Facebook's Libra gamble

RBI should stay firm in not allowing it in India

Facebook’s planned 2020 launch of Libra will mark a paradigm shift by taking the cryptocurrency concept mainstream. The Libra will be backed by a basket of assets. By enabling fast, seamless cross-border transactions and micro-payments, it could substantially reduce transaction costs and address the needs of the unbanked. Facebook has a user base of over 2 billion and it has signed up some of the biggest names in financial services to join the new initiative. While FB will back the initiative through its subsidiary, Calibra, the currency will be managed by an independent foundation, the Libra Association. It is based in Geneva, and other members will have voting rights. The Association already includes Visa, Mastercard, PayPal, Uber, Lyft, Spotify, Coinbase, Vodafone, and several large Venture Capital firms. Any reputable entity can join by paying $10 million into the reserves. 

The Association will take independent decisions on currency management. Libra will be a “stablecoin” issued on the currency board principle: Every coin will be backed by assets. The reserves will consist of a basket of fiat currencies, gold, etc, and it will be regularly audited. Libra would be issued to all Association members against the membership fees payable. The digital wallets will be issued by Calibra to users of Facebook Messenger and WhatsApp, after KYC certification. Transactions will be handled by Calibra, which will do verifications on a “permissioned” blockchain. The blockchain will be open-source. But access to carry out transaction verifications will be restricted to Association members. Calibra has invented a new computer language, Move, for the specific purpose of handling Libra-related activities.

The social network has said there will be a “Chinese Wall” between the parent Facebook, and Calibra, to prevent Facebook accessing sensitive transaction data. In a nod to the practices in bitcoin, and other cryptocurrencies, users may own multiple Calibra wallets used under pseudonyms. This would help them maintain secrecy from other users, although Calibra would be able to map transactions and wallets back to the owner's KYC, preventing easy money-laundering. Putting together the financial muscle and reach of the Association members, Libra would be available to nearly 3 billion individuals scattered across the globe. This also means that it would be widely acceptable to all sorts of vendors, and easily vetted by central banks.

This could dramatically reduce transaction fees in many domains, by for example, charging a small flat fee for every transaction, regardless of the transaction size. Unlike bitcoin, or ethereum, or other cryptocurrencies, a stablecoin also rules out wild speculation that characterises cryptocurrencies backed by nothing. The supply of Libra depends on the value of reserves held by Libra, implying non-volatile exchange ratios depending on the movements of fiat currencies. This also means it is easily and seamlessly convertible back to fiat currency. The social network is also setting up a technical and organisational structure that complies with both local and international regulations, and anti-money-laundering norms. 

Questions remain, of course. For example, it's not clear how Libra intends to comply with the know-your-customer norms for the unbanked - reason why it is unlikely to be available to customers in India, one of the world's largest remittance markets. Though it could, among other things, save non-resident Indians huge fees and commissions on the $80 billion they are expected to remit in 2020, the Reserve Bank of India is unlikely to grant it permission despite India being Facebook’s largest user-base. Privacy is also a huge concern, particularly in view of Facebook's dubious record in this respect. In any case, the central bank has been dead-set against cryptocurrency and in April 2018 had given regulated entities a three-month deadline to stop dealing in virtual currencies due to associated risks. The argument in favour of Libra has been that it is a stablecoin — a cryptocurrency whose value is pegged to be as stable as the dollar. But the RBI should stay firm in its decision not to allow any form of cryptocurrency due to legitimate concerns around tax evasion, money laundering and fraud.