Facebook’s new cryptocurrency and five ways it might affect you
This week, Facebook announced the launch of a new global cryptocurrency Libra. With Libra, they pledge to deliver a stable virtual currency that lives on smartphones and could bring over a billion “unbanked” people into the financial system.
Governments and regulators have been busy dishing out negative commentary at this announcement and being generally unsupportive. Their reaction is not entirely surprising given Facebook’s spate of privacy troubles in the last few years. Basically every new product they launch now needs to come with a disclaimer that it will be a standalone product and will not be used in any ad targeting.
According to the announcement, they have learnt lessons from the roller-coaster history of bitcoin and have designed the new currency to be backed by real cash. The non-profit Libra Association based in Geneva will oversee this new cryptocurrency and maintain a real world asset reserve to keep its value stable. Libra Association debuted with 28 members including Mastercard, Visa, Stripe, Kiva, PayPal, Lyft, Uber and Women's World Banking.
So what does this announcement mean for you as a consumer? We explain five ways it might affect you in the near future:
1) A threat to US banks and your banking investments
The use of real cash to backup the currency is interesting, because this can greatly stabilize the value of Libra. It can also result in massive holdings by the Libra Association if it has worldwide consumer uptake. After all, Facebook boasts a monthly active user base of 2.3billion. If Facebook succeeds in getting 50% of its user base to buy $1000 worth of Libra each, Libra Association instantly holds assets comparable to the top 30 largest banks in the world. It claims to focus on the unbanked population, which should not subtract from the assets of existing banks. However, if Libra becomes a popular currency, the assets of existing US banks will surely be affected to some extent.
As it is, the widespread usage of WeChat and Alipay (mobile banking methods in China) has already disrupted local Chinese banks and are starting to worry US banks. Estimates by Bloomberg show that a potential mobile payment method in the US could take as much as $43 billion revenue out of US banks. Mobile payment methods might mean that banks no longer benefit from transaction fees on credit card purchases, bank fees, overdraft fees and ATM fees (ugh I hate these).
To me, this signals a threat to the traditional revenue streams of banks. If they are unable to participate in this new cryptocurrency (perhaps by offering complementary wallet or conversion services at a fee), this might gradually drain their profits over time. Given that I own quite a bit of bank shares, I will be looking to pare those holdings back if Libra gains widespread adoption.
2) Greater convenience and lower fees
The use of a direct peer to peer payment system might mean greater convenience for consumers and businesses alike and cut out the middleman fees imposed by credit card companies and payment processors. A seamless global currency will reduce friction in paying globally and allow greater transparency in purchasing items across borders.
Without credit card fees supporting the system, travel hacking with credit card miles might become a thing of the past. However, hopefully retailers will be able to price more competitively and pass on the merchant fees as discounts to consumers.
3) Your future mortgage might depend on it
Imagine paying for your daily coffee, settling the bill at your favorite dive bar and going grocery shopping without cash. Even though Facebook says its not going to use the data for ad targeting, they can still use the information they collect in a million ways: to profile you and learn your daily habits, to attribute purchases to content you have seen on Facebook and to aggregate consumer behavior trends.
Judging by how China’s mobile currency wallets have developed, it’s only a matter of time for a currency like Libra to expand to loans and interest-bearing deposits. By then, whether you qualify for them might be impacted by how much time you spend playing Fortnite or online shopping during working hours.
4) Easy and fast money transfers
Ever had the issue where you needed to make an instant fund transfer between banks either locally or globally and couldn't do it? Me too. The use of a global currency like Libra could solve this issue and allow instant, low-cost transfers instantly. Venmo and Zellepay exists but they have daily limits and not used at all outside of the US. Meanwhile, companies like Transferwise, Revolut and YouTrip already exist outside of the US and are widely used globally. It’s overdue for the US to start using a global currency system compatible with the rest of the world.
5) You will be screwed if you don't have a mobile phone
Already, many New York taxis offer Alipay as a payment option to customers. With retailers all over the world already educated on collecting mobile wallet payments, it’s easy for Facebook to fast follow many countries and retail outlets where Alipay and WeChat pay are already accepted.
In fact, it is getting pretty impossible to pay by cash in China and tourists are now trying to preload their WeChat wallets before they visit the country. In other words, if you still don’t have a smartphone, you might find yourself locked out of daily transactions.
With the ubiquity of affordable smartphones globally, even in rural areas, the market is ripe for mobile currencies. To be honest, US is already kind of late to the game because China and many other parts of Asia have already been strong adopters of mobile currencies for a while. Meanwhile, people in the US still pay with checks.
What do you think? Will you jump on the Libra bandwagon in the Facebook world when it becomes available?
Also read: “A beginner’s guide to investing your money”