As a third of the world’s population is currently ‘unbanked’, tech companies race to establish an online payment system that’s fit for purpose. Global Insight considers Facebook’s stablecoin project, Libra, and whether regulatory barriers might tip the balance in favour of international competitors.

Having access to financial services is not a human right. Today, three in ten people are excluded from the financial system globally. This is despite the fact that the World Bank has said that using some form of bank account (or mobile financial app) is a critical step towards reducing poverty and inequality.

One might expect Facebook’s announcement last summer, that it would launch a global payment system to help tackle this issue, to have been met with jubilation. Instead, Facebook’s Libra, a form of cryptocurrency underwritten by real cash (called a stablecoin), was greeted with a storm of criticism from those in government and bankers. This caused a wave of defections by some of its initial backers: PayPal, Visa, Mastercard and eBay all dropped out as the plans to launch the currency came under scrutiny – leaving about 20 partners, including Uber, Lyft and Spotify, with a stake in the underlying Libra Association.

Digital banknotes

Even so, Mark Carney, the former Governor of the Bank of England, admitted that the global payments system was no longer fit for purpose: ‘Making a payment should be the same as exchanging a banknote, but online,’ he said.

That dream has been pursued in recent years by an internet subculture that has grown up around cryptocurrencies. While bitcoin is the largest of these initiatives, the magazine Wired has estimated that at the time Libra was launched there were over 2,400 cryptocurrencies in circulation.

Cryptocurrencies behave like cash insofar as they provide total privacy for users making online transactions, but they are more like chips deposited on a roulette table when it comes to the stability of their value. Since they are not underwritten by anything except the goodwill of their users, and a trust in the underlying technology, they are too volatile for most people. The price of a bitcoin has bounced between $3,000 and $12,000 in recent years, for example.

Facebook’s solution makes sense to the extent that the proposed currency is backed by real cash reserves – that should take care of the problem of volatility. It also makes sense because the company has an estimated 2.5 billion active users, many of whom are likely to be outside the banking economy but own mobile phones. Yet if it agrees to come under the regulatory regimes institutions – which it says it has – it may be hard to realise these aims because making payments will be unlike exchanging a banknote.

Regulators

In October 2019, Lael Brainard, one of the governors of the US Federal Reserve, went on record during a public speech about the ‘core set of legal and regulatory challenges’ Facebook would need to deal with if it wanted to go live. ‘Compliance with know-your-customer rules and regulations are essential to ensure stablecoins are not used for illegal activities and illicit finance,’ Brainard said.

The Group of Seven (G7) leading economies also waded in to the debate with its own report in October 2019. In addition to criminality and cyber-risk, it said that privatising global money flows has the potential to destabilise the global financial system and erode nations’ control of their monetary policies. This could echo the situation in economies where the US dollar is used for cash payments because the local currency is relatively valueless.

In April 2020, Libra issued a statement revising its approach. It said it would issue single currency coins and make changes to its plans for regulatory compliance. Discussions on the exact details of how it will deal with the know-your-customer rules are likely to roll on.

Inevitability

The irony that privacy is at the heart of the problem has not been lost on Facebook’s CEO Mark Zuckerberg. In a six-hour appearance before the United States Congress’ House Financial Services Committee in October 2019, he was grilled on everything from his company’s policies on transparency in political advertising; its lack of corporate diversity as an employer; his knowledge of the Cambridge Analytica scandal; and the privacy of users’ data.

Unlike with many other disruptive initiatives – such as Uber launching its services without regulatory permission – global regulators are not willing to accept an implementation of Libra that they regulate afterwards. But Zuckerberg warned Congress that it did not have the monopoly on the regulation of stablecoin initiatives.

‘China is moving quickly to launch similar ideas in the coming months,’ he said. ‘If America doesn’t innovate, our financial leadership is not guaranteed.’

A digital version of the renminbi would be cleared through the Chinese financial system and backed by the state-owned People’s Bank of China. This would fit with China’s plans to integrate big data into its Belt and Road Initiative, which aims to create the ‘digital Silk Road of the 21st Century.’ As well as building 5G-enabled networks in developing countries, it may offer the digital renminbi in those jurisdictions that want it – which may include parts of Africa, Asia and Latin America. Surveillance of all transactions is likely to be standard.

Given the failure of the global financial services industry to serve almost a third of the world’s population, it would seem that the time for some form of stablecoin is overdue. Facebook is still ploughing ahead with its plans – no doubt China will too. Whether the world will ever see a stable, digital currency that is as easy to exchange as a banknote is another matter.

Arthur Piper is a freelance journalist. He can be contacted at arthurpiper@mac.com