As the noise grows about Libra, Facebook’s proposed cryptocurrency, reports suggest that a number of European and US banks are actively avoiding the project.
This may be out of fear of antagonising banking regulators – in particular those concerned with stopping the spread of money laundering – or over banks’ concerns about undermining the financial sector’s own digital currency programmes, according to the FT.
While a number of digital payment providers, such as MasterCard, are supporting the social network’s project, no banks are currently listed as being members of the Libra Association, the organisation that will oversee the new currency.
Meanwhile, there is resentment in the industry over the way the initiative has been publicised, with (apparently) little consultation with banks, regulators, or governments. However, if the possibility of Facebook or Amazon launching into the finance business was not listed in banks’ scenario planning, risk assessments, and stress-testing programmes, then it clearly should have been.
Despite the controversy, Libra chief David Marcus has predicted that some banks will be onboard by this time next year. The first bank to join would certainly have first-mover advantage among Facebook’s billions of users – or disadvantage if the scheme backfires.
One of the motives behind the establishment of Libra is the slowness and complexity of international banking transactions – though there is little preventing people from sending money instantly via, say, Western Union or PayPal today. That said, one reason for the slowness of banks’ cross-border transactions is the checks and balances that have been put in place to prevent money laundering.
The subtext for Facebook is who will be the prime users of its new system: people who are simply transferring money to their friends and families (or buying goods from overseas, such as from eBay), or the kinds of institutions that regularly transact across borders?
If it is the former, then it is hard to see what prevents most people from doing this today using existing systems, including PayPal (from whom credit can now be obtained instantly). However, if it is the latter, would those institutions trust Facebook to handle their money in a post-Cambridge Analytica world?
It seems likely that creating an ecosystem and marketplace for personal identities, Likes, and targeted advertising is the core reason for Facebook’s move. In short, Facebook wants to be the world’s databank.
That the financial services industry is ripe for disruption is not in doubt. However, the use of digital tokens is not in itself a challenge for the sector. Last September, for example, IBM brought its Blockchain World Wire out of Beta testing. The system uses the Stellar blockchain to clear and settle international payments between banks in near real-time (according to IBM), via a mutually agreed digital currency.
Via the new system, a stable coin, a central bank-issued digital currency, or another digital asset acts as the bridge asset between two fiat currencies, allowing banks to deploy their existing payment systems on either side of the transaction, which is recorded on Stellar.
Meanwhile in June this year, 13 major banks announced plans to launch their own digital coin. According to the FT, those banks expect the first institutional transaction using the ‘universal settlement coin’ to take place within a year, and it could be a cross-border trade.
However, the most interesting question involves regulation. It is inevitable that Facebook/Libra will be forced by industry and government pressure to carry out Know Your Customer checks and other anti-money laundering and anti-terrorist-financing tests. However, Facebook might see this as its biggest advantage in the market: its platform encourages people to self-declare huge amounts of information about themselves. Might Facebook be the ultimate KYC platform?
Be part of a discussion and connect with like-minded leaders in your sector at our exclusive event series on banking and RegTech.