Facebook’s Libra is about to disrupt mobile money; here’s why central banks must care

Thursday July 11 2019

Facebook Libra

Libra will make it possible to transfer funds with the ease that users transfer photos from their gallery in the phone to a contact in their WhatsApp list. PHOTO | KAY NIETFELD | AFP 

ROBERT KIRUNDA
By ROBERT KIRUNDA
More by this Author

Facebook announced on June 18 that it is leading a consortium to build and launch Libra, a cryptocurrency, illustrating disruption in its best form.

If the project succeeds, the scale of disruption in Africa — and beyond — will be enormous. For example, traditional remittance businesses such as Western Union and MoneyGram will either adapt or become extinct.

Mobile money, too, will not be spared. Libra will enable instantaneous micropayments — something mobile money cannot achieve, given its architecture.

Mobile money demonstrates the purpose of convenience and has improved financial inclusion. It has introduced regulators in the region to the challenges surrounding the overlaps between banking and telecommunications in a domestic context. Libra raises the levels of complication to the global scale.

Libra will be on the blockchain. Regulators can use this fact to drive for greater transparency, if they choose to come down hard on the Libra consortium. That level of transparency does not exist presently with mobile money players.

The only reason for this is that the legal framework has never required it. With blockchain, in theory at least, the information should be available to anyone with a blockchain reader.

Advertisement

Libra will make it possible to transfer funds with the ease that users transfer photos from their gallery in the phone to a contact in their WhatsApp list. Libra will disrupt the pricing and practicality of mobile money. It will be cheaper and require fewer steps.

Libra’s success presents new frontiers of thinking for policy makers, regulators, legal practitioners and the courts of law. Consider the questions of territorial sovereignty that surround the issuance of currency.

The Uganda shilling has a value because the Bank of Uganda says so. When that currency comes under threat from any forces, internal or external, it is the duty of the central bank to intervene and stem that risk at the earliest possible. This is partly why it is in the interest of central banks to oversee mobile money.

Libra will shift the power of financial regulation from central banks across the world. Given that it is starting out as a “permissioned blockchain,” Libra will not provide blockchain enthusiasts with the same level of “liberation” as Bitcoin.

The net result in the long run is that enthusiasts will either move to Bitcoin thereby driving the price further up or build similar currencies. It will be interesting to see if central banks will change their stance on whether cryptocurrencies are in fact a form of money.

To be fair, Facebook is not the first non-state actor to influence financial regulation. Through Basel Guidelines, the little-known Bank for International Settlement influences financial sector regulation more than the legislatures of most countries in the world.

The difference is that while Basel is, at its core, a meeting place for the most powerful regulators, Libra is the classic centralisation of power in private hands.

This guarantees the 100 companies in the consortium an unimaginable amount of power without giving them the responsibility to account to any population or parliament.

Unless a new form of regulation were to emerge, the social implications of the disruption this will cause will be left with central banks and governments that are significantly weakened in the controls they can impose. Governments across the world have to quickly think about a new regulatory model that suits such a development, as the current regimes fall woefully short.

Central banks need to consider the potential impact on balance of payments. Car importers, for example, will pay for those cars in Libra and the conversion will happen at rates not monitored by the central banks. How then do we determine the value of exports, in which today the value of foreign currency is a major consideration?

Then there is the tax collection component of the trade cycle. Policy considerations are often driven by selfish national interests. In this context, it will be as interesting to see how tax bodies and financial sector regulators in one country respond, as it will be to note how divergences in country approaches will be addressed.

Libra will be backed by a basket of the world’s most stable currencies to be held by a financial institution big enough to hold such deposits. Central banks need to consider how they will deal with the attendant currency fluctuations.

There is a chance that there may be massive cuts in deposits in bank accounts and mobile money. The natural reaction of some central banks in the face of such risks would be to ban Libra or any type of cryptocurrency. This approach would be both impractical and unwise.

