‘Big Tech’ are coming for our banks, but should we be worried?
Digital currencies are back in the spotlight as US regulators take swing at Facebook’s lofty plans.
Last week David Marcus, head of Facebooks ‘Cailibra’ project and former
president of Paypal testified before the US government for their proposed digital currency ‘Libra’, which according to David Marcus, is intended to address an important problem:
president of Paypal testified before the US government for their proposed digital currency ‘Libra’, which according to David Marcus, is intended to address an important problem:
“Imagine a daughter who wants to send money home to her mum in another country. Of the $200 she sends, $14 on average will be lost because of fees. It can also take several days or even weeks for the mother to receive the money. A delay that can prove disastrous in an emergency. Not to mention lines may be long, and collection points may be in high crime areas.”
Captured in a small village close to Tangier, Morocco: People line up to use the only ATM in town.
So What is Libra?
Libra will be a stable currency that can be used for payments and other financial activities around the world. One big advantage is that payments in Libra will be available on both existing payment rails (i.e. card terminals), and also by scanning barcodes via your smart phone. The currency will be maintained by a distributed ledger, empowering users to take custody of their own funds, initially in the Calibra wallet online. This means your smartphone can become your bank account, killing the need for a retail bank entirely.
Today 1.7 billion adults in the world remain unbanked, with women making up a higher percentage of those than men. Indeed many countries around the world have poor access to financial services that involve long lines at ATMs & Banks, limited access to credit, high borrowing rates and more.
Libra aims to lower the barriers of entry to financial services by requiring
only a smartphone, and reducing the costs of commerce with distributed
ledger technology. With access to 2.38 Billion monthly active Facebook users, its easy to see how Libra could be integrated into the everyday lives of so many people.
only a smartphone, and reducing the costs of commerce with distributed
ledger technology. With access to 2.38 Billion monthly active Facebook users, its easy to see how Libra could be integrated into the everyday lives of so many people.
Governments Don’t Like Libra
Before Facebook’s announcement, banks and governments weren’t threatened by digital currencies. Many of the projects that exist today simply aren’t as equipped to take on the world. But Facebook is a centralised company, and must cooperate with local authorities in each jurisdiction (unlike Bitcoin). This is one reason why Facebook was careful to keep separate the Libra foundation from its US counterpart. Facebook also has a terrible reputation, with authorities around the world unhappy with the size and power they already have. Not to mention their track record of scandals that have rigged democratic processes and proliferated the spread of ‘fake news’.
Despite its challenges, Libra, if successful could be a popular option for
those who suffer from poor local banking experiences and an inflationary
local currency.
those who suffer from poor local banking experiences and an inflationary
local currency.
Certain governments will increasingly see Libra as a threat to both Central
Bank policy and retail banking industries and so it’s likely that central banks with the most to lose from Libra will be the first ones to oppose the use of it in their countries.
Bank policy and retail banking industries and so it’s likely that central banks with the most to lose from Libra will be the first ones to oppose the use of it in their countries.
Anti Money Laundering
One of the major themes of the recent US government hearings has been Money Laundering and the perceived risks associated with digital currencies. US Treasury Secretary Steven Mnuchin expressed his concerns
that Libra could be used by terrorists and money launderers, a narrative often used to argue against the merits of Bitcoin and other digital assets. While these concerns are valid, he added that regulators are open to digital currencies so long as these risks are managed, and that Libra has a long way to go to prove this.
that Libra could be used by terrorists and money launderers, a narrative often used to argue against the merits of Bitcoin and other digital assets. While these concerns are valid, he added that regulators are open to digital currencies so long as these risks are managed, and that Libra has a long way to go to prove this.
But as far as digital currencies go, how concerned should we really be
about money laundering and terrorist financing? Should they be treated
any differently to cash?
about money laundering and terrorist financing? Should they be treated
any differently to cash?
