United States, June 18, 2019 – Facebook and 27 other partner companies formally announced Libra, a form of digital currency powered by blockchain technology. Facebook will launch a new subsidiary, Calibra, in 2020 that will offer a digital wallet for Libra and be available in Facebook Messenger and WhatsApp, as well as through a standalone app. At launch, Calibra will focus on peer-to-peer (P2P) transfers of Libra, but could later introduce the digital currency as an alternative for consumer-to-business (C2B) payments.
We see the launch as supporting Facebook’s efforts to integrate more deeply with its 2.4 billion users beyond social media platforms and to potentially attract new users. The launch could also help the company tap new data sources, making its advertising more efficient and boosting overall advertising revenue.
From the payment processing industry’s perspective, the launch of an alternative payments platform by a technology leader as ubiquitous as Facebook is likely to accelerate electronic payments’ share gains from cash and checks. The key issue that remains unclear at this time is how Libra will tie into the rest of the world’s financial ecosystem. Visa and Mastercard appear to be more natural partners for Libra than national automated clearing house systems in light of the global nature of Facebook’s effort.
Still, Libra faces a range of regulatory hurdles. The announcement has already attracted the attention of financial regulators globally. Some US lawmakers have been quick to raise privacy concerns, while national authorities in Europe and Asia have raised concerns regarding the stability of digital currencies. The adoption of new forms of currency that fall outside of a country’s control raise a variety of issues for sovereign issuers, in that digital currencies can adversely affect national and regional central banks’ ability to implement monetary policy. Governor of the Bank of England (BoE) Mark Carney signaled the BoE’s intent to engage with tech companies to ensure consistent regulatory treatment and ultimately allow payment providers access to central bank overnight accounts – similar to
commercial banks.
For potential efficiencies to be realized, Facebook and its partners will need to overcome a number of hurdles, in particular, regulatory acceptance, which will be a key determinant of Libra’s path. In addition, for Libra to develop economic characteristics associated with currencies, a critical mass of users will need to trust it, its price and liquidity will have to be relatively stable and there will need to be a means to control supply. It is unclear what other ‘money-like’ applications Libra will ultimately be used for beyond the ability to make P2P transfers within a relatively contained context.
According to the Libra white paper, the currency will be backed by reserve assets consisting of bank deposits and short-term government securities (in a basket of so-called stable currencies) to minimize price volatility. The reserve feature of Libra makes it distinct from Bitcoin and most other cryptocurrencies. A wide range of firms, including online payment processors, telecom companies and major merchants, will govern the new currency through a new group known as the Libra Association, as shown in the exhibit.
Libra is positioned as a stable, real asset-backed currency built on a secure and stable open-source blockchain. One of its primary goals is to improve access to financial services for the global underbanked population, which is estimated at 1.7 billion people.
The significant issue that remains unclear at this time is which processing infrastructure the new digital currency will use. On the network side, Visa Inc. (Aa3 stable) and MasterCard Incorporated (A1 stable) appear to be more natural partners for Libra than national automated clearing house (ACH) systems in light of the global nature of Facebook’s effort. If Facebook were to launch a separate payment processing network, it would be credit negative for the card networks. On the merchant processing side, there will be a role for processors to handle transactions settled with Libra, as they handle transactions in national currencies today. With operational details not yet available and the launch for C2B payment applications some time away, we believe that the impact to the industry will be broadly positive, but it is too early to judge the magnitude and timing.
The widening application of digital distribution and product development in financial services is materially changing the basic terms of competition across banking business segments, including payments, lending, capital markets, and wealth management. In the fast-evolving digital ecosystem, the largest technology firms are poised to become formidable competitors in retail financial services, undercutting banks’ transaction fees. Facebook is certainly not the first company to launch a crypto payment solution; however, with its immense user base it would pose a threat to the banking industry should the initiative gain traction with consumers and businesses.
In particular, this new platform could effectively provide an alternative ecosystem for payments, bypassing existing players and obviating some of the roles banks traditionally play. Another key factor to watch as the product evolves is whether Calibra and other Libra wallets ultimately offer deposit-like products and other financial services and, if so, to what extent clients, including consumers and businesses, use them.
As big tech companies like Facebook position themselves as financial service providers, their success could allow them to control not only a significant portion of distribution and customer mindshare, but also to compete more directly with incumbents by manufacturing financial products, controlling the user experience and, ultimately, capturing a greater share of associated profit.
Credit Outlook: 24 June 2019. Pg. 11
Moodys
Atlantic Investors Service 