Facebook libra was announced on June 18 as a “global, digitally native, reserve-backed cryptocurrency built on the foundation of blockchain technology” as stated in its white paper vision preamble. But if we look at its objectives, Libra is really a global digital payment system.
This vision is similar to other payment system ideas such as Apple Pay, Paypal or a credit card. The difference between Libra and Apple pay or a credit card is that Libra does not need to be backed by a credit card or bank account. Essentially, Libra is a prepaid digital instrument.
Politicians were deeply concerned because they were focused on its blockchain technology and considered it a cryptocurrency. But really Libra does not conform with what a cryptocurrency is, because the blockchain will be controlled by a group of corporations, instead of being distributed decentralised community sharing the transaction verification through competitive rules.
Technology is only a mean for Facebook to achieve its goals. As said, there are currently similar payment systems. The two critical ideas behind libra are
1.- To increase its customer base by including the under-banked citizens, which, the Global Findex 2017 report says is 1.7 billion persons.
2.- Reduce to close zero the transactions costs and instant delivery of value.
Some authors see similarities to Visa’s founder Dee Hock idea about an electronic payment system instead of the rudimentary paper-trailed credit card processing system.
No doubt the idea of an electronic payment system is already well known since it started being used by credit card corporations and banks to control and authorise transactions using their cards. But, there is no doubt that Libra and its rival Telegram-backed TON are inspired by the Chinese experience with digital transactions.
According to an article by South China Morning Post, China will overtake the US as the top market for digital payments by 2020. The United Nations Conference on Trade and Development (UNCTAD) in its “Information Economy Report 2017: Digitalisation, Trade and Development” said that credit and debit card share in global payments would drop to 46% from its 51% three years ago.
The French tech consulting firm Capgemini and BNP Paribas stated in the World Payments Report 2018 noted that Global non-cash transaction volumes grew 10.1% in 2016 to reach 482.6 billion. Emerging Asia ( 25.2%) and CEMEA (17%) were the main drivers of this growth. Also, the growth rate grew in developing countries to 16.5%, driven by governments’ efforts to encourage financial inclusion and the increasing presence of mobile devices with payment apps. India (33.3%), China(25%) and South Africa (15.1%) were leading this growth.
A report on mobile payment in China released on June 11, tells that till December 2018 the number of Chinese “mobile netizens” reached 817 million. 98.6% of them accessed the internet through a mobile phone, and 71.4% of them paid online using its smartphone, this method showing a growth rate of 10.7%
The two most influential companies on digital payments are WeChat Pay and Alipay. WeChat Pay is the Chinese equivalent of Facebook’s WhatsApp, holding 902 million daily active users. Wechat pay is available in 40 countries and 13 currencies, its digital currency accepted in over 300,000 offline stores. Wechat Pay daily transactions exceeded 1 billion in 2018, according to this article by chinainternetwatch.com
Alibaba launched Alipay in 2004. In 2019 it had $519 billion payment volume and 608 million monthly active users, with an average 175 million transactions per day.
According to that scmp.com article, The Chinese mobile payment market was 23 trillion yuan ($3.5 trillion) in 2017.
Taking all these facts into account, it is evident that Facebook’s board of directors recognised that they must follow the path WeChat Pay and Alipay showed, and monetise the vast customer base Facebook and WhatsApp have while at the same time be the leader in the electronic transactions market in the west.
Was it an error to call Libra a cryptocurrency?
Possibly. While Libra uses blockchain technology to secure transactions, the cryptocurrency name is associated with fringe, non-central-bank issued currencies. Thus, a new cryptocurrency would be not very well perceived by the financial and political establishment.
Their best strategy to “sell” Libra to Politicians and bankers would have been to acknowledge from the beginning that, although the Libra token would be using blockchain technology to verify and confirm transactions, the Libra blockchain would be controlled by the Libra Asociation members exclusively. Also make clear that its real objective was just to create a digital payment system, not a currency in any way. Maybe its second mistake was not to back Libra directly with the Dollar or devise a system with multiple interchangeable Libra versions. Everyone backed by local currency.