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LEAD Innovation Blog

Read our latest articles on innovation management and innovation in a wide range of industries.

Date: 28-Jun-2019
Posted by: Gerhard BERTHOLD
Category: Banks

Why Facebooks new currency Libra not only threatens the banks


Libra is to come in 2020 as a new currency for the whole world. This will reduce transaction fees and give 1.7 billion people without bank accounts access to the financial world, promises Mark Zuckerberg. Read in this blog post how Libra should work, who will benefit from it and why the crypto currency threatens the role of banks and the currency monopoly of states.

Mark Zuckerberg recently presented his plans for a new digital currency. Together with major partners such as Visa, Mastercard, Paypal or Booking.com, Spotify, Uber and Vodafone, Facebook wants to provide the world with a global parallel currency. The new crypto currency called Libra will make money transfer as easy as sending text messages. In order to be able to use the new means of payment, only a smartphone should be necessary.


How Mark Zuckerberg's new money will work

How the new money or the financial infrastructure is to function can be read in a comprehensive white paper. In short, Libra is structured as follows: Like other crypto currencies, the new digital money from Facebook is also based on a blockchain. This is a kind of digital cash book, in which every transaction is stored in a forgery-proof way, but the sender and recipient remain anonymous. In order to be able to use crypto currencies, the user must install a digital wallet on his smartphone or computer. Facebook has founded a subsidiary called Calibra, which offers such a program. It can be integrated directly into WhatsApp or the Facebook Messenger. Libra should also work with other wallets.

The main difference to existing crypto currencies is the binding to important established currencies such as dollars, euros or yen. Libra is therefore a so-called stable coin. Unlike Bitcoins, which are limited in quantity, users cannot create their own currency by digging. Who wants to acquire a Libra, which must pay the equivalent value for it in a Fiatwährung such as euro or dollar to a reserve fund of the Libra reserve. Experts expect that the value of a Libra will correspond approximately to that of a dollar. The Libra Reserve will control the Geneva-based Libra Association. In addition to Facebook, 27 other founding members are currently represented in this non-profit organisation. By the time Libra is launched, there will be 100 partners, each of whom will have to contribute 10 million US dollars. Together, the members of the Libra Association will decide how the money that has flowed into the Libra Reserve will be invested in order to keep Libra as stable as possible. The partners also operate the computers on which the Libra blockchain runs.

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Which advantages should Libra convince the users with?

Libra should make money transactions easier for everyone. With a few clicks you can send money worldwide. A little later, payments will be possible in the restaurant or shop. The new currency should also solve a whole bunch of global problems. Libra could offer people who do not have a bank account access to the financial system. After all, 1.7 billion people, about 31 % of the world's population, have no bank account. But one billion of them have a mobile phone and 480 million have access to the Internet. This would bring additional growth to developing countries. Especially because it would give many micro and small enterprises access to a loan. At the same time, Libra should make remittances faster and, above all, cheaper. According to Facebook, the fees for international transfers are over 7 percent. It is not yet known how much the transactions with Libra will cost. However, they should be transparent and fair, as the Libra Association emphasizes.


Why Libra can be a good business for operators

Facebook and its partners certainly don't want to improve the world with Libra - at least not only. The new currency Libra offers the social network in particular many new opportunities to earn money:

  • So far, Facebook has been used to exchange information. If money can now be sent in the ecosystem of the social network, this will increase its attractiveness and more users will spend more time on it. This in turn increases Facebook's advertising revenue.
  • Although the fee for transactions with Libra will be small, it will still be a source of income for the partners of the Libra Association.
  • The funds bunkered in the Libra Reserve generate interest income. The German news magazine Focus has drawn up a simple calculation: If each of the 2.7 billion Facebook users buys 10 libraries, 27 billion euros will go into the Libra Reserve Fund. With a rather conservatively calculated yield of 3 percent, this still results in 810 million euros per year.
  • Facebook promises to be able to use Libra completely anonymously and not to have access to the transaction data itself. However, the past teaches us the value of such promises - Cambridge Analytica and many other data scandals.


Why banks and politicians have great reservations about Libra

In any case, Libra has the potential to change the entire financial world. Christoph Kley, a banking lecturer at the Zurich University of Applied Sciences, told the Swiss daily 20 minutes that banks could lose market share in payment transactions. This is the case when bank customers transfer large amounts of credit from their bank accounts to the Libra world. Many of the founding members mentioned already have a dominant market position in their field. If these companies were to work closely together, they would further strengthen this position. But Libra could also cause state currencies to lose their significance: "If Facebook issues a crypto currency the group becomes a central authority similar to a fed or an ECB," Sven Korschinowski, digital banking expert at the consulting firm KPMG, told Der Spiegel.

Politicians from all over the world are therefore already warning against Libra: "We should prevent the Wild West from returning to the monetary system," Joachim Wuermeling, Chairman of the Deutsche Bundesbank, warns the FAZ. He fears exchange rate and default risks for Libra users. In addition, Facebook could hoard huge amounts of government bonds and thus develop into a large creditor of states, believes the Bundesbank board and calculates: "If only 100 million of the 2.7 billion Facebook users participated, Libra would already have more customers than the entire German banking market". Great concerns and the clear demand for a quick regulation of crypto currencies are also coming from Great Britain and France. The chairwoman of the US Finance Committee, Maxine Waters, called on Facebook to put the Libra plans on ice and wait for the authorities to investigate. In Germany, some politicians are calling for the introduction of a digital euro in response to Libra. China shows that politics no longer has much time to give an adequate legal framework: thanks to Wechat Pay or Alipay, the mobile phone has more or less replaced the wallet there.


Conclusio: Why Facebooks new currency Libra not only threatens the banks

Facebook shows a lot of courage with the presentation of the new currency. After all, money is based on the trust of its users. In the past, however, the social network was more than careless with this. However, if the advantages of digital money, such as high usability and low costs, convince the billions of active Facebook users, Libra can quickly become a global parallel currency. Not only banks and other financial service providers will have to fear for parts of their business. The currency monopoly of states is also at stake.

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Image Source Cover picture: https://pixabay.com/de/illustrations/libra-kryptow%C3%A4hrung-facebook-geld-4283995/


Born in Vienna. At LEAD Innovation he works as Innovation Manager.

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