Since Facebook announced its Libra cryptocurrency, there has been a great deal of speculation on its impact, particularly on the financial industry. As a cryptocurrency that will provide financial access to the unbanked, Facebook Libra has great disruptive potential. Take a look at some of the ways that Libra may disrupt the financial industry, including who will benefit from this disruption.
A Refresher on Libra
Before delving into how Facebook Libra is likely to disrupt the financial industry, take a few seconds to refresh your memory on what Libra is. Facebook hopes that Libra will become a global currency and financial infrastructure. It will run on a new blockchain that Facebook will create.
The Libra Association
The Libra Association, not Facebook, is in charge of Libra. Facebook hopes that by being just one of the many pieces of Libra’s management, Libra will not suffer from the lack of trust in the company following recent data scandals. The Libra Association is a not-for-profit and based in Switzerland. Its governing body is the Libra Association Council, which includes a representative from each member. After the blockchain and Libra launch in 2020, the Libra Association will be in full control, not Facebook.
Remember that Facebook Libra will be a stablecoin, meaning that it remains pegged to existing assets, which reduces its volatility. It is also important to remember that Facebook said one of the major goals of Libra is to reach the current unbanked population.
Facebook still has not released information about how you will be able to get Libra, but it seems likely that the answer will include a hybrid method. MasterCard and Visa are on the founder’s list, so it is safe to assume that you will be able to buy Libra with a credit card. It is also likely that Facebook will use traditional crypto release methods, like airdrops. It will also likely be listed on at least a handful of crypto exchanges.
Anyone will be able to use Libra via the Calibra digital wallet provided they have a smartphone. You can use it via the future standalone application, WhatsApp, and Messenger. Individuals will be able to use Libra to send money to each other, and Facebook also wants it to be an option for daily normal transactions. The presence of Lyft and Uber as early investors indicates they may support it soon after the launch.
Facebook claims that Libra will be completely safe, despite the privacy concerns people have given Facebooks less-than-stellar privacy track record. However, Facebook indicated it will use various technologies that stop fraud and money laundering. It will have the same antifraud and verification processes as credit cards and banks, including automated systems to spot fraud. There will also be live support, and Facebook will offer a refund if a user loses funds via fraud.
The code for the Libra Blockchain will be open-source, allowing for transparency. This also makes it possible for developers to monitor it. Additionally, Facebook will offer a bug bounty.
Reducing the Number of Unbanked
Facebook is completely upfront about one of the ways that it hopes Libra will disrupt the current financial industry: by reducing the number of unbanked people. According to the Libra website, 31 percent of the world’s population of 1.7 billion people are currently unbanked. The website also states that those unbanked people pay an average of $4 more per month. Via Libra, Facebook hopes to provide financial access to these unbanked people, helping them take advantage of the opportunities typically reserved for those with bank accounts and saving them money.
Increasing the Number of Non-Cash Transactions
According to the Libra site, 85 percent of global transactions are currently conducted in cash. If Libra becomes popular, it would encourage this to change by providing a simple method of accepting non-cash payments.
On the Libra website, Facebook presents some indications of what could happen if everyone had access to digital financial services all around the world. These estimates indicate the potential creation of 95 million jobs, adding $3.7 trillion to the developing economies, reducing extreme poverty by 22 percent, and improving earning potential by 20 percent.
Even if these are all incredibly optimistic figures, Libra still has the potential to bring digital currencies and digital banking methods to millions of people around the world, encouraging the adoption of non-cash transactions.
According to Libra, a high level of cash transactions also makes it easier to commit fraud. The website cites that, on average, U.S. businesses lose $40 billion annually from fraud. Libra implies that this is due to the difficulty of tracing cash. By contrast, digital transactions are much easier to trace, reducing the risk of fraud and potentially saving businesses billions each year.
Speeding Up Transactions
Libra also has a great deal of potential in terms of transaction speeds. One of the figures cited on the Libra website is that the typical cross border transaction takes between three and five business days. By contrast, most digital currencies can complete cross-border transactions in a fraction of the time, sometimes minutes or hours. Even some domestic transactions will take days.
By reducing the time spent waiting for transactions, people can access their money sooner, potentially boosting the economy. At the very least, it can change the expectations people have as to how long a transaction should take.
Reducing or Eliminating International Fees
Libra cites data that the average international transaction currently comes with a fee of around 7 percent. This is a strong deterrent to international transactions, and it stands to reason that it makes some retailers second guess offering items internationally. It also likely deters shoppers from buying something from another country.
