Facebook crypto currency: Is the Libra Coin a threat to banks?

Two weeks ago, Facebook published a whitepaper with first information about its own crypto currency project. The consortium, called Libra Association, currently has around 30 partners. Numerous well-known companies such as Paypal, Mastercard, Visa, Spotify and Uber already belong to the Libra consortium; 100 partners are expected at the start of the project in 2020. According to rumors one week after the announcement of the Libra plans, more than 500 companies have applied to join the consortium — far more than previously planned. And this just after two weeks. The aim of the project is to provide a blockchain-like infrastructure that enables payments to be processed quickly, easily and cost-effectively worldwide.Authors: Philipp Sandner, Jonas Gross, Felix Bekemeier

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Unlike Bitcoin, which shows large price fluctuations, Libra is supposed to be a stable coin. This will be achieved by a 100% coverage of financial assets, the so-called Libra reserves. However, Libra will not be linked to the US dollar or any other traditional currency, but to a diffuse basket of financial assets (mainly currencies and government bonds).

The project has the potential to significantly reduce transaction costs — especially for cross-border transactions for millions of people in developing and emerging countries. In certain regions of the world, these fees are currently often equivalent to 10 percent of the transaction volume. According to the whitepaper, 1.7 billion adults worldwide are currently excluded from the financial system. This means that these people often do not have the ability to make efficient remittances or — for example because of local inflation — to safely store values for the future. 1.7 billion adults , that’s about 30 percent of the world’s population. However, two-thirds of those people own mobile phones with Internet access. These phones could be used like a wallet to store Libra and make payments.

If Libra were not only used on the Facebook platform itself, but also on Whatsapp, Instagram, Visa, Mastercard — all of them are already part of the consortium — a very high worldwide reach would be possible in a very short time. Almost overnight, hundreds of millions of people could become Libra users. It could be expected that Libra would soon become one of the world’s most important trading currencies. The 100% coverage would mean that several hundred billion US dollars would have to be bought in these very currencies and in government bonds. Thus, Libra would quickly become a very significant buyer of government bonds.

The goal of providing financial services to hundreds of millions of people (“financial inclusion”) is also high on the list of priorities of important institutions such as the United Nations and the World Bank. If Libra were to achieve this goal — even if it were through an initiative by profit-oriented companies — this would be fundamentally positive. However, there are considerable risks: Facebook is not a raw model when it comes to data protection and secrecy of correspondence. More serious, however, is the fact that the governance of the Libra Association and in particular the decision-making on the composition of the Libra reserve are still unclear today. Most critical, however, is the risk that the initiator Facebook and the consortium members will connect the following three things: Data, personal identities and payment transactions. It is precisely these risks that are currently generating resistance and scepticism. Governments, financial market regulators and central banks should therefore — with these risks in mind — examine exactly under which conditions Libra receives the necessary licenses for its operation. Then, with all the lamentations that are going on, Libra can become a very impressive project that will change the financial industry and can change the world.

Impact on the financial sector

Banks in Germany and Europe would not be endangered by Libra in the short term. The reason for this is that the euro is the legal tender in Germany. In the short term, it seems inconceivable that Libra — as a diffuse basket of financial assets — could be used on invoices or in accounting.

However, there are two essential aspects that could also cause problems for banks in Germany: The first aspect concerns Libra. Germany conducts a considerable volume of international trade, naturally in various currencies, first and foremost in US dollars. Would there be any argument against Aldi, for example, paying these bananas in Libra when bananas are imported from Ecuador? The Libra amount would have been transferred from Aldi to Ecuador within milliseconds — a process which now takes days. All this may be speculation. But it would not be out of the question that Libra would gain some importance with respect to foreign trade in the medium term. This business would then be withdrawn from banks.

The second aspect does not concern Libra as a project, but the technology behind it: blockchain technology. This will change the German and international financial and banking scene very radically in the coming years. It can be assumed that sooner or later not only the euro, for example, but also shares and other securities will be listed on blockchain systems. For banks and especially for 500,000 employees in the German financial sector, this is mainly unknown. This is unfortunate, as there are numerous business opportunities in the blockchain sector today — including the Libra project. Those who do not act courageously will be confronted with the risks within a few years. Then the headwind will come and one will have to watch how margins and sales will shrink.

The keyword: digital transformation. Even if this term triggers fear and resistance in many institutions, digital transformation must be tackled with verve, because: Technological progress has never been and digital change is unstoppable. Let’s do it!

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Authors

Prof. Dr. Philipp Sandner has founded the Frankfurt School Blockchain Center (FSBC). In 2018 and in 2019, he was ranked as one of the “top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belonged to the “Top 40 under 40” — a ranking by the German business magazine Capital. Since 2017, he is member of the FinTech Council of the Federal Ministry of Finance in Germany. The expertise of Prof. Sandner includes blockchain technology in general, crypto assets such as Bitcoin and Ethereum, the digital programmable Euro, tokenization of assets and rights and digital identity. You can contact him via mail (email@philipp-sandner.de) via LinkedIn or follow him on Twitter (@philippsandner).

Jonas Groß is a project manager and research assistant of the Frankfurt School Blockchain Center (FSBC). His fields of interests are primarily crypto currencies. Besides, in the context of his PhD he analyzes the impact of blockchain technology on monetary policy of worldwide central banks. He mainly studies innovations as central bank digital currencies (CBDC) and central bank crypto currencies (CBCC). You can contact him via mail (jonas.gross@fs-blockchain.de), LinkedIn (https://www.linkedin.com/in/jonasgross94/) and via Xing (https://www.xing.com/profile/Jonas_Gross4).

Felix Bekemeier is a project manager and research assistant of the Frankfurt School Blockchain Center (FSBC). His interests include the microeconomic analysis of agent behaviour in DLT networks as well as the use case development, monetary theory and policy as well as regulatory strategy. You can contact him via mail (felix.bekemeier@fs-blockchain.de) or on LinkedIn (https://www.linkedin.com/in/felix-bekemeier).

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