Still at the nascent stage of the financial technology development era, global corporations and financial intermediaries from banks to payment mediums are engaged in a "treasure hunt" to come up with a financial breakthrough, thanks to the mobile data-driven young thinkers and innovators around the globe.
Recently, the financial industry and regulators were shaken by the most ambitious foray from Facebook through the introduction of Libra. Libra is a digital currency which will be available on the largest social media platform of 2.40 billion users soon. Digital currencies are electronically-created, internet-based money which, like paper currency, can be used as a medium of exchange for purchasing goods or services. Such currencies are claimed to be faster as the ownership of these can be transferred limitlessly at lower transaction costs. These are also convenient and offer more data privacy and security as digital currencies are designed and built on cryptography, more specifically, blockchain methods.
Unlike payments through conventional banks or online gateways like PayPal, ApplePay, WePay - Libra would be based on peer-to-peer network. This means that no bank accounts or credit cards would be required to transact. It is said to be a "harbinger" for the mass consumers who are not willing to go to banks for financial services and can avoid transaction fees.
As per Gallup World Poll 2017, two-thirds of the world's adult population have a mobile phone, but do not have bank accounts. Digital currencies would undoubtedly cut down the transaction costs and boost up the pace of cross-border trades by making financial intermediaries redundant. Apparently, it would benefit the emerging economies full of growth potentials especially the Asian market.
After hearing the post-launch disparagement of Libra by the critics, a number of unanswered questions regarding roles of the central banks and giant financial intermediaries; and the extent of data protection for digital currency users along with others have surfaced.
How would China, with yearly imports of US $1,800 billion (10 per cent of the world total) and with "no access" to Facebook, Google and Amazon, be connected with the digital currency framework? Since Libra is considered as a payment solution and not an investment vehicle, to what extent would it threaten the global banking system? Facebook is in talks with crypto-focused exchanges like Binance and Coinbase to list Libra for trading. But these exchanges are usually not accepted.
The governing body of Libra Association contains corporations like VISA, Mastercard, Paypal, Uber, Vodafone, eBay, Spotify and others. Since these corporations operate in un-identical regulatory perimeters and geographical boundaries, how would Libra ensure uniform data protection policy and combat financial crimes?
Interestingly, billion-dollar investments for the sake of building blockchain-based digital cash settlement system by some mammoth banks have not seen any light in the form of financial breakthroughs.
Chris Hughes, a co-founder of Facebook, has recently indicated a shift in the control of monetary policy from central banks to corporations, how digital currencies like Libra can impact indicators like inflation rate or interest rate of any economy and more. Hughes also said that the policymakers need to coordinate their efforts in order to make sure that the new systems are regulated so as to protect customers and prevent them for facilitating money laundering. So, did Facebook overlook and de-emphasize the financial crime aspects and leave it for the central banks to come up with something "friendly"? Interestingly, before Libra, crypto currencies faced slumps for more than a year. Lira of Turkey faced several nosedives and depreciated by 19 per cent in the last one year as the currency has bitcoin adoption rate of 20 per cent followed by Brazil (18 per cent), Argentina (16 per cent) and South Africa (16 per cent).
Firstly, it is quite necessary to understand the strategic difference between tech-giants and banks. Success of tech companies depends on the efficiency of SMAC (social, mobile, analytics and cloud). Banks mostly depend on financial offerings, customer relationships, technology, service quality and efficient uses of deposits. Bank is a product company that sells its own financial products and value of the banks are roughly proportional to the number of customers. On the other hand, a tech company is called a 'platform company' that leverages value created by its users. Some banks are partnering with these platform companies with the belief that they would be better able to compete with tech firms in an integrated ecosystem. One should consider how bKash or other mobile financial services (MFS) in Bangladesh are integrating with banks and creating both value and customers.
Several experts have predicted that digital currencies and the robust platforms for these by the tech-giants will eventually replace existing brick-and-mortar banking system. We need to understand that digital currencies would probably make the paper currencies obsolete, as the next-generation customers are more likely to depend on these more than cash or plastic money. At least for now, digital currencies are considered to be vehicle of transactions. Digital currencies would bring fastness in making transactions worldwide without sets of trust associated with financial intermediaries, mainly banks. Tech-giants will soon provide electronic wallets for individual users (like bank accounts) who would purchase the digital currencies and exchange those for online and offline transactions. This will actually make country-wise currencies irrelevant and clear away speculation risk and exchange fluctuation risk for the users. It would be primarily built on nodes of computer network and blockchain technology, which is proved to be 'un-hackable' till date.
It is beyond question that the most traditional banks, except for the giant ones, have been myopic. Some have been rushing towards technology while undermining the need for re-shaping the brick-and-mortar century-old model. According to the FDIC's household survey in 2017, 35 per cent of the household in USA think that they do not have enough money to keep in a bank account, 6.0 per cent are concerned of inconvenient banking hours and branch locations; 10.0 per cent are wary of unpredictably high charges related to accounts and only 1.6 per cent pointed out that the banks does not offer needed services.
But banks have one big advantage over tech giants on the digital currency issue. Banks can amass deposits that tech firms are not regulated to carry. Banks have ample investment products and these can accumulate funds for industrial finances for long terms. Banks facilitate governments' financial requirements and ensure monetary policy of central banks. Banking industry is established on robust and widely-accepted guidelines by BASEL committee, Financial Action Taskforce (FATF), Wolfsberg and WTO, which are considered as the integrated foundation to fight financial crime, money laundering and terrorism. It is direly needed for banks to beef up their current business model and collaborate with tech firms' to create greater value for customers.
Apart from the topic of which market players would operate, regulate and monitor the digital currency market, one has to know why the banks and financial institutions (FIs) around the globe have not come up with this sort of financial innovation, despite the fact that, until 2019, financial industry has been allocated the majority investment of USD 2.9 billion in blockchain technology followed by oil, automobile and FMCG industry worldwide. However, blockchain, a distributed ledger technology, has been mostly hindered by numbers check-posts at implementation stage. PWC's survey in September 2018 indicated that, 27 per cent of blockchain development attempts have been impeded by regulatory uncertainty; followed by lack of trusts among users (25 per cent). Remaining impediments include ability to bring networks together, intellectual property concerns, lack of scalability and audit concerns.
It was hinted in the whitepaper of facebook during the announcement of Libra that it will be based on blockchain technology like bitcoin. Libra differs from bitcoin on the ground that it will be backed by a reserve of assets, including a basket of bank deposits and short-term government bonds. This is designed to make Libra a stable, low-volatility digital currency.
In the coming days, the world would experience increasing integration among banks and tech companies which will change the financial eco-system by putting financial services for mass people 'on-the-go'. This is why Facebook's founder Mark Zuckerberg, while launching Libra, rightly said, "Calibra [facebook's crypto-currency wallet] will let you send Libra to almost anyone with a smart-phone at low to no cost. Over time, we hope to offer more services for people and businesses-like paying bills with the push of a button, buying coffee with the scan of a code, or riding public transit without needing to carry cash or a metro pass."
Adnaan Jamilee is a certified blockchain experts and financial services professional.
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