Facebook's Libra is a Banker's Nightmare and the Banks Will Fight Back
LinkedIN: Fawaz Shakralla
The impact of Libra on Global Finance
The World’s Greatest Mystery:
Satoshi Nakamoto (probably) had zero experience in finance. He (probably) never worked in a bank and (probably) does not have an accounting or a finance degree. He (probably) never worked as an accountant.
In 2008, due to the frustration with the financial crisis Satoshi issued a white paper “Bitcoin, a peer-to-peer electronic funds transfer” and joined forces with other technology professionals – together they launched Bitcoin.
And for the first time in the history of our world, people can move money from one person to another electronically, skipping the banks and skipping the high fees that banks charge for money transfers.
To this day Satoshi’s identity is an enigma, his identity is one of the worlds’ greatest mysteries.
Bitcoin is a currency beyond the control of the central banks. It is not vulnerable to inflation. As we all know, the US dollar has been losing its purchasing power since its inception.
Twenty thousand dollars today does not have the same purchasing power that it did back in the year 2000, driving the American dream further and further into oblivion.
Bitcoin’s value is determined by supply and demand and not a centralized controlling authority. Bitcoin’s model mitigates the risk of corruption by centralized authorities as we witnessed in 2008’s financial crisis.
A New Economic Model:
In 2012, a computer science student in university in Canada – Vitalik Buterin, was intrigued by Bitcoin, he was so impressed by its model and what it can do, he launched an online forum, Bitcoin Magazine, where he collaborated with other technologists to understand the technology that powers bitcoin.
Vitalik does not have an accounting degree, he never worked in a bank, or a company. He does not have a finance degree. In 2013, he issued a white paper, “Ethereum: The Ultimate Smart Contract and Decentralized Application Platform “.
Vitalik received funding of over $19 million and moved to Switzerland. In July 2015, Ethereum was born, and with it, it created a brand-new economic model for the world: ICOs – Initial Coin Offering.
JP Morgan’s Report – 2018 – Blockchain & Decentralization:
In April, 2018, JP Morgan issued a report
“Blockchain and the Decentralization Revolution”
The report outlines JP Morgan’s recommendation; companies of both financial and non-financial line of business should actively engage in learning about blockchain and its advantages.
The report confirms that a decentralization ledger has substantial advantages that can be leveraged in the real world, such as reduced opex cost, improved settlement time and faster time to market.
The report mentions astonishing numbers such as:
- $ 6 billion raised in ICO’s in Q1 2018 alone
- There are over 86,000 active blockchain projects world-wide (at the time of publishing).
- Telegram raised one of the largest ICO’s funding to date, $ 1.6 billion
The report mentions how company directors and executives should get into blockchain and learn how it can be leveraged for different use-cases. The numbers in the above graph prove that there is an insatiable appetite for products and services beyond what banks are offering today.
The fact that people were willing to put their money in an ICO; companies that did not have any occurring revenue, did not have a working product/service, did not have any existing customers, or staff; yet the public pored their money into them by subscribing to those ICO’s.
The popularity of ICO’s proved to the world that there is growing demand for services beyond what we are seeing today from traditional financial institutions.
The objective is to leverage the right technology and combine it with a product or service to achieve that silver lining. The explosion of fintech ventures world-wide is validating this truth.
This is also the reason that now many of the big accounting firms: EY, KPMG, and Deloitte are now offering their own blockchain products and services, aiming to capture a share of this demand.
A Titanic Reality:
From 2017 to late 2018 as the popularity of ICOs exploded world wide, many of the ventures behind those ICOs failed to deliver on their promises. There were numerous reasons for these failed ventures, some could not deliver due to technical reasons, others had conflicts with their teams, and many simply took the money and ran.
There are reports that almost 50% of those ICOs did not deliver, they took the public’s money and transferred it to their own wallets. With no regulation or contracts behind those ventures, the public had nowhere to go to get their money back.
In late 2017 the SEC in the US made a clever move, they banned all US citizens and residents from subscribing to any ICO’s knowing well the high risks involved. With nowhere to go, the public blamed the Ethereum platform, stating that they are to blame for not taking proper action against the failed ventures.
Since they created the platform, the Ethereum alliance should have responsibility to check those ventures and their teams. The main-stream media then caste a dark cloud on the Ethereum platform and its founders. Consequently, Ethereum’s reputation sank so fast into the ocean like the Titanic.
A Bright Light:
Fast forward to 2019, ICOs are now termed STOs – Security Token Offering. The SEC in the US started to impose strict regulations on STOs to ensure the stakeholders are protected. Regulation authorities in Europe and rest of the world are taking similar actions.
The great news is that the regulators understand the potential of this technology, hence decided to harness it and impose the right regulation methods such a KYC – Know your Customer and AML – Anti-Money Laundering; to ensure the investors interest is protected and legal due diligence is applied.
Enter the Dragon:
Facebook’s management was monitoring closely the progress of Ethereum and its ups and downs. Facebook knew the positive impact blockchain technology could bring, and the potential for products and services that can be launched.
With Facebook’s planet of 2.7 billion users, the possibilities are endless. But how can they navigate the problems that Ethereum faced..
