Can Libracoin take on Banking?

Facebook has had its share of scandals, data breaches, hates speech and smear campaigns. It may seem strange that they are spearheading a cryptocurrency given their poor image. As a stablecoin many analysts are saying that this represents more of a challenge to traditional banking than to Bitcoin or the wider crypto world.

To be fair the banking world does not have a good reputation either and it looks like Facebook is going to take a swipe at the industries flaws which are most noticably slow and expensive transacions.

A digital shake-up of the banking industry is long overdue. Whilst regulatory pressure, Facebook is trying to reinvent itself as a private, encrypted network. Building a dedicated financial system is integral to the company’s pivot away from an open platform.

Instead, it aims to offer an experience similar to what Tencent’s WeChat provides in China, combining featuressuch as messaging, photos and purchases on a single platform — all on a global scale. Facebook has marketed Libra as a “stablecoin”, backed by a reserve of low-risk assets to avoid volatility.

The company states it has created a new blockchain, which it hopes will support rapid transactions at a global level. A Facebook subsidiary, Calibra, will produce a “digital wallet” to store Libra coins, with the goal of the currency gaining traction in offline retail as well.

A digital challenger the size of Big Tech represents a major challenge to the old guard of finance. Facebook says that money transfers with Libra will be fast and cheap. That would undercut banks’ transaction fees, especially internationally. There may be scope here for central banks to ensure that commercial banks lower their exorbitant prices if they wish to compete with digital challengers. Facebook’s LibraCoin: how is it going to work? Libra also shows the increasing influence of blockchains in the banking industry.

In February, JPMorgan Chase announced JPM Coin, a stablecoin pegged to the dollar. Yet experiments have not always yielded encouraging results. Last month, the Bundesbank said its blockchain trial had been slower and more expensive than traditional methods. It remains to be seen whether the proposed blockchain can scale up to deal with billions of daily transactions without slowing. Moreover, the system would offer Facebook access to an almost unrivalled treasure trove of financial information.

Despite the company’s claims to have developed more of a conscience over how it uses data, executives have suffered negligible consequences. While Calibra has pledged customers’ account information will not be used to target advertising, Facebook’s record on this front gives cause for doubt.

If the system is successful, there are other reasons to be worried. The question of whether Libra is a security or not must be answered: if it is, it will have to be formally registered with the Securities and Exchange Commission. Facebook will have to demonstrate, too, how it intends to combat money laundering. Without robust checks, it could become an attractive platform for criminals to move “dirty” money. Its ambition for frictionless cross-border transfers may also threaten governments, if payments increasingly take place not in national currencies but in Libra.

It is difficult to accord full trust to Libra, as a project of a company whose commitment to users has been ancillary at best. Its unveiling is significant, however. Smaller players have shown they can inflict disruption on an ossified banking system. A company with Facebook’s size and social media infrastructure could be many times more potent. Traditional banks must move into the 21st century or risk an exodus to more attractive alternatives.

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