Facebook announces new cryptocurrency Libra: What will it mean for banks?

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  • 29.06.2019
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<em>Written by Roman Krutyanskiy</em><br>
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On June 18, Facebook revealed its plans to release a new currency in 2020 – Libra.
Based on a Distributed Ledger Technology (DLT) called Libra-Blockchain, Facebook claims Libra will make money transfers worldwide as simple and cheap as a mobile text message – all users need is a smartphone with an internet connection. Transactions will be made via “Calibra”, a digital wallet called that can be embedded in Facebook Messenger or WhatsApp, or installed as an independent application on a user’s smartphone.
Beyond the technology, one of the things that makes Libra and Calibra different to other cryptocurrencies and payment services is its potential to quickly hit a mass market, with Facebook having a built-in audience of nearly
<a href=”https://www.statista.com/statistics/264810/number-of-monthly-active-facebook-users-worldwide/”>2.4 billion users</a>. If only one in a hundred Facebook users uses Libra (24 million users), the cryptocurrency would have more “customers” than many of the world’s major banks.
So what does this mean for the traditional banking sector, and does this creating opportunities for savvy traders? Read on to find out.
</p><h2>The technological upheaval of traditional sectors</h2><p>
Many areas of the economy are undergoing a major upheaval, with automation, robotics, digitisation and artificial intelligence creating transformation across a range of industries. This includes the financial sector.
Consider today’s most popular tech companies – Amazon, Apple, Facebook, Google, Microsoft and PayPal. While these brands are undoubtedly masters in the areas of communication, advertising, and commerce, all are disrupting the way consumers and businesses process payments – providing new options that are more convenient and competitive to their users than traditional banking.
Anyone who wants to make payments with a smartphone will find it hard to get past Google Pay and Apple Pay. However, these payment gateways only work in conjunction with bank cards that are compatible with Google Pay and Apple Pay. Those banks that are not compatible, will find themselves losing business – especially as younger generations account for a larger percentage of the world’s spending power. There is also no way around PayPal, which has over
<a href=”https://www.statista.com/statistics/218493/paypals-total-active-registered-accounts-from-2010/”>277 million customers worldwide</a>.
At the same time, long-established banks are facing the challenges of low, zero and negative interest rates in the current economic environment, not to mention highly competitive economic conditions.
This is where Darwin’s theory comes into play: If banks and other financial institutions do not adapt their market strategy to match changed market conditions, they will not survive the change.
</p><h2>Facebook is already a financial services company</h2><p>
To some, the announcement about a new cryptocurrency might seem out of place. However, Facebook has long been a financial services company as well as a social network.
In some countries, such as the US, money transfers are possible via
<a href=”https://www.thebalance.com/facebook-messenger-payments-send-and-receive-money-315074″>Facebook Messenger</a> and <a href=”https://www.ft.com/content/e045cdd2-0503-11e9-99df-6183d3002ee1″>WhatsApp</a>. And in 2016, Facebook <a href=”https://ibsintelligence.com/ibs-journal/ibs-news/facebook-nabs-financial-licence-from-central-bank-of-ireland/”>received a license</a> from the Central Bank of Ireland as a financial services provider and has since been officially authorised to handle payment transactions and to issue ‘e-money’. According to the EU Passport procedure, this means that the regulatory doors for the Facebook subsidiary Facebook Payments International Limited have been opened for the entire EU28. The authorisation also includes, among other things, the execution of monetary services on telecommunications equipment.
Why could Libra be dangerous for banks?<br>
Libra endangers traditional banking for a number of reasons.
The first is convenience and ease of use. With Libra, Facebook intends to make money transfers fast, easy to handle and, above all, cheap compared to traditional bank fees and other institutions in the sector. Sometimes the transfers will even be free.
As the customer base increases, the next step would be for Libra to become a widely used traditional currency with high price stability, in addition to being a platform for smart contracts. This will then make Libra a form of financial infrastructure.
Is this realistic, though?
With Facebook’s existing user base of 2.4 billion users, Facebook’s ‘population’ is nearly a third of the world’s population, and is larger than the population of India and China. This numbers game alone shows how quickly the banks could lose this new competition. High fees and additional bank charges could serve as additional accelerators to look for alternatives to traditional banking houses.
In addition, the Facebook Group is already looking at Libra with a long-term perspective, by considering securities that would increase the cryptocurrency’s stability. Facebook has already taken steps in this direction, having established the Libra Association in Geneva (Switzerland) to control the Libra network itself and the reserve. In future, the cryptocurrency would be supported by means of a currency reserve. In this way, Libra would have an intrinsic value. For each newly created Libra unit, a basket of bank balances, short-term government bonds, and reserve currencies should exist.
It is precisely this point that has attracted the attention of the central banks and supervisors, because this structure would also make the Libra system a threat to overall financial stability. If Libra spreads in such a way, this would require an enormous security cover and make Facebook perhaps even one of the largest creditors of states. However, this is not the intention of the regulators.
</p><h2>How Libra could propel Facebook towards further growth</h2><p>
Beyond the dangers to the banking sector, however, Libra cold easily propel Facebook towards further growth by feeding its ever-hungry data kraken.
The Facebook group currently generates revenue via advertising, along with selling customer data to advertising companies. Whether Facebook, Instagram or WhatsApp – the more that users use the websites or mobile applications, the more digital traces or data they will leave behind.
Should the users then send money to each other or carry out transactions with Libra, the Facebook group would not only extend the retention period of its websites enormously, but also would be able to exploit even more and more targeted user data in order to increase keep it up use advertising-specific and profitable.
</p><h2>How will Libra create opportunities for traders?</h2><p>
As with any market disruptions, the launch of a new cryptocurrency by a company with such a large customer base is sure to have ramifications for traders.
Just consider one example of how Libra could be used: a simple money transfer from a private person from Europe or the United States to a private person in a Central or South American or African country. Historically, Western Union has been the traditional provider of these services, with approximately 80% of turnover being generated from international transfers. Should Libra become a reality, Western Union is one company whose stock price could be affected.
Other markets to watch include major iternational banks, existing cryptocurrencies like Bitcoin and Ethereum, and, of course, Facebook.
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