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Will Libra shake up financial services and banking?

Facebook’s first foray into the financial world prompted an immediate question yesterday: how far will your new digital currency shake up traditional financial services?

The vision of Facebook promises a world where banks and other means of payment are disintermediated by Libra, which could allow instant and almost free international money transfers. And if the currency is adopted by the 2.4 billion Facebook users, it could have a considerable weight, affecting even the role of central banks.

Facebook, Libra and bankers

With the ink of the proposals of Facebook still not dry, bankers, regulators, executives of means of payment, investors and experts of the industry said to be occupied evaluating their impact, but they suggested that there could be many obstacles in the way of Libra.

Regulation is one of the most cited issues. Harsh Sinha, director of technology for forex trader TransferWise, described the lengthy regulatory processes that his firm had to go through to create a network to move money around the world, including obtaining authorization in each of the US states.

“It’s a lot of work”, he said. “You have to do a lot of checks against money laundering, fraud checks, and make sure you’re looking at the source of the funds.”

Supporters of Libra point to the transfers of workers who send money home from abroad as a key use, which would require the approval of regulators of large destinations of such shipments as India and Mexico, as well as the United States.

The Libra project

The Libra project will face an additional obstacle because it is introducing a new currency, which may make it harder for countries to control issues such as inflation and could be particularly problematic in countries with capital controls.

“So far, the scale of cryptocurrencies has not reached a level sufficient to alarm central banks”, said a director of a central bank in the euro zone. “The size of Facebook’s customer base and the tremendous size of the company is something that, of course, we have not seen before”. For now, its central bank “is watching closely” the project and waiting to learn more details.

What does Facebook want?

In the UK, Mark Carney, governor of the Bank of England, said the central bank will analyze Libra with “an open mind”, but “not with the door open”. In the United States, regulators were reluctant to comment, although the Commodity Trading Commission (CFTC) has said it was talking to Facebook about its plans.

“What Facebook wants is to validate crypto and blockchain technology and it is illustrative of a vision of how the world should operate, but it does not take into account the complexities of cross-country transfers and legal, regulatory and other responsibilities”, Alex said.

The payments executive of a large global bank said there is “a lot of confusion” about how regulators are going to deal with cryptocurrency, and executives at several banks cite the uncertain regulatory environment as the main reason for not being involved in the project. There are no banks among those who initially support Libra.

“Obviously, banks by definition are more aware of regulatory obstacles in general”, said one fintech sector executive at another large global bank explaining why banks are more cautious than the dozen companies that have lined up to support the currency.

The interaction of Facebook with banks before the launch of Libra is not clear

Sources familiar with the situation say that there was an approach to the Dutch bank ING, but the latter decided against it. Citigroup, one of the largest payment banks says it “never had conversations” with Facebook or Libra about the currency. Facebook did not comment on the negotiations before the launch.

The adoption of the currency was the second major issue mentioned; the difficulty of convincing businesses, which have been slow to adopt simple payment technologies in the United States, to accept payments in the form of a currency whose value will fluctuate against the local currency that the trade uses to pay its taxes and the rent.

The thing with MoneyGram

“Bringing this to reality in 2020 in partnership with different payment providers and different companies could be difficult – it’s going to take time”, Holmes said.

“And as for its specific application for our type of consumer – the two billion people who hardly use the banks in the world. I think it’s an interesting question to see how long it takes to filter to that level”.

MoneyGram has an obvious interest in generating questions about Facebook’s plans, as well as other transfer businesses and banks that question the viability of Libra. Sinha, of TransferWise, indicated that his firm and Facebook are working “with the same mission” to eliminate expensive intermediaries and there is a lot of market share to be gained.

But Lex Sokolin, global co-director of fintech at consultancy Consensys, sees challenges. “Facebook is a thousand times bigger, has a massive relationship with customers, and has the largest alliance to create a cryptocurrency. Facebook is also very good at copying and Ant Financial is among its objectives. Therefore, fintech for the consumer are at risk”.


Also published on Medium.

Published inFintech

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