What is Facebook Libra?
This year Facebook announced its global cryptocurrency, which is technically very similar to existing digital currencies, but based on a different and sound launch strategy when compared to its competitors. It promises to rock the banking sector worldwide as it has the potential to become a global currency. What kind of impact could it have on Brazil?
First of all, it’s a Stable Coin
Unlike Bitcoin (BTC), Ethereum (ETH) and others, Libra is a Stable Coin, i.e. its value does not result from mining costs and market demand-supply fluctuation alone. Like other less common currencies, Libra has a third balancing element, it is backed by highly liquid market assets (e.g., U.S. treasury securities). This gives the currency much more stability and a “dollar-like” feature, as it is mostly backed by American financial assets.
Facebook is a brand we already know
You are probably suspicious of today’s cryptocurrencies, since there is no big company or government behind them and their anarchic spirit turns most people away. Unlike the market as a whole, Facebook has a reputation to protect, which leverages the project to an even greater extent. If its currency collapses, the company could break as well, despite the fact that it has set up a second one to Libra. After all, we are talking about the company that owns the largest global social network.
It is very likely that the company will cooperate with governments from the beginning of its operations worldwide to prevent local currencies and taxation systems from collapsing. Thus, it should not be easily banned by disorganized countries like ours, where prohibition precedes reflection about issues.
How will it impact the Brazilian financial market?
Dear reader, before you conclude that some of the views below might be overstated, please be reminded that Facebook’s social network currently counts approximately 2.38 billion active users per month, a number that has never been achieved by any bank. In other words, more than half of the planet Earth could be potentially interested in using Libra in its first month.
After all, what could be the impacts? Let’s go step by step:
Exchange and remittance abroad
That market, which is already illegally affected by current cryptocurrencies, tends to be further troubled, as Facebook Libra has the potential to become the largest resource for international transfers from natural persons to natural persons and from natural persons to legal persons, as it, just like other cryptocurrencies, replaces other means of payment, e.g. credit cards. Sale of foreign cash by currency exchange offices could drop to a very low level, since Libra’s acceptance capillarity could reduce the need for physical money to travel abroad.
Low-turnover bank accounts and saving accounts
As other digital currencies, Libra is free of any account maintenance fees, but charges transactions, which feels more transparent to customers when fees are charged in general. Customers who use a savings account to receive money or save a small amount in Brazilian reais may now do it in (dollar-backed) Libra, free of bank fees and of exposing themselves to the risk of the Brazilian real.
Customers with a negative credit score and barred from banks
There is a strong movement in the market to serve customers who cannot afford to open a conventional bank account. The Brazilian Payment Arrangement Legislation has encouraged the creation of several Fintechs that focus on serving this public, offering simple products, such as accounts with no overdraft and prepaid credit cards, and those companies are booming. Potentially, the Libra digital wallet system serves this audience and could become a villain for startups. Those who stay out of the Libra network may not survive, as the new currency has made agreements with large credit card companies, allowing them to directly recharge their cards in Libra.
Also mostly served by the Brazilian Payment Arrangement Legislation or specific segments created by large banks, Individual Micro-Entrepreneurs (MEI) could quickly adhere to Libra due to its capillarity and popularity among their customers and the easy way to control, receive and transfer money. Banks may have to add products to their accounts to preserve this customer share. They may potentially have to offer accounting and tax consulting products, as well as different financial management experiences.
Credit Card Machines and QR codes
If Facebook turns its guns on payment systems, we may forget that one day, there was a time when credit card machines fought daily for a place in the sun. Potentially, any blockchain-based cryptocurrency could extinguish card payment modalities and completely eliminate payment intermediaries we know today (credit card companies and machines). If blockchain technology is used fully, it directly transfers any amount from a buyer to a seller. Credit card companies would merely offer installment payments, thus becoming on-the-go financing firms. With companies like UBER as official Libra partners, peer-to-peer transfer of funds should be increasingly encouraged.
As we experience a new era dominated by technology companies, large economic and financial groups will now have to tackle the same threats which small segments, e.g. passenger transportation, recently faced. Popular trends are deemed to prevail and banks may actually have to reinvent themselves for a new era of global currencies. Even the concept of open banking may not have enough time to be implemented as we have thought so far and may have to reinvent itself on the go. Will customer interfaces no longer provided by banks, which are then reduced to actual banking activities, such as products related to treasury, credits and financing?
Everything indicates that 2020 will be a fantastic year and, apparently, for the common good.
The cards are on the table. Long live innovation!