Development of Facebook’s Libra expedited amid Covid-19
By Emir Hrnjic
Amid the COVID-19 pandemic, experts warned that the virus could spread via physical money as the monetary notes and coins may carry viruses and up to 3,000 types of bacteria. In March, the World Health Organisation confirmed that banknotes may carry the coronavirus for several days and recommended the use of e-payments to mitigate the risk of contagion.
Moreover, the widespread national lockdowns highlighted the need for people to transact from the comfort of their own home. Thus, a heightened virus awareness and a more urgent need for contactless payments might have expedited the development the digital currency of Facebook, Libra.
Libra’s development was further highlighted by the pilot launch of digital yuan in four cities across China. Even though digital yuan may not be a direct competitor to private digital currencies such as Libra, its upcoming rollout threatens to affect Libra’s potential market.
More recently, Libra made the headlines again as Singapore’s sovereign wealth fund Temasek joined Libra Association and became its first Asia-based member as well as the first member with state backing. After the departure of several prominent members such as Visa, MasterCard and PayPal, Temasek’s backing breathed new life into the digital currency.
On May 7, the Libra Association appointed Stuart Levey, former chief legal officer of HSBC, as its first CEO. The hiring of a legal expert to run the digital currency clearly signalled Libra’s priorities after intense regulatory scrutiny from US lawmakers triggered massive exodus from the Association last year.
While cryptocurrencies have great potential, they are notorious for widespread scams, frauds and hacks. Thus, scepticism towards Libra has been expected. US Congresswoman Maxine Waters went as far as to request a moratorium on the development of Libra, comparing it to “starting a bank without going through any [regulatory] steps”.
Regulatory response around the world will differ due to diverse regulatory philosophies. While China is expected to ban Libra, Singapore will likely have a much more accommodating approach. Even though Ravi Menon, Managing Director of Monetary Authority of Singapore, expressed concern that Libra raises global financial risk, Temasek’s involvement signals that the Singapore government has decided to focus on potential benefits.
Libra has the potential to be a game–changer in digital payments thanks to Facebook’s 2.5 billion active users. While one of the major problems with existing cryptocurrencies is slow and insufficient adoption, Libra wallets will likely ease and accelerate Libra’s adoption, thus creating an immediate advantage over existing cryptocurrencies.
One could argue that a single digital currency – or perhaps very few of them – will dominate the global market, while the overwhelming majority will fail. In this “winner-takes-all” market, contenders are incentivised to move early and aggressively, and Libra’s start seems like the step in the right direction.
Libra was initially designed as a stablecoin fully backed by a basket of bank deposits and treasuries denominated in stable international currencies, comprising the US dollar, euro, Japanese yen, pound sterling and Singapore dollar. This backing would ensure a stable exchange rate in contrast to the overwhelming majority of existing cryptocurrencies with extremely volatile prices.
After the strong pushback from the regulators around the world, Libra was recently revamped in the initiative allegedly aimed at minimising disruption to the global monetary system.
Libra 2.0 will comprise several stablecoins – each backed by a single currency such as the US dollar or Singapore dollar – separate from the Libra coin. The Libra White Paper added that “each single-currency stablecoin will be fully backed by… cash or cash equivalents and very short-term government securities denominated in that currency.”
Libra coin will be a “digital composite” of some of those coins – most likely the initial five currencies – and could potentially operate as a settlement coin in cross-border transactions as well as in countries without a single-currency stablecoin on the Libra network.
In a further attempt to satisfy regulators, Libra reemphasised its commitment to financial compliance, including strict enforcement of measures against money laundering, terrorism financing, sanctions compliance, and the prevention of illicit activities.
In the first stage of Libra rollout, Unhosted Wallets will not be allowed on the Libra network and their eventual inclusion will have limited balance and number of transactions. As Unhosted Wallets are, loosely speaking non-institutional developments and thus crucial for financial inclusion, crypto enthusiasts criticised this deferral.
In another major change, the Libra Association will vet any wallet launched on the network. While the first Libra White Paper vowed to transition Libra to a permissionless system, Libra 2.0 backed out of this promise. Hence, Libra 2.0 will lack censorship resistance, disappointing cryptocurrency devotees who consider the absence of censorship a very important feature of cryptocurrency.
While Libra’s initial idea was to become a global digital currency with permissionless network and censorship resistance that would have an easy adoption by Facebook’s massive user base, Libra 2.0 has significantly scaled back from its initial promise and made uneasy compromises to satisfy regulators. In an attempt to please both crypto enthusiasts and regulators, it seems that Libra 2.0 has not satisfied either side. Time will tell.