In June of 2019, Facebook’s announces that it will be launching its own crypto currency, called: Libra. They issued a whitepaper which outlines the plans of Libra. Some of the high level facts are:
- Libra will be built on a private blockchain platform
- Libra will be pegged to a basket of currencies (USD, JPY, Euro to begin with)
- Calibra, will be the wallet that allows the user to hold and transfer Libra coins
- Calibra will be integrated into Facebook’s apps: Messenger, Whatsapp, Instagram and future apps.
- Libra will have a programming Language called “Move” which will allow third party developers to create apps to transact with Libra.
Libra’s main objective is to solve the problem of the “unbanked”, the two billion people worldwide who do not have access to banking services in many of the underdeveloped countries such as India, Venezuela, and some of the African Countries.
Libra will make it easier for users to send Libra coins from person to another over WhatsApp with little or almost no cost at all. The disruptive impact Libra would have on existing remittances companies, exchange houses, and money transfer companies is simply enormous.
The announcement of Libra sent shockwaves across the news wires in global finance. Facebook’s mantra of “Move fast and break things” will now enter the world of global finance with its own currency. It’s bad enough that Bitcoin disrupted finance in a way that was never expected, now Facebook is launching its own currency to serve its billions of users for almost free of charge.
Almost all central banks across the globe issued warnings about the risks Libra would have on financial services.
The financial industry has no choice but to assume the worst. Given Facebook’s history and massive user base, the impact will most likely be negative for global finance.
If Facebook succeeds, most likely people will prefer to use Libra for daily transactions than to use the traditional fiat currencies in their countries, if that happens, the demand for fiat currency will simply decline.
And the consequences of that are most likely disastrous.
Why is Libra a Storm and not a Rainbow?
Remittances: Today in most countries, if you want to send money abroad, you have to go to an exchange house, wait in line, pay a transaction fee of about 12%, and an exchange rate fee.
If you notice, when you Google the exchange rate of the currency you want to send, it is not the same as the rate you are getting. This is because the exchange house makes money of the exchange rate.
Every exchange house has a different rate, depending on the volume of currency transfers they have.
Wire-Transfers: One of the primary sources of income for banks is wire-transfer fees. For every wire transfer that a bank receives to any of its accounts, they charge a transaction fee.
For example, in the UAE the merchant bank is JP Morgan, meaning; for every bank wire transaction that the UAE receives, JP Morgan charges a fee in order to transfer that amount to the destination bank.
And when the destination bank sends the amount to the account holder, they charge a fee on the amount to the account holder. When you consider the hundreds of thousands of wire-transfers that get transacted you can imagine the volume of fees that banks collect.
Libra, if launched successfully, has a direct impact on wire-transfer fees for banks. Currently WhatsApp launched WhatsApp for business. An app designed for business to use for their own services, either customer services or as an promotional channel.
We are all familiar with showroom in car companies, when you visit a car showroom, you will see a sign “Add us on WhatsApp, and get the latest promotions and offers as soon as they are launched.” Facebook aims to add Libra to WhatsApp for business.
Hence, every small business on Instagram, will have a link to their Whatsapp Calibra Wallet, which will say, pay us directly in Libra coin to get your cupcakes delivered to you.
Those businesses will no longer need to issue wire-transfers to their suppliers, they will just do it with Libra coins, because it costs zero transaction fees.
E-Commerce: Uber makes over $100 billion in revenue per year, almost 90% of that is generated through credit card transactions. Uber pays 3% credit card fees for every transaction that a user conducts using their credit card.
Uber if one of the members of the Libra Association that will be setting policy for Libra when its launched next year. Why Uber involved, imagine next year when Uber says you can now pay over Whatsapp with your Libra coin. “Pay with Libra for the next ride, and get 50% discount on your following ride”.
Naturally, with Libra, Uber does not have to pay the 3% fees that they normally get charged by the credit card companies. Other e-commerce entities will follow suit naturally, booking.com, Expedia, Agoda and so on.
Telecom: Mobile telecom operators receive the majority of their revenue from credit card payments. Imagine the next time you pay your mobile bill, you’ll get a message, “hey you can pay with Libra and get 10GB of free data on your mobile”.
This would be a powerful incentive because the more people use Libra for payments the less telecom will have to pay 3% of the credit card fees per transaction.
The bottom line, Libra’s success will have a direct impact on financial service companies. Libra will be the dragon that will disrupt revenues for retail banks, investment banks, credit card issuing companies and remittance companies.
With Facebook’s mammoth user base of 2.7 billion, which is more than the population of China, they can launch their own digital planet. And when Libra can be used by those 2.7 billion users with no cost, considering the public’s disinterest in traditional banks and their high fees; Libra will shine.
The dragon will disrupt some of those traditional companies as they wonder how did it all change.
If you don’t leverage new technology to improve your services someone else will. To prove this point here are some examples: Blackberry disrupted Nokia, and iPhone disrupted Blackberry. WhatsApp disrupted revenues of Mobile operators.
Airbnb disrupted revenues of hotels industry and the list goes on with Snapchat and Uber. These ventures entered the market with zero experience in the industry.
The combined an idea with the latest technology at the time and were able to gain massive success. Libra will most likely succeed which will give Facebook a new level of corporate control.
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