Facebook’s digital currency should be operating by now. Will it ever go live? Or will it be beaten to market by central bank digital cash launches? Tim Green reviews the evidence.
When Facebook chief executive Mark Zuckerberg appeared before the US Congress in October 2019 to explain his plans for the Libra digital currency, it took just 71 seconds for him to admit: “I’m sure people wish it was anyone but Facebook putting this idea forward.”
Just a bit. Facebook’s original motto for developers was “move fast and break things”. It was fine for nerdy tech ideas, not so great for money. Congress went on the attack, echoing the withering tone of regulators ever since Libra was announced in June 2019.
The pushback proved too much for Libra Association members Stripe, Mastercard, Visa and Mercado Pago. They all dropped out, leaving the consortium with no payment representatives. There were never any banks on board. A year later, Libra has still not launched, and it has changed substantially. Let us recap.
In June 2019, Facebook published a white paper outlining plans for “a reliable digital currency and infrastructure that together can deliver on the promise of the internet of money”. But Facebook would not own Libra. Instead, it would be controlled by a consortium of 28 members, each with an equal stake.
The big promise of Libra was to combine the benefits of cryptocurrency with the stability of fiat currency. Like bitcoin, it would sit on a blockchain and support near-instant payments anywhere in the world for virtually zero fees. Unlike bitcoin, it would have tangible value – as a stablecoin pegged to a basket of real-world assets (US dollar, euro, government bonds, etc).
Libra’s announcement put the cat among the regulatory pigeons. “It has the potential to be extremely significant,’’ Andrew Bailey, the then head of the Financial Conduct Authority, told a UK Treasury Committee on 25 June, 2019. “It does raise big issues for the public policy world… At the moment, I would have to say there is insufficient detail on it to really be able to understand what the business model is… We will have to engage very heavily…we’re gearing up with the Treasury and the Bank of England (BoE).”
The essential challenge for Libra is that money has to be a store of value, a means of payment and a unit of account. Without the support of central banks, regulators and a liquid banking system, Libra cannot be money.
In April 2020, the project pivoted. Central banks in some regions feared Libra would be more stable than their own money. In such a situation, Libra would become a quasi-sovereign currency controlled by private companies. In response, the association devised a new plan to release several Libra stablecoins instead — each of them backed by a fiat currency.
Over the course of Libra’s eventful journey, many people have asked: why is Facebook doing this? The official answer from the company itself is that it wants to make payments cheap and easy for the unbanked and the underbanked. And with 3.14bn people registered on Facebook, WhatsApp, Instagram or Messenger, it would be in a good position to facilitate this.
David Marcus, vice-president of messaging products at Facebook, told CNBC:
“The status quo of the financial system does not work for a lot of people. It is like telecoms in the pre-internet era. We were all paying a dollar a minute for international calls and now calls are free for anyone with a US$30 smartphone. That has not happened with financial services.”
Marcus, formerly president of PayPal, argued that Libra had to create a quasi-digital currency to solve this problem. “The current system is not interoperable. You still cannot send money between PayPal and Venmo. You cannot cut costs and lower barriers of access for millions of people using the current system. Otherwise it would have already been done…You have to change the core of the system that moves money around.”
That is a valid – even altruistic – reason. But, as Ajay Banga, chief executive of Mastercard, pointed out in an interview with the Financial Times, financial systems have to be compliant with local financial regulations. Banga said that Libra was reluctant to commit to that. He was also concerned about how, exactly, Libra would make money. For those reasons, Mastercard withdrew from the Libra consortium.
Which brings us to the incentive for launching Libra. There seem to be two possibilities. The first is to keep people inside the Facebook universe. People will not delete their Facebook ID if it is inextricably linked to their ability to pay. And if they stay on the network, Facebook can keep generating data insights that it can sell to advertisers.
But if you have to be on Facebook to use Libra, that undermines the case for financial inclusion. It also raises the question whether advertising revenues are all Facebook wants. Bill Barhydt, chief executive and founder of Abra, a bitcoin trading app, says: “Facebook already has a low revenue per user and as it expands outside the US, it is only going to get worse. The best chance to fix that is transactional revenue.”
