Social Currency: what Facebook's Libra could mean for the future of money

Crypto-asset societies around the world were nervously excited while the regulators had their eyes wide open. 

Based on the encrypted technology used by Bitcoin and other cryptocurrencies, Libra is a form of digital currency with the ability to be transferred between users on the social media giant’s messaging platforms such as WhatsApp and Facebook Messenger. It will supposedly serve a different purpose to bitcoin in the wider market, eventually being developed into a global coin where users will be able to swap their real-world money for digital coins, similar to exchanging money for foreign currency.

Up until now, FinTech projects have remained relatively small and have been monitored through regulatory sandboxes. As highlighted during an interview on July 7, 2019 with Benoit Coeure - Member of the Executive Board of the European Central Bank - with a new player such as Facebook, the game will change.

Described as a “global currency and financial infrastructure”, Libra would reach billions of people – 2.38 billion of active monthly users of Facebook worldwide, to be precise. Unlike Bitcoin and other cryptocurrencies where value is created by the underlying technology, the market or the mathematical foundation – Libra will be a digital “stablecoin” backed by securities, as Facebook states: “such as bank deposits and short-term government securities in currencies from stable and reputable central banks”.  Stablecoin could be defined as a cryptocurrency pegged to another stable asset - fiat money or exchange-traded commodities, to offer better price stability.

As of March 31, 2019, according to the data published by the ECB for Europe, currencies in circulation and overnight deposits total EUR 8.5 trillion and to circa EUR 12 trillion when adding  deposits with an agreed maturity of up to two years and deposits redeemable at notice of up to three months. It is clear that with Libra, Facebook aims to cash in on this available liquidity.

With its 286 million active monthly users - representing 38% of the total European population – there is no doubt that Libra’s value may increase substantially and rapidly. And that’s without taking into account WhatsApp and Instagram users – both companies owned by Facebook. The volume of Libra instruments may potentially be as important as bank balance sheets in a few years’ time.

However, digital stablecoins don’t come without risks. Money laundering, terrorism, data protection, privacy, and financial instability are potential risks associated with these kind of crypto-assets. As highlighted by Benoit Coeure Libra is, in fact, a “useful wake-up call for regulators and public authorities”.

New technologies mean progress, but also increased risks. The frequency of high-profile data breaches which affect global technology and payment companies is a significant issue: and one that is perhaps exacerbated by a traditional banking system failing to keep pace with technological developments.

Whatever the reasons, new players are entering the financial market and stablecoins may serve different purposes, from payment services to investment financial instruments as well as financing. Regulation needs to be adapted accordingly and the different regulators have started to make their moves.

Since the Libra cryptocurrency announcement, a G7 working group initiated by France has been created to examine the potential issues it might raise. The report is expected in the coming days.  

On July 2, US Congress wrote to Facebook and requested that all actions related to the development of Libra cryptocurrency should be placed on hold. On July 17, Facebook representatives are once again expected before Congress for cross examination.

Over the last months, Facebook executives have been defending their actions and inactions in front of Congress. The idea that a major corporation would create a global currency is concerning for any government, but in this case the US government might view Libra as a potential threat to the US Dollar dominance. 

Wang Xin, the head of the research bureau at the People’s Bank of China, stated on July 8, 2019 at an event at Peking University’s Institute of Digital Finance, that they are following the situation with “high attention”. It has been working on the development of its own digital currency for some years now and is hoping to reach the final phase very soon, now that Libra has been announced. It is of major importance for China to know precisely which currencies and government bonds will be included in the basket backing up Libra, as well as how significant the influence of the US Dollar will be. Those are all understandable concerns, keeping in mind the ongoing tensions between US and China in the last months. 

The idea of a business creating a currency would make any regulator around the world pause and consider. A global currency, created by a social media corporation like Facebook, which has a third of the world’s population as active users, would make the watchdogs act. Libra could have major economic, financial and international political consequences for everyone. The regulatory landscape is still quite bare, while the technology for such projects has been there for a while. Now that the ball is in the regulator’s court, let’s watch and see how they’ll react.