“Change is the law of life, And those who look only to the past or present are certain to miss the future”
– John F. Kennedy
Wise words from the former U.S. president whose ambitions for change were, quite literally, sky-high – the pursuit of his administration to place the first man on the moon. Such ambitions for change are what push today’s entrepreneurs to rethink products, services, systems, and value delivery to end consumers, some notable examples are: Elon Musk’s private space company SpaceX and commercial e-vehicle company Tesla, Nikolay Storonsky’s challenger bank Revolut, and Satoshi Nakamoto’s decentralized digital currency Bitcoin. Yet some would argue that such examples, especially within FinTech, are nothing more than examples of regulatory arbitrage than providers of real value (from their underlying technologies, business models and ability to automate and scale.).
According to Investopedia regulatory arbitrage is the idea that firms capitalize on loopholes in regulatory systems in order to circumvent unfavorable regulation (either because the regulation is not up-to-date, too slow to react, or restrictive to new entrants). Just last week we attended the OMFIF lecture by Denis Beau, First Deputy Governor of the Banque de France on ‘The role of crypto-assets in payment systems’, in which it was made clear that regulators do not have a clear cut solution to proactively address the speed at which crypto-asset entities like Libra, Binance, and Telegram move in order to ensure that they are compliant within the regulatory requirements of their operational jurisdictions.
Now let’s talk Libra – the global digital currency and financial decentralized infrastructure that sought to empower primarily the billions of the unbanked and sparked a global debate over the role of cryptocurrencies in payments and financial services. Specifically, both private and public institutions alike have raised major concerns around the notion of a single global currency, Libra, running over new payments rails, and into a Facebook wallet called Calibra. All of which is managed by the Libra Association – a consortium of 29 private companies, including Visa, Coinbase, Spotify, Vodafone, and Andreessen Horowitz to name a few. Additionally, Libra was conceived by a global organization Facebook Inc. founded, in part, on breaking the rules, running up against the sub-global entities that created those rules, to operate a network and a currency that could unseat the power of central banks and governments to make fiscal and monetary policy.
In early October, the Wall Street Journal reported financial partners such as Stripe, Mastercard, Visa, and PayPal were “reconsidering their involvement following a backlash from U.S. and European government officials.” Among those concerns was that Libra, backed by big private institutions, could create — as French finance minister Bruno Le Maire put it in September — “a possible privatization of money.” “The monetary sovereignty of countries is at stake,” Le Maire said – and there is a good chance he is right. But Libra threatens more than that, and both Le Maire and Beau probably know it. As regulators and governments have recently recognized that the actual idea of the countries themselves is at stake.
Needless to say that what was a tough sell at launch, has become nearly impossible four months later, and here’s why:
(1) Central banks need to accept the idea of an entirely new global financial network using an entirely new digital currency that is in part removed from their own fiat currencies (apart from those in the basket Libra is pegged to) and that could, at scale, compromise their ability to control their fiscal and monetary policies.
(2) Regulators need to be assured that Libra and Calibra – the network construct, the code, the initial digital wallet, the currency – integrates security features to prevent the likelihood of illegal activity i.e., money laundering, and ensures that, in the long run, no single representative of the 29 member consortia holds a disproportionate share of influence over the rest.
(3) Card networks and banks need to ensure that Libra and Calibra will complement their future growth and development strategy, rather than be a Trojan horse.
(4) Digital wallet providers require a similar surety that Calibra will accommodate their products and services beyond the initial P2P use cases that many of them already enable today.
(5) Attention Platforms need to be assured that Libra will help direct and enclose users into the platform via encouraged engagement and attractiveness of use (much like beautifully designed and integrated Apple software, quirky Snapchat filters, or Amazon's user-centric business model).
Apart from this, each Calibra member has to be convinced that it’s collectively worth putting $1 billion into the Libra Association’s bank account to get it off the ground. Needless to say that over the course of the past month, seven of the Libra Association’s founding members -- mostly financial firms -- dropped out, namely: Stripe, Booking Holdings, PayPal, Mastercard, Mercado Pago, Visa, and Ebay. More importantly, Mastercard, Visa, PayPal, and Stripe represented a significant chunk of the strategic value and commercial leverage of the planned association, specifically, a huge number of payment processors and merchant touchpoints that the new cryptocurrency would need, were it to dramatically scale to the size Facebook wanted at launch.
This week, Facebook CEO Mark Zuckerberg discussed Libra before the U.S. House Financial Services Committee. Zuckerberg insisted that if America does not lead on digital payments via initiatives like Libra, foreign companies and countries will move in, perhaps without the same level of regulatory oversight. Specifically, he says, "China is moving quickly to launch similar ideas in the coming months," an allusion to the People's Bank of China's planned digital currency.
From what has been mentioned, it is clear that Libra has too many moving parts and nothing as a cornerstone to give leverage over regulators to be granted a green light, at least in the near term. Libra relied on the narrative that the financial system is broken and that the cross-border movement of money is too expensive and clunky. The only solution being a complete overhaul, the creation of a new network from scratch that would reinvent the process. Yet, the global financial system isn’t broken. The unbanked can still transfer money in minutes, via mobile money accounts (MPesa) or in cash. Entrepreneurs in emerging markets are using existing payment rails to ignite digital wallet schemes -- similar to the structure used by Alipay and WeChat Pay.
Source: Medium (Libra — Concept and Policy Implications), BusinessInsider (Facebook’s Libra may start to lose initial backers amid regulatory pressure)