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Could Libra Become a Chaotic Good in Financial Services?

Jenna Ammann headshotWords by Jenna Ammann
Investment & Markets
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Mercy Corps, the global humanitarian aid nonprofit, recently announced its partnership with various organizations on the development of the digital currency Libra.

Libra has generated countless headlines since June 19, when Facebook formally announced its plans for an early 2020 launch of this cryptocurrency. One doesn’t need too scrutinizing of an eye to see the motives behind Libra. On one hand, backers of this currency say Libra could help boost financial inclusion worldwide. On the other, if Libra succeeds, transactions occurring across Facebook’s various platforms—Whatsapp, Instagram and Messenger—could cement the company’s presence in billions of people’s daily lives. We’ll delve into the potential effects of Libra on some of the poorest people in the world and discuss whether or not this currency could work.

A step forward for financial inclusion

Mercy Corps has a compelling track record with its worldwide humanitarian aid projects, and has partnered with leading companies including Cisco. The NGO has a long history of leveraging its expertise on the challenges faced by the world’s poorest communities, so working on the development of Libra appears to be a natural fit for this Portland, Oregon-based organization.

Citizens long overlooked by financial firms could have the opportunity to become more integrated in the global economy if Libra can succeed on the financial inclusion front. To that end, Mercy Corps has identified five areas in which Libra would redefine the global economy.

Low volatility: People susceptible to periods of high deflation or inflation in their home country’s currency could have the option of resorting to Libra as a more stable currency. Libra is currently backed by assets from partners within the Libra Association, including Uber, Lyft, Spotify and Mastercard. The currency’s value will be pegged to the value of these assets—of course, one risk is that some of these companies, including Lyft and Uber, have yet to make a profit. Assuming this structure will yield a more stable cryptocurrency than other digital currencies, Libra has an opportunity to be the default currency for people living in economies where the current currency of choice is vulnerable to devaluation or volatility.

Lower transaction costs: Today, money sent abroad is often subjected to fees up to 7 percent, or a total of $50 billion annually charged to citizens who send remittances. One vision for Libra is that it will be able to improve the finances of more citizens by lowering the costs to remit money and convert currencies. It’s tempting to liken Libra to Bitcoin, which has attracted attention for high transaction fees that compensate the parties that help facilitate transactions. Libra’s backers say that it can reduce such costs with its structure as a peer-to-peer platform, similar to PayPal and its suite of mobile payment services.  

User identification: In communities where birth certificates aren’t necessarily issued, citizens without traditional means of identifying themselves are frequently cut off from financial services. Libra’s blockchain structure provides a solution by identifying users based on their past transactions. All transactions will be recorded in the blockchain as a cryptically secured public ledger, which could then be used for identification and lending decisions at financial firms.

Open platform: Any developer can build on Libra by coding in the blockchain-friendly language “Move.”  Mercy Corps views this as an open opportunity for outside players to introduce new ways of extending financial inclusion.

Efficiency and transparency: If Libra can achieve its goals of becoming a global stable currency, this platform could transform how monetary aid is sent around the world. Mercy Corps sees the potential for efficient and transparent transactions, and more participation in the global financial system, through speedy blockchain technology. 

Libra: More than meets the eye?

Libra has the potential to address the shortfalls of traditional currencies and payment systems by expanding financial inclusion. There’s more to this picture, though. The biggest question floating around is one to do with regulation: Who will keep an eye on this global cryptocurrency, and how?

Two main concerns in regulation are competition and privacy. While new entrants typically increase competition, the same cannot be said for big tech companies entering financial services. Facebook and other global digital platforms can leverage their wide user base as customers for their products, establishing their presence as a formidable competitor.

As for privacy, one critical standpoint on Libra speculates on Facebook’s spotty reputation on protecting user data. The company says it plans to develop Calibra, a digital wallet designed to process Libra transactions through its own standalone app and Facebook’s other apps. Facebook claims that transaction data stored in Calibra will not be used for targeted advertising on its social platforms, but politicians in the U.S. and Europe have their doubts based on the company’s history. The big question is: Can we trust Facebook—or any company—to have a stake in the financial lives of the world’s poorest and most vulnerable people?

Image credit: Niels Steeman/Unsplash

Jenna Ammann headshotJenna Ammann

Jenna Ammann is a student finishing her senior year studying Corporate Finance and Hospitality at UMass Amherst. She has a focus on investigating environmentally and financially sustainable food service business models. Jenna is from Westport, Massachusetts.

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