Photo: Reuters
Photo: Reuters

Opinion | Libra should confine itself to conventional finance

Mastercard, Mercado, Pago, eBay, Stripe and Visa have followed PayPal out of the Libra project

Facebook has been in the news for its cryptocurrency project, Libra, which is designed to appeal to its over 2 billion members. It was to be supported by a 28-member consortium of large-scale corporate houses, financial services firms and venture capitalists called the Libra Association. Companies such as Visa , Mastercard, and PayPal had signed up. Each of these 28 members had agreed to pay $10 million to further develop Libra and draft a charter for the association’s members to work together.

It is not surprising that Facebook would look for more ways to monetize its 2 billion-strong user base. Today, its main revenues come from user-targeted advertising that it sells to firms looking for access to its captive user set. Advanced customer segmentation and profiling done by Facebook with the aid of Artificial Intelligence allows it to serve advertisements that have a high chance of being clicked, thereby potentially closing a sale for an advertiser. However, advertising dependence would leave it as a one-trick pony. Diversification of the company’s revenue streams would help.

However, even though it could let Facebook add a revenue stream, Libra might also render ineffective some of the levers that a country’s central bank uses. A country can pick only two of the following three at the same time: a fixed foreign exchange rate, free capital movement (as in, no capital controls), and an independent monetary policy that controls money supply, mainly through interest rate regimes. Economists have established that a global cryptocurrency would seriously impair these levers and would force each country into a monetary policy frame not of its sovereign choosing. I explained this here (bit.ly/2OGAHEh).

This is in addition to concerns about the inability of cryptocurrencies to control bad actors and money laundering. Libra will be a no-go from the get-go with many nations.

In July, US treasury secretary Steven Mnuchin said that the Libra consortium had a lot of work to do to convince regulators that it could get to a point where it had a payments system that could effectively weed out money laundering. US President Donald Trump tweeted some time ago that “Facebook Libra’s “virtual currency" will have little standing or dependability. If Facebook and other companies want to become [banks], they must seek a Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International." Meanwhile, David Marcus, Facebook’s in-charge of Libra, has been up in front of the US Senate banking committee. Despite political polarization in the US, it appears that adequate regulation of cryptocurrencies such as Libra is one of the few issues that has bipartisan support.

Across the pond, Bruno Le Maire, finance minister of France, said in September that Libra would lead to an eventual privatization of money, and would obliterate weaker currencies around the world. He also said that this would undermine the sovereignty of nations, the fight against money laundering, and could even lead to an economic crisis simply because of a potential technical glitch. Soon after Le Maire’s statements, both France and Germany said Libra would be a threat to their sovereignty and made clear that it is unwelcome. The two governments said in a joint announcement that “no private entity can claim monetary power, which is inherent to the sovereignty of nations".

Now it seems as if the governmental pressure has given pause to some of the initial members of the Libra Association. The Wall Street Journal reported on 2 October that Visa, Mastercard, and PayPal were all re-considering their involvement. Two days later, PayPal confirmed that it would pull out. PayPal itself was founded on the premise that money could freely move across borders in much the same way that digitized information does. This company, however, like others in today’s global financial system, has been subject to various national rules.

Libra, by contrast, is an attempt to break away from regulations through the use of a cryptocurrency, which is not well understood yet, and so not well regulated. Over the weekend, eBay, Mastercard, Mercado Pago, Stripe, and Visa followed PayPal out the door. The exits came as the association prepared for its first meeting on 14 October in Geneva, where members were to formalize their participation in the project. None of them has ruled out working with Libra in future. Current governmental opposition may be intense, but the lure of a captive market of 2 billion plus is hard to resist.

There are less controversial plays that social networks could attempt in the financial world. One such is peer-to-peer lending. Several technology startups such as LendingClub, PeerStreet, SoFi, and others are already trying to disintermediate banks in the US by using the “marketplace" effect of the internet. These have been replicated worldwide, largely by local players. India supposedly has more than 30 such platforms. Facebook has also been in the peer-to-peer lending business in some form over the last five years. If these efforts were concentrated, such financial engineering could form a revenue diversification opportunity that Facebook would probably have better luck at dominating. Another would be for it to enter the payments space through its subsidiary WhatsApp, as it has been trying to do in India. These moves would certainly be easier than picking fights with governments across the world.

Siddharth Pai is founder of Siana Capital, a venture fund management company focused on tech

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