Facebook, after conquering social media in its acquisition of Instagram, and dominating the world of messaging apps with its Facebook Messenger and Whatsapp platforms, is out for blood. This time, it’s digital payments.
Libra: A Crash Course
June 18th, 2019 saw the rise of Facebook’s Geneva-headquartered Libra project, which aimed to create a new global cryptocurrency based on blockchain. Unlike Bitcoin, Libra is intended to behave a lot more like fiat currency – that is, backed by reserves of assets and guaranteed by an authority.
Facebook envisions Libra as a means to purchase both online and offline services, which is where its key global partners come in. The nonprofit Libra Association of 28 partners include everything from technology service providers like Uber, Lyft and Spotify, along with telecommunications firms like Vodafone, and crypto, finance and payment-processing firms like Coinbase, Mastercard, Visa, PayPal, eBay, Stripe and Mercado Pago.
These firms will contribute to the Libra Reserve, a pool of assets that will give each unit of Libra currency intrinsic value. This also means that Libra will not consume the massive amounts of energy required to “mine” cryptocurrencies with value driven by scarcity, like Bitcoin.
While the immediate consequences spell considerable doom and gloom in light of constant regulatory calls for Facebook to be broken up, the Libra Association maintains that the organisation’s goals are focussed on “financial inclusion” and the improvement of “the transfer of value and payments”.
Its global nature offer a glimmer of hope for potential users all over the world, especially for those in developing nations with banking systems that are lacking in adoption, stability or infrastructure. Mobile-based, Libra would spell a disruption in global mobile payments and banking.
And Facebook knows that much. It has launched a subsidiary called Colibra to capitalise on this adoption. It will act as a digital wallet, and will be integrated with Facebook Messanger and WhatsApp at launch alongside a dedicated iOS and Android app.
But Libra will be open source by nature, with an Apache 2.0 license that allows anyone to create products based on the blockchain. Calibra will only hold a single vote out of the 28-member board.
Slated to launch in 2020, Libra has immediately run into issues in lieu of a landmark Libra Council meeting on October 14th in Geneva, where the nonprofit is expected to create and ratify a formal charter.
Libra’s Crash Course
Understandably, big, global names in payment processing like Visa, Mastercard, Stripe, Mercado Pago and PayPal are all reticent to expose themselves to vulnerabilities when it comes to official governmental requirements like fraud, money laundering and economic sanction enforcement.
Libra’s transnational, global nature makes it difficult to implement common standards as it would be largely unregulated. Due diligence and KYC commitments would be in the hands of Libra, and if the cryptocurrency was used by drug lords, kleptocracies or terrorists, payment processors like Mastercard and Visa will suffer the consequences.
That leaves us with two key takeaways, positive and negative. On the plus side, because the exodus was triggered by regulatory fears regarding payment processing, other members of the Libra Association have no incentive to renegade and leave.
However, the loss of some of the largest names in digital payments (the top firms in the USA) mean that Libra will struggle to forge ahead with adoption on the business end, with regulatory burden now a question mark for the organisation.
Visa and Mastercard dominate the digital payments scene, especially in brick-and-mortar settings, and have lent their prestigious big-name credibility to the project. With countless terminals and portals, both payment methods would have contributed greatly to the liquidity of Libra and thus its universal adoption.
As incumbents in mature marketplace, Visa and Mastercard’s participation in Libra lent reputation not only to the cryptocurrency, but to cryptocurrencies in toto. Their combined exit withdraws that vote of confidence, instead threatening competition against the blockchain-based Libra with its lack of transaction fees.
PayPal, eBay, Stripe
Where Visa and Mastercard dominate physical stores, PayPal’s domain is in its massive network of online merchants along with its peer-to-peer payments app Venmo.
Like Visa and Mastercard, PayPal, the godfather of online payments, lent its good name to the Libra enterprise. It had also been the calling card for Facebook when questioned about its growing and expanding dominance for all things online – PayPal will directly compete with Facebook’s Colibra platform to keep it in check.
Its withdrawal is further soured by the fact that Facebook’s head of Libra David Marcus was also the former president of PayPal.
Stripe and eBay present various aspects to online payments, and their exit signifies the burning of bridges that served as inroads to respective fintech, startup and e-commerce ecosystems.
The Future of Libra: hanging in the balance
It’s not out of the question for Facebook to attract the same big names back like Visa, Mastercard, PayPal, eBay and Stripe back for their network externalities, brand name and concomitant goodwill. The main question appears to lie in the compromises Facebook has to make with regard to regulation, but that ultimately shapes the vision and future of Libra.
Without these allies, Libra will not be much different from the run-of-the-mill cryptocurrency startup seeking to unilaterally ‘disrupt’ the global financial scene.
The remaining road blocks lie in the US Senate. Facebook’s terrible track record with this year’s Cambridge Analytica has marred the reputation of Big Tech, and its expansion into the massive payments industry has politicians vying to break up the massive Facebook.
Its spiel of providing access to banking and credit to those who need it most around the world is admirable and even desirable, but it remains to be seen (and believed) – not just by the political powers that be, but by millions if not billions of potential users around the world.