One interesting statistic shared by Steven Mnuchin in his recent cryptocurrency press conference discussed the progress that has been made in combating anti-money laundering & terrorism with the Banking Secrecy Act:
"Last year alone, it (Fincen) collected over 20 million BSA reports (Banking Secrecy Act Reports), and has collected over 300 million in the last 11 years."
In a recent interview, Caitlin Long, a corporate finance expert and long standing advocate for digital currencies cited her 2018 piece on the cost of the Banking Secrecy Act, stating the most recent publicly available data for these figures is from 2006, in which it was reported that 16 million BSA reports had been collected, resulting in a total of 296 anti-money laundering convictions. Her interpretation being that BSA reports had increased from 16 million (2006) to 20 million per year (2018, as per Mnuchin’s recent statement) which isn’t a significant difference. The conclusion of her 2006 analysis was that 296 convictions is a small outcome for the extra costs and efforts that went into collecting 16 million BSA reports.
In other words, decades of costly fees for consumers, sensitive data
breaches, and non-existent innovation in financial services may be
getting traded in for a sobering number of yearly convictions.
breaches, and non-existent innovation in financial services may be
getting traded in for a sobering number of yearly convictions.
While anti-money laundering and terrorist financing are important, it
shouldn’t be so taboo to ask fair questions about how we can balance
this with improvements in the user experience of money, especially if
these risks are overblown.
shouldn’t be so taboo to ask fair questions about how we can balance
this with improvements in the user experience of money, especially if
these risks are overblown.
Libra will Not be Open and ‘Permissionless’
Networks like Bitcoin and Ethereum are open and permissionless, which means anyone with a computer and internet connection can contribute to the network by running a ‘node’ or adding proposals to it’s open source development.
This is a core design feature that promotes egalitarian access whilst
also giving the network resistance to censorship and control. The recent
hearings have made it clear that Libra will not benefit from these properties and will in turn prioritise the needs of the corporations and regulators involved rather than its users.
also giving the network resistance to censorship and control. The recent
hearings have made it clear that Libra will not benefit from these properties and will in turn prioritise the needs of the corporations and regulators involved rather than its users.
Some points we can confirm from the hearings are:
- The Libra foundation will control who can join the network as a ‘Node’.
- The Libra network will have an anti-money laundering program.
- The Libra network will report directly to the Internal Revenue Service (IRS).
Still, Libra has impressive technical details shared in its white paper and technical papers. Its network will have its own programming language called ‘Move’ that will allow invited members to build applications and extend the use cases of Libra.
It’s likely that Facebook will encourage third parties to build new
financial services on top of Libra, including tools for lending and
saving, all without the need for a bank.
financial services on top of Libra, including tools for lending and
saving, all without the need for a bank.
Conclusion
Countries that are weighed down by the limitations of cash, bad central bank policy, and poor retail banking experiences have the most to gain from Libra. Ironically, these countries are also the most likely to ban Libra as it directly reduces the influence and control they have over their
own banking systems.
own banking systems.
Anti-money laundering practices are a major bottle neck for global commerce. If Facebook gets this right it could significantly reduce the costs of financial services which would in turn create more equal opportunities
for the un-banked and under-banked. It could also promote competition
among retail banking in first world economies.
for the un-banked and under-banked. It could also promote competition
among retail banking in first world economies.
Libra will not be open and permissionless. If Libra becomes mainstream it
will be interesting to see if these limitations cause users to migrate
to more open networks.
will be interesting to see if these limitations cause users to migrate
to more open networks.
_________________________________________________________________
I collect my information from a variety of sources linked throughout
the article. My interpretation of these sources are my own opinions. The information provided is for general use only. All images are either my
own or have been sourced through Adobe Stock. If you have anything to add or feel that any sources could be improved, please comment below.
the article. My interpretation of these sources are my own opinions. The information provided is for general use only. All images are either my
own or have been sourced through Adobe Stock. If you have anything to add or feel that any sources could be improved, please comment below.