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Facebook's LIBRA : Liberalized Finance #MBAIITKANPUR

Jul 23, 2019 | 3 minutes |

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What For years Wall Street’s magnates have worried that Silicon Valley’s giants will shake up finance. Facebook thinks it has found a way. That, in a nutshell, is what Facebook promised on June 18th. Within a year, the social network will launch a new digital currency to be known as Libra. The Libra’s value will be pegged to a basket of major currencies, it will be able to handle large transaction volumes and 28 other big firms say they will join a consortium backing the currency. Uber, Visa, Vodafone and Spotify are among the big firms that are keen to be anchor members. Facebook wants to outsource the running of Libra to a consortium of worthies recruited from the world of finance, technology and NGOs. Enter the Libra consortium. The association to be based in Geneva, will take over from Facebook before the first Libra has been spent, and manage the hard-currency reserves. Facebook has enlisted 28 other prospective founding members out of an envisaged 100, each with equal voting rights and operating a node in a decentralized system which issues coins. They include financial firms (Visa, Stripe), online services (Spotify, Uber), cryptocurrency wallets (Anchorage, Coinbase), venture capitalists (Andreessen Horowitz, Union Square Ventures) and charities (Kiva, Mercy Corps)—though, for the time being, no banks. To add credibility to its promise, broken in the past, to keep social and financial data separate, Facebook has created a subsidiary, Calibra, to run Libra services within its apps. Why Facebook’s interest is its own survival, since a new financial utility ties in its social-media and chat customers. Still, the digitization of finance promises to make life easier and cheaper for billions of people. In China, where digital payments are ubiquitous, people transfer money to friends and firms within a chat app for almost nothing. In America, 18bn cheques are signed every year. Fees eat up 5% of a typical cross-border transfer. And credit-card giants skims about 0.25% from the global transactions they carry, which is worth over $30bn a year. Challenges Mr Zuckerberg’s initiative has two problems First, it could disturb the stability of the financial system. America’s biggest bank, JP Morgan Chase, has 50m digital clients. Libra could easily have ten times that number. Were every Western depositor to move a tenth of their bank savings into Libras, its reserve fund would be worth over $2trn, making it a big force in bond markets. Banks that suddenly saw lots of deposits leave for Libras would be vulnerable to panic over their solvency; they would also have to shrink their lending. And the prospect of huge sums flowing across borders will worry emerging countries with a fragile balance of payments. That is where the second danger comes in: the Libra’s governance. In a tacit acknowledgement that it’s mishandling of user data, tolerance of the spread of misinformation and other sins have devalued Facebook’s credibility. It will be run by a Swiss association, initially controlled by the consortium. It will be independent of Facebook, though the social-media firm will supply lots of Libra users and could end up holding sway. Though Facebook says it is talking to regulators, the assumption seems to be that Libra can ultimately transcend governments and central banks. Facebook also promises that it will safeguard users’ data. Caveat emptor.