Facebook has one thing no central bank in the world has: Two billion users. If Libra succeeds, central banks that take that route will have to contend with the implications of a massive adoption by users who just cannot wait two days for cheques to clear or pay for telegraphic transfers that can be free on another platform.

Then there is the regulation of data and the impact on privacy. The amount of transaction data at this scale will be enormous.

If East African behemoths in the financial sector like Safaricom and MTN do not find new ways to tap into these data streams, they lose a valuable asset.

But data on blockchain has another invaluable purpose: Sovereign identity. Facebook has proposed that it will put in place stringent KYC (know your customer) measures. In time, domestic KYC requirements will either have to change or adapt.

In future it will be possible or even desirable to identify an individual by their digital footprint just the same way we identify them by passports when they travel. While passports are territorial, Facebook, Amazon, Apple, Google, Alibaba and similar companies are creating a seamless world in which the case for data as the basis for sovereign identity is gaining currency.

No East African country has a data protection law good enough to address the concerns of a project at this scale. The farthest-reaching data protection legal regime in the world today is the General Data Protection Regulations (GDPR) in Europe.

Conversations are happening among some of the world’s smartest lawyers on the relationship between GDPR and blockchain — and which any regulator and consumer of data in the Fourth Industrial Revolution must pay attention to.

Facebook is no stranger to controversy on privacy issues. However, Libra presents a new opportunity. In the nascent days of blockchain advocacy, there were concerns about the privatisation of user generated content.

The idea is that Facebook, Twitter and like companies should be paying users a data dividend for creating their content. The challenges were two: How to define these data rights and how to enforce the right to earn this data dividend. A new proposed law answers the first question.

On Monday June 24, a Bill known as the Designing Accounting Safeguards to Help Broaden Oversight and Regulations on Data (or DASHBOARD) was introduced in the US Senate. If it passes, the Bill will force tech giants like Facebook, Google and Amazon to tell users how much their data is worth.

Companies will be required to provide specifics of how much data is collected, how it is being used and its value on an annual basis.

Dividends

Libra makes the collection of this dividend possible. Facebook should be paying its users a rebate the same way funds are transferred along the network. This transforms privacy from a human right to a service.

It would be interesting to see if Facebook will give up African users where a court in Nigeria or South Africa or Kenya rules that this should happen if Libra is to be allowed to operate there. These are the legal questions of tomorrow but for these new fields of law to grow, judges and lawyers need to adapt to these paradigm shifts.

It has been predicted that Facebook will pay interest to Libra users. This is because the “basket of currencies” and “low risk securities” that will back Libra will need to be held with a financial institution such as a central bank or the Federal Reserve in the US.

These funds will attract interest. The sums will be huge. If the consortium pays interest to Libra users, banking and capital markets regulators will have to debate whether it is a security or a currency. In some countries, licences may be required from central banks and capital markets regulators.

Locally, two scenarios are immediately possible: Either smart lawyers will start to build the case for MTN, Airtel and Safaricom to share the interest they earn from holding mobile money deposits with their customers or the return on Libra holdings will drive deposits out of mobile money accounts.

The extent to which domestic courts will play a role in adjudicating Libra-related disputes is unclear. Can an aggrieved Libra user sue the Libra Association or Calibra — the company responsible for protecting financial data from abuse in Uganda’s courts?

If so, how should such an order be enforced? The Libra Association, which will be responsible for regulation, will be based in Geneva. It is a not-for-profit entity that has profit-motivated companies. There are both legal and moral questions here. But it is doubtful that many countries in Africa will have the machinery to take on such an institution in Geneva.
The disruption will not only be on money, banking and finance. New creative tech and regulatory products will emerge for which most legal regimes are unprepared.

Capital markets regulators, for example, need to rethink the regulation of crypto assets.

If the Libra disruption is successful, it will only be a matter of time before security backed tokens and initial coin offerings are back in vogue.

Robert Kirunda is a Kampala-based advocate and a member of the National IR Taskforce in Uganda.

Advertisement