Barhydt is enthusiastic about Libra and is sure the project will go live. He thinks the biggest hurdle is not regulatory approval or technical design, it is “money-in, money-out”. That is, Libra’s link to local currencies and to cash. He says: “What value can Facebook add to crossborder payment compared with what is out there today? The biggest is integrating it into WhatsApp. But if it is hard to get the money in and out, no one is going to use it. This is the single biggest challenge for Facebook.”
Whatever the merits or otherwise of Facebook’s approach, it has stimulated interest in cryptocurrencies – not least from central banks. James Wester, research director for worldwide blockchain strategies at IDC, a tech research company, says: “Libra has made the conversation go from theory to ‘how do we make this work?’.”
In January 2020, the Bank for International Settlements (BIS) revealed the extent of central bank activity. It estimated 80 per cent of central banks were investigating digital currencies – and around 40 per cent were either experimenting with central bank digital currencies (CBDCs) or running pilots.
On 9 October, 2020, BIS went further, publishing a report that laid out the “foundational principles and core features” of a launch. The paper focused on retail payments and identified three key principles for a CBDC: co-existing with cash and other types of money; supporting “wider policy objectives” with no threat to monetary and financial stability; and boosting innovation and efficiency.
The report gave further legitimacy to the CBDC concept. And given that the central banks working with BIS on its recommendations were the Bank of Canada, the BoE, the Bank of Japan, the European Central Bank, the Federal Reserve, the Swedish central bank Sveriges Riksbank and the Swiss National Bank, global momentum looks increasingly likely.
That leads to the question: what is the central banks’ motivation? Why launch a CBDC? The Brookings Institution, a policy research specialist, lists five main benefits:
- efficiency: CBDCs lower the cost and increase the speed of transactions
- broader tax base: CBDCs can limit tax evasion and inhibit the use of cash for illicit purposes
- flexible monetary policy: CBDCs could give central banks direct access to digital wallets and, therefore, more power to affect fiscal outcomes
- payment backstop: CBDCs could counter privately managed payment systems, mitigating the risk of collapse in times of crisis and
- financial inclusion: CBDCs could make it easier to bring digital payments to the unbanked and underbanked.
All this activity could impact on the current card payment schemes. In the spirit of “if you can’t beat them, join them”, card providers have wasted little time moving into the space. In September 2020, Mastercard announced a virtual sandbox in which central banks could simulate the issuance, distribution and exchange of CBDCs between banks, financial services providers and consumers.
For its part, Visa filed a patent for a “digital fiat currency” to operate on blockchain technology. Cuy Sheffield, Visa’s head of cryptocurrency, believes the company has no choice. He says: “CBDC is one of the most important trends for the future of money and payments over the next decade.. Whether it’s good or bad, global interest in it is not going away.”
Wester believes the card schemes are carving a new role for themselves in an era of instant transactions and virtually zero fees. “Tech is moving us to a place where you can’t charge for moving money,” he says. “So Mastercard and Visa want to be involved in the on and off ramps. They want to sell the aggregated data insights and connect the end points. And this is not just for payments between people but for transactions by things too. There’s a huge market coming for Internet of Things payments.”
Could the other tech giants follow Facebook down the cryptocurrency path? Google and Apple might have launched payments products but both Google Pay and Apple Pay sit firmly inside the rails of existing banking infrastructure. Their interest seems to be in getting a full view of consumer data, not in being financial services providers.
Apple has even been openly critical of Facebook’s digital currency plans. Shortly after Facebook first announced Libra, Apple chief executive Tim Cook made his feelings clear. “I really think a currency should stay in the hands of countries,” he said. “A private company should not be looking to gain power this way.”
It seems safe to assume Apple will not be joining the Libra Association.
Tim Green is a journalist who has been writing about mobile technology for 20 years, first with Screen Digest, then Mobile Entertainment. He has written papers for companies, including Citi, Boku, Juniper Research and GSMA. He is head of content for the trade body Mobile Ecosystem Forum.