Today, I gave a speech on Africa’s fintech and banking sector outlook with full consideration of the unveiling of Facebook Libra cryptocurrency. In my practice, our best product is being retained by firms so that CEOs or Chairmen can call in and ask for perspectives. But this was different: a fintech investor with focus on Africa wanted a quick insight.
Simply, I want everyone to note that Libra will partly provide paths for citizens to “avoid” the inflationary paralysis on the Nigerian naira. Libra is not fully decentralized – it is largely a digital currency which is tied to major currencies under the supervision and regulation of the founding members like Visa and Stripe. You have to go through those gatekeepers to participate in Libra. That is it – its functionality is different from the fully decentralized Bitcoin even though the blockchain engine is typical. (Read Libra Whitepaper here; great vision, generally.)
And when in, within the Libra ecosystem, interesting things can happen:
- Cushion Against Inflation: Consider this scenario: I have been paid N1 million (in Nigerian naira) which I want to keep in my Naira bank account, but also worried that after a year, I will lose about 10% of value to inflation. With Libra, I can move that money into Libra which theoretically will not experience inflationary pull. With all frictions for Forex and currency conversion gone, this movement will be seamless. To avoid getting that inflated equivalent of N1m after a year, I will ask Facebook to pay me via my domiciliary dollar account in Nigeria trusting that my US dollars has marginal inflation. If I convert that USD back to Nigeria Naira, I would get better value compared leaving the money in Nigeria Naira bank account. (Assume Naira-US Dollar exchange rate is constant for a year). Using this, one can technically avoid inflation provided there is no significant friction in moving the money from bank account to Libra and out. Of course, Libra can say you must use the same bank account that you funded Libra wallet to get your local fiat currency. If that happens, this fails. But expect people to open Libra-anchored eShops so that they can pay themselves to have the capacities to move that Libra money to another bank account to overcome that inflation. Libra payment attracts no fees on users.
- Cushion Against Currency Exchange Rate Deterioration: Then consider a situation where a currency keeps losing value like Naira. The simplest and safest strategy is to move your Naira into Libra so that if Naira drops from N310 to $1 to $N320 per $1, your Libra will ensure you do not lose value due to Naira currency deterioration. In that case, Libra will become a store for value.
Sure – Facebook and members of Libra are not concerned on monetary policies but their technology will wrestle significant powers from central banks as citizens will make best decisions for themselves. Why keep Naira to lose value when a mere Facebook account can “protect” it against loss of value.
The Calibra Digital Wallet
Libra comes with a digital wallet called Calibra. That will anchor many things like financial services and possible credit services in future:’“It’s an anomaly that the Internet has no protocol for money,” David Marcus [Libra Project lead] tells Fortune, adding that Project Libra will also provide more competition in financial services, along with increasing access to capital.’
In addition, the company also announced a new digital wallet called Calibra, which will be operated by Facebook as a separate subsidiary and provide users with a way to store and spend Libra. The digital wallet, which won’t be available to the public for months, will display the value of users’ Libra in their local currency and provide a design similar to popular digital wallet Venmo for transferring money.
In addition, members will also maintain the supply of Libra in response to demand—meaning they will issue new Libra as needed, and destroy the digital currency when people redeem them….In order to avoid the notorious volatility of cryptocurrencies like Bitcoin, each unit of Libra will be backed one-to-one in a basket consisting of dollars, pounds, euros, and Swiss francs.
It is key to note that while Libra Foundation can create new Libras, it does not seem like new ones will devalue already existing ones due to the pegging imposed with the basket of currencies.
At the moment, only South Africa’s Naspers is in the Libra founding membership from Africa. Facebook expects 100 founding members (it has only 27 now), each pays $10 million.
It is important to understand that Libra will be the fiat currency of many fiat currencies just like central bank is the banks’ bank.
As this redesign happens, some of the most powerful institutions will be the institutions Libra will approve to connect Naira into Libra via the founding team. I will hope they will allow many and not just few. If not, there will be a dislocation. Yes, if they choose a Bank A, everyone will leave other banks for Bank A in order to have access into Libra.
My assumption is that Libra will have near-zero marginal cost with distribution and transaction costs largely insignificant. Yes, those costs will not drive the decisions of users in the practical way paying bank fees affect you when sending money from Nigeria to New York.
Ultimately it’s consumers who will determine whether Facebook’s grand gambit will succeed or fail, with the most important test of Libra likely being convenience. If the currency’s use becomes widespread and proves to be more useful than payment options like credit cards, debit cards, Venmo and Bitcoin, it could transform large parts of the tech and finance industries.
Then again, it could also inspire others—notably Apple or Amazon—to launch cryptocurrency networks of their own.