In June, Facebook and a consortium of technology companies announced a plan to create a new digital currency known as Libra. Politicians were highly sceptical. After all, the money monopoly is still a primordial state privilege. Nevertheless, Libra is not the first digital currency and experts attest to the thorough competitiveness of the payment medium – solely because of the prominent names involved. Among the thirty members are Visa, Uber, Mastercard and Paypal. But the Facebook consortium may lack one thing in particular: Trust! Facebook already has problems controlling its countless fake accounts.
“If just 100 million of the 2.7 billion, if Facebook users were to participate, Libra would already have more customers than the entire German banking market,” the German Bundesbank board member Joachim Wuermeling estimated in an interview with the Frankfurter Allgemeine Zeitung. There is no way to ban the introduction of Libra. However, Wuermeling sees it as “an accomplishment that independent central banks provide stable and secure money” and warns against the return of a new Wild West in the monetary system.
Moreover, the Bundesbank’s board believes that Facebook may become the largest creditor to states because of Libra. The price of the crypto currency Bitcoin depends on supply and demand and therefore fluctuates sharply. Libra is supposed to become a stable currency and is not only backed by the major currencies, but also by government bonds.
Attack on the banking world
The consortium wants to establish a company in Switzerland and create a stable system based on established currencies. They want to use short-term government bonds and bank deposits. Teodoro Cocca, Professor of Asset und Wealth Management at the Johannes Kepler University in Linz, doubts that the system works as easily as that or that Libra could be fully backed by bonds from stable currency areas.
Cocca also sees Libra as an attack on the banking world. There is not one single banking institution to be found in the consortium of renowned technology groups. The digital payment system Libra is supposed to simplify cross-border payments and the transfer of credit notes from person to person. This will directly affect the banks in these services. Transfers by Whatsapp, Instagram or Messenger would be possible. Incidentally, the cashless payment service via WeChat is already a reality in China.
This digital currency would have clear advantages for customers and it would also offer the advantage of lower commissions than those charged by conventional financial institutions.
Interest earned on the currencies will be used to cover the costs of the system. This is to prevent Libra from fluctuating excessively (stablecoin). However, the currency will not pay out any interest to customers.
Currency risks are another risk factor. If someone exchanges euro for Libra and Libra is covered by just 30 % on the euro, they will run a currency risk on 70 % of their credit balance. A problem familiar to us from foreign currency loans.
Promising innovations on the horizon
Nevertheless, a promising innovation area of services could emerge involving Libra, says Cocca. Completely new financial services could be developed from the data pool of payment histories stored on blockchain. As examples, the expert cites automatically generated real-time credit ratings or smart contracts for monitoring the credit rating of retailers.
Regulatory matters
For Cocca, the challenge lies in matters concerning regulation. Libras are deposited in a currency such as the euro and are stored in a digital wallet at the end consumer’s premises. He cannot imagine that a uniform global regulation will be devised for this model. He anticipates national standards.
Libra users would have to disclose their identity to the provider just as they would do when opening a bank account. This is a measure to prevent money laundering. Which raises another key question for Cocca: namely, how and who enforces the money laundering regulations (Know Your Customer – KYC) in this ecosystem?
According to the white paper, one of the aims of the project is to develop an open digital identity standard. Cocca derives an individual KYC rating for each user from this.
Where are Amazon and Google?
Apart from banks, there are other major players missing in the Libra consortium. Cocca points to the absence of the technology giants Amazon and Google and concludes that there may be competing strategies. The discussion on digital currencies has most likely only reached a temporary peak as far as Libra is concerned.
Advantages and disadvantages of transparency
The twelve-page White Paper published by Facebook is not particularly informative. Crucial questions remained unanswered. This also applies to the question of what technology the new digital means of payment should be based on. Experts assume that it will be blockchain technology – which forms the basis of the digital currency Bitcoin as well.
“Thanks to blockchain, you are able to establish a business relationship without any risk when it comes to companies that you are not even familiar with yet,”
– says Bernhard Bergmair from the Linz Center Of Mechatronics (LCM) at Johannes Kepler University. To put it simply, a blockchain is a database that is not located on a single server, but is distributed across multiple individual computers worldwide. Since every participant has the same access rights, misuse and manipulation are out of the question. However, the question must always be asked what is stored within a blockchain. After all, even the best technology is not immune to the fact that something could be entered incorrectly.
The advantage of blockchain is at the same time its disadvantage. The system makes it easier for trading firms to follow the exact path of a coin. Yet this also opens up the way to consumers becoming more traceable, their activities are all the more transparent the more they engage with and pay with the Libra system.
“The danger of the monitored citizen and the transition to the surveillance state is fluid,”
– says Thomas Buchegger from the Linz Center Of Mechatronics. China is already on its way there and is evaluating its citizens according to their social credit rating.
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