetary sovereignty. EU finance ministers agreed on December 5 against this backdrop stating that all the options available should be considered. They are ready to consider any measures that will prevent the creation of unmanageable risks by several global stablecoins.
However, Disparte affirmed that the Libra Association is determined to get the authorization in 2021. Although the Association is focused on 2021, that may not mean that they will seek authorization in all countries worldwide next year. But, Europe is part of their goal.
Regulators are still analyzing the opportunities and risks that arise from stablecoins including Libra. The stablecoins are considered less volatile than other digital currencies. Disparte commented:
“Since the beginning, we have always said that the project would seek to be regulated.”
Operational readiness, risk management, financial compliance, operational security, governance, and policy will come in handy. The engagement in Brussels was quite positive. Libra seeks to first launch in Switzerland, a country that has a ‘sober’ approach to stablecoins.
Libra Association is trying to make a home in Europe. Their message for this side of the Atlantic is clear:
“Don’t push Fintech innovations of any size offshore from the European market because, in the long run, it is going to be bad for the economic competitiveness of the region”.
The association requests for the same risks and same rules that regulators defend in Europe with Disparte saying:
“If we are building a 21st-century payment network, then regulate it in the same way you would do with other payment networks.”
Risks and Scandals Undermine Trust
Concerns surround Libra arise from their main sponsor. The many issues and scandals that affect Facebook, mainly the Cambridge Analytical case, destroyed the trust between the social media company, legislators, and citizens worldwide. Thus, the company seems unsuitable to handle a payment network that can deploy directly to around 2.4 billion people worldwide.
Facebook plans to give regulators and interested companies minimal information on the operation of their stablecoin. The European Commission sent two questionnaires to try and find more details about the Libra project.
In the meantime, almost 25% of the firms that originally joined the company have left the project. The most notable firms that have abandoned Libra include MasterCard, Visa, and PayPal. Some said that the promoters had failed to clarify primary aspects of how to deal with data.
Although fears are not misplaced, Disparte said that Libra should be treated like other payment networks that reach millions and do not destabilize the market. Though people may not like Facebook, they should get the message that it is passing across which is Libra. Libra aims to offer opportunities for achieving financial inclusion.
Disparte played down criticism saying:
“Ask any startup if they could answer the types of questions we have received to the satisfaction of the world. It’s not possible yet. I would say ‘judge us by the outcome a year from today’, in terms of where we stand and whether we have succeeded or not.”
For the coming 6-9 months, the Libra project will progress on three areas including the technology, governance, and regulatory approval. The organization has 21 members for now and they want to sign up almost 100 firms. Each association member will have the same powers and privileges.
“Facebook is on the same footing as a nonprofit or any other member of the project”.
Any major changes like amending the code of the organization, basket of currencies, or enhancing the technology, must pass through the general council. The decisions will get adopted by a supermajority of 66 members. However, a 5-member executive board will run the day-to-day business.
The 5-member board will be in charge of the ‘operational action’ offering the mandates for the executives. One of the board members will be David Marcus from Facebook.
The Business Ecosystem
Libra proponents believe that their initiative is an instrument for financial inclusion. Disparte explained:
“The world is not doing enough to ensure financial access because we’re using tools designed 50 years ago to serve people in the 21st century.”
Almost 1.7 billion people do not have a bank account and around 1.3 billion are currently underserved by their financial institutions. However, a billion of these people have an internet-connected phone. Behind the huge numbers and altruistic purposes is a business case opportunity:
“If you think of that market size, Libra at core represents a market expansion opportunity. It’s about pulling more people into basic services where a mobile phone becomes a payment endpoint.”
Remittance is the most obvious attraction projected at a $700 billion business annually. The average fee isalmost7% with a few global options. Disparte thinks that Libra can get the fees much below the 3% mark that is in line with the United Nation’s development goals.
Additionally, the institution will not offer direct options for clients but instead, it will create an institutional ecosystem together with a global payment network where companies can offer their customized digital wallets. Disparte elaborated:
“The plan, at least the design principle, from the association level is to build a network that can support these types of peer to peer payments at near free or near-zero cost.”
It will be up to the institutions in the Libra network to determine what extra services they offer and how they charge for them.
Libra’s unveiling also acted as a ‘wake-up’ call for central bankers since their monetary sovereignty was at stake. The ECB and some other central banks are looking into the feasibility of launching their local stablecoins. The Libra-effect is a fantastic idea that got Disparte saying:
“The ‘Libra effect’, if you will, has been to force people to look in the mirror long and hard about what innovation should look like if we want to serve our citizens better in the 21st century.”
However, the main case that central bankers are trying to support is a wholesale service aiming to link central banks and the banking ecosystems more efficiently.
“They are not really thinking about retail household level applications of these technologies. And that is, frankly, where we’ll have the biggest impact.”
Will Libra launch in 2021 as scheduled or will regulators and authorities stand in its way? Only time will tell.