Reading Libra’s horoscope

Libra, at one extreme, is the long awaited alliance of fintech and bigtech which will totally upend the financial system. At the other, it is a systemic threat which will hand control of the global payments system - the fundamental plumbing of capitalism - to private companies.

"Libra will do nothing that can’t already be done. That means the question has to be is it cheaper? Faster? More convenient? Safer?”

The global banking supervisor, the Bank for International Settlements, was moved to pre-release a chapter from its annual Economic Review called “Big Tech in Finance” in the days after Facebook’s announcement.

The BIS noted “big techs' entry into finance introduces additional elements into the risk-benefit equation”.

“Some are old issues of financial stability and consumer protection in new settings, but a new element is big techs' access to data from their existing platforms,” the BIS said. “This could spark rapid change in the financial system through the emergence of dominant players that could ultimately reduce competition.”

The role of big techs in finance raises issues that go beyond traditional financial risks, according to the BIS.

“Tackling these requires striking a balance between financial stability, competition and data protection. Regulators need to ensure a level playing field, taking into account big techs' wide customer bases and particular business models.”

Why bother?

Libra has been an enormous marketing coup and it certainly has institutional backing and a structure which at least ostensibly separates it from Facebook and all the privacy, security and cultural baggage that platform brings with it.

There has been extensive, technical analysis of Libra, such as by the Financial Times’ Alphaville column, and the issues of systemic threat, regulation and feasibility will be tested over time.

But history gives us guides to how, if not the whole concept, sufficient examples of revolutionary payment projects which promised elements of Libra have played out.

The fundamental question history teaches us to ask is “why bother”?

Libra will do nothing that can’t already be done. That means the question has to be is it cheaper? Faster? More convenient? Safer?

Ultimately, consumers and merchants make that choice. And then, even if they do support it, regulators will determine the actual scale and nature of uptake.

Take the evolution of “smart”, microchip-equipped payment cards. France has had them for decades. The UK was a relatively recent convert. Australia abandoned them in the 90s only to relaunch them in the 2000s.

The different reasons are instructive: France saw smart “chip” cards as an adjunct to national policy; the UK only introduced them when fraud spiked on magnetic stripe cards; in Australia an earlier trial with electronic purses had petered out because, well, people had physical ones which worked fine.

Scalability trilemma

This is the point Australia’s Reserve Bank governor Philip Lowe made after the Facebook announcement: "I have long thought that a kind of cryptocurrency would not really take off in Australia."

His reasoning - backed up by research published in the RBA’s latest bulletin - was incumbents are already delivering innovation fast enough for consumers.

"We already have a very, very efficient electronic payments system that allows any one of us to make bank payments to another person in five seconds just knowing their mobile phone number. It’s incredibly flexible," Dr Lowe said.

The RBA bulletin saw “little likelihood of a material take-up of cryptocurrencies for retail payments in Australia in the foreseeable future”.

According to the RBA analysis, cryptocurrencies face a trade-off known as the “scalability trilemma” where they can at best offer two of three key properties - decentralisation, scalability and security.

For example, Australia’s New Payments Platform (NPP) can handle 1000 transactions a second compared with Bitcoin’s current capacity of 10 per second.

Another lesson is the catch-22 which has been immanent in each financial revolution: disrupters can be as radical as they like while they are small enough not to be systemically important. But once they hit critical mass, they will be regulated into the existing universe.

As Bank of England governor Mark Carney told a meeting of central bankers in the wake of the Libra launch, if Facebook was successful in attracting users “it would instantly become systemic and will have to be subject to the highest standards of regulation”.

We see this constantly. Take Afterpay, the staggered repayment credit provider. It grew rapidly to the point the securities regulator flagged closer monitoring and now anti-money laundering and criminal financing regulators are investigating its governance.

Facebook appears to favour being part of the system, transparent and properly regulated, presumably calculating credibility is a greater challenge for it than radical disruption.

Tellingly, even Chris Hughes, co-founder of Facebook, makes the same point. Writing in the FT, he said “move fast and break things - our mantra in Facebook’s early days - was an appropriate slogan for a college social network. It’s not appropriate for the global monetary system”.

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Profits and influence

While Libra has been structured to distance itself as much as possible from Facebook’s tainted reputation, kicking off with two dozen other partners and a not-for-profit governance model built around a Switzerland-based association, Hughes is wary of shifting power in the payments system away from state-sanctioned bodies.

“This currency would insert a powerful new corporate layer of monetary control between central banks and individuals,” he wrote. “Inevitably, these companies will put their private interests - profits and influence - ahead of public ones.”

Other risks have been analysed in depth: while Libra is a “stablecoin” backed by a basket of real, fiat currencies, it could still suffer a run; while the asset backing is aimed at reducing volatility it means it will in affect be an asset-backed security; Facebook remains blocked in China (where anyway there already exist digital payments system linked to massive Chinese platforms).

Meanwhile, the more Facebook seeks legitimacy by being regulated, auditable, transparent, the less it is attractive to those - licit and illicit - players who are attracted by truly crypto currencies and their anonymity and opacity.

As a side note, it is not just Facebook’s own transgressions of user privacy, such as with the Cambridge Analytica scandal, that is a challenge but Libra’s auditability in emerging markets where citizens are wary of state monitoring.

Witness the huge queues of normally digitally advanced Hong Kongers buying subway tickets with cash instead of their smart cards when massive civil liberty demonstrations were taking place - they didn’t want to risk their movements being tracked.

Ultimately, the success or otherwise of Libra is going to be quotidian. There are some fundamental mutual exclusions: it can’t be truly revolutionary and truly inside the system. If it is inside the system, it will lose its revolutionary potential.

The attraction of Libra is that it should be cheap and easy. It should be cheap because it uses blockchain to bypass existing, expensive, bank clearing and settlement systems. But the banking system too - and existing global payment bodies like SWIFT - are already working on blockchain.

It is one thing to say an existing system has fat margins, another to think that system can’t evolve to combat margin compression. In fact the banking system has been doing exactly that for decades.

And you have to buy Libra to make your purchase (then sell Libra to get real cash back if you want it) then it doesn’t sound that convenient - so it would need to be a lot cheaper.

Andrew Cornell is Managing Editor of bluenotes