Libra – Boon or Bane?

Libra – Boon or Bane?

Libra is a digital currency that has the potential of lowering transactional fees for consumers.

In addition, it can also facilitate monetary transactions in an easier and faster way.

These values can benefit not only consumers, but also Facebook and other social media sites, and other e-commerce firms.

As a result of being able to access more consumer data and facilitate easier and faster purchase of advertised products, these firms can increase their marketing fees and profit margins.

Libra therefore has the potential of catalysing a series of changes and innovations in banking and finance, and trade and commerce.

On the other hand, there are inherent risks and dangers that may pose challenges to both local and global economies.

Thus far, Facebook has been long on promoting commercial benefits of Libra but short on providing information about proper running and control of Libra.

The following are some of the risks and dangers:

1. Facebook

Facebook has entrenched itself in many developed and developing countries, and among those who are relatively more educated and financially better off.

If a part of Facebook’s 2.4 billion users adopt, hold, transact and use Libras, the new digital currency may become a widely-circulated currency on a cross-border basis.

Although Facebook has announced that it will not be running Libra, it will most likely recruit the most number of users of Libra.

Facebook may therefore have a big say in the running of Libra.

In addition, Facebook will be starting its own digital wallet, Calibra, to help manage its customers’ digital currencies.

In doing so, Facebook will have access to users’ personal and financial data, and be able to have a stronger influence on these users.

Unfortunately, Facebook and many other social media firms are not well regarded for managing private data, handling of fake news and other misinformation, keeping their promises, and being transparent with their standards of governance.

Moreover, Facebook and other online firms may not be willing to give up control of their consumers, and to share data with other partners even if it’s for the greater good.

2. Systems and Technology

Systems and technology behind managing of Libra are largely unknown, unverifiable and untested.

Case in point, the system to process an initial 100 nodes – and the number of nodes is projected to grow – is a relatively complex system with many moving parts.

It will take time to develop and test such a system, and it cannot be done using Facebook’s “move fast and break things” approach without causing major repercussions.

Proponents may argue that the system supporting Libra can be securely encrypted and therefore, digitally secured.

However, advancement of technology has always shocked and surprised us in the past and will continue to do so in the future.

As a result of progress in advanced computing, artificial intelligence, quantum mathematics, and other technology, there may be ways to hack into Libra and for that matter, any other digital currency.

Hackers are probably working overtime right now to develop ways to exploit Libra under different scenarios.

3. Consortium managing Libra

Managing of Libra will be outsourced to an independent Geneva-based consortium, comprising of presumably credible professionals from the banking and financial, technology, and non-governmental sectors.

Its major policies and initiatives require the endorsement of a two-third majority.

That being the case, will having many “cooks” working together be able to run Libra effectively and efficiently?

4. Consumers

The Libra Consortium is building up a war chest from the US$10 million one-off fee from each founding member of the consortium.

These fees will be offered to both online and brick-and-mortar vendors to attract more consumers to use Libra by offering them discounts and other incentives.

It is likely that such “freebies” can potentially attract a growing number of Libra users, and many of these users may have no or little knowledge about Libra, and its potential downsides.

These consumers may not have adequate financial knowledge and skills to manage Libra and use it wisely.

That will give regulators added concerns and impetus to monitor and regulate Libra closely.

5. Regulatory Measures

Many digital currencies have been known to facilitate illegal activities, including illegal vices, tax evasion, avoidance of capital controls, and money laundering.

Hence, there’s added need to regulate the digital currency market.

Also, if there’s any adverse inflation or currency fluctuation, it may affect users of digital currencies.

If anything untoward happens, there is little that the authorities can do, both locally and overseas to mitigate any potential fallout.

They may not be able to offer a safety net and legal recourse for affected victims.

Just as importantly, it may be hard for regulators, even on a collective basis and across different countries, to prevent financial instability and social unrest, and bring calm to the economy and society.

Hence, there is a growing number of governments that are working together to regulate digital currencies, including and most likely Libra.

They are increasingly eliminating anonymity in the use of digital currencies, for example, by making it mandatory to report any capital-enhancement or income-generating activity and transaction.

Such regulatory enforcements may erode the advantages of using digital currency to facilitate easier and faster transactions.

6. Financial Risks

Libra will most likely not offer interests on deposits, and it is pegged to a basket of major currencies.

(These currencies are not made known to the public at this point).

As such, users may suffer forex losses if their local currency strengthens against the pegged value of the Libra.

In addition, the Libra may not be a safe asset as the reserve that is backing it may largely be deposited in fractional reserve banks and its stability is reliant on those banks.

The Libra Consortium may not have access to money from central banks to help clear its transactions between banks.

Also, the deposits in Libra may not be supported by government-backed insurance.

7. Banks

Libra has the potential to decrease profits of banks by disrupting banks’ revenues from cross-border transactions and other services.

It can also affect bank’s volume of deposits if Libra is being used to purchase government bonds and other assets.

If undue amount of money is converted to Libra and not held in a bank, it may cause the banks to reduce their lending capacities, and that may even lead to insolvency issues.

Facebook may develop a range of financial services similar to what WeChat and Alipay have done, and may even become a bank so as to offer a wider range of banking and financial services.

These services have the potential to disrupt banks and affect their survival and growth.

8. Anti-Competitive Practices

If Libra becomes a dominant currency, and it is supported by more and more digital wallets, it may stoke concerns about anti-competitive practices.

The authorities can come down hard on Libra if it causes undue effects on the financial markets and social stability.

The abovementioned issues and other forces have a major influence on Libra’s stability and sustainability.

Until more and better information is available to make a better-informed judgement, remember the Latin term – caveat emptor.

It means “Let the buyer beware”.

https://www.straitstimes.com/business/mas-in-talks-with-facebook-over-its-libra-cryptocurrency

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