As a digital currency, Libra should not have any separate international fees apart from the typical nominal transaction fee. This is possible since it cuts out the intermediaries — the financial institutions that charge those high fees. This would allow for seamless border transactions and encourage cross-border buying and selling, boosting economies.
Potential Data Privacy Issues
Given the Cambridge Analytica data and privacy scandal with Facebook, it should come as no surprise that many are concerned about the impact of Libra on data privacy. The Bank for International Settlements (BIS) is one of the organizations expressing concerns about a negative disruption to the financial system that impacts data privacy. There are concerns that Facebook and the Libra Association would not be able to handle data privacy as well as traditional financial institutes.
Facebook has firmly said this is not the case and that Libra will have a strong respect for privacy. The company claims it will use the same privacy safeguards as existing financial institutions. It also says that it will take the project as slowly as necessary to ensure privacy and that everything is done correctly.
There is also the fact that those in the cryptocurrency community prefer digital currencies for their built-in privacy. Using other cryptos, like Bitcoin or Ethereum, can provide privacy since they will not display personal information. In addition, there are also fully private cryptocurrencies available. As such, it seems likely that, if done correctly, Facebook Libra could improve data privacy in regard to financing. If done incorrectly, however, these fears may be founded. In either case, there is certainly potential for disruption to this aspect of the financial industry.
Changes to the Key Players
One of the biggest ways that Libra can disrupt the financial industry is the same as how any other successful crypto can disrupt it. This is by changing the key players in the game. Even with the rise in cryptocurrency use, major financial institutions still tend to be in control. The central banks make important decisions, such as whom to offer bank accounts to and what fees to charge. The current system means that banks can charge as much as they want and get away with it since no one offers a better choice.
If Facebook Libra is successful, it will show that tech and private companies can become key players, as well. Those in the banking industry have concerns that this will reduce their ability to make a profit. After all, they will not be able to keep charging exorbitant fees for things like international transactions or transactions involving the unbanked since people will have other options.
Essentially, Libra will add more competition to the financial industry. As with other industries, an increase in competition means that each company needs to try to appeal to clients, and banks with high fees will not be able to do so.
Moreover, Libra and other similar cryptocurrencies will have a greater reach than current financial institutions. This comes from the ability to welcome those 1.7 billion unbanked people around the world. As technology advances, smartphones are becoming more common, even in areas where banks are still in low numbers. This would give Facebook Libra the ability to harness the power of over a billion unbanked people in a way that traditional banks cannot, at least not without dramatically changing their infrastructure.
Disrupting Central Banks
One of the main concerns of those in the financial industry is the ability of Libra to disrupt central banks. Each country has its own central bank. In most developed countries, these are well established and may not face too many threats from Libra. In the developing world, however, central banks may face major challenges with Facebook Libra.
Some experts worry that the power would move to a combination of the central banks in larger countries and multinational corporations. The inclusion of central banks in developed countries with a great deal of influence comes from Libra’s status as a stablecoin. Since it is pegged to the currencies of those countries, they will directly affect it and those who use it.
The worry is that people in developing countries with unstable currencies will not use their own currency if they have a more stable alternative. This could potentially pose a problem for the central banks in those countries if enough people opt for the more stable Libra instead of the local currency. This could have far-reaching consequences for the local economies and governments.
It is unlikely that Libra would have such a significant impact on the central banks of developed countries with major currencies. At most, it may increase the importance of the currencies that get pegged to it.
Of course, the disruptive potential of Facebook Libra will depend largely on its levels of adoption. It will have a stronger impact on the financial industry if more people adopt Libra. There is no way to know for sure how Libra adoption will go, but there are some expert predictions already underway.
Many feel that those who regularly engage in cross-border transactions will start using Libra fairly quickly and do so in large numbers. The low fees, quick transaction times, and accessibility will all be factors in this quick adoption. That is particularly true given the current high fees, slow transactions, and difficulty with sending money across borders.
It may take more time for people to adopt Facebook Libra for domestic transactions since there are fewer barriers to these transactions in the current financial system. However, the adoption should be greater in areas with unstable currencies where the stablecoin’s nature will have some appeal. It should also see widespread adoption in areas with large unbanked populations due to the benefits of being able to save and send money.
Time will tell how Facebook Libra affects the financial industry. However, it is safe to say that adoption of Libra would cause at least some disruption.