By Jonas Groß on ALTCOIN MAGAZINE
Authors: Jonas Gross, Philipp Sandner, Felix Bekemeier
Two weeks ago, Facebook published the first information about its own cryptocurrency project. The consortium, Libra Association, currently has about 30 partners. The Libra consortium already includes numerous well-known companies such as Paypal, Mastercard, Visa, Spotify and Uber; 100 partners are expected at project start in 2020. According to rumors one week after the announcement of the Libra plans, more than 500 companies have applied to join the consortium — far more than previously planned. And this after two weeks. The aim of the project is to provide a blockchain-like infrastructure that enables payments to be processed quickly, easily and cost-effectively worldwide.
Unlike Bitcoin, which shows large price fluctuations, Libra is supposed to be a stable coin. A 100% coverage of financial assets, so-called Libra reserves, will achieve this. However, Libra will not be linked to the US dollar or any other traditional currency, but to a diffuse basket of financial assets (mainly currencies and government bonds).
The project has the potential to significantly reduce transaction costs — especially for cross-border transactions for millions of people in developing and emerging countries. These fees are currently often equivalent to 10% of the transaction volume in some regions of the world. According to the whitepaper, the financial system currently excludes 1,7 billion adults worldwide. This means that these people often do not have the ability to make efficient remittances or — for example, because of local inflation — to safely store values for the future. 1.7 billion adults, that’s about 30 percent of the world’s population. Two-thirds of those people own mobile phones with Internet access. These phones could be used as a wallet to store Libra and make payments.
If Libra were not only used on the Facebook platform itself, but also on Whatsapp, Instagram, Visa, Mastercard — all of them are already part of the consortium — a very high worldwide reach would be possible in a very short time. Fast overnight, hundreds of millions could become Libra users. It could be expected that Libra would soon become one of the world’s most important trading currencies. The 100% coverage would mean buying several hundred billion dollars in these very currencies and government bonds. Thus, Libra would quickly become a very significant buyer of government bonds.
The goal of providing financial services to hundreds of millions of people (“financial inclusion”) is also high on the list of priorities of important institutions such as the United Nations and the World Bank. If Libra were to achieve this goal — even if it were through an initiative by profit-oriented companies — this would be fundamentally positive. There are, however, considerable risks: Facebook is not a raw model for data protection and correspondence secrecy. More serious, however, is the fact that the Libra Association’s governance and particularly the Libra reserve composition decision-making are still unclear today. Most critical, however, is the risk of Facebook initiator and consortium members connecting three things: data, personal identities, and payment transactions. Resistance and skepticism are generating precisely these risks. Governments, financial market regulators and central banks should, therefore — with these risks in mind — examine exactly under which conditions Libra receives the necessary licenses for its operation. Then, with all the lamentations that are going on, Libra can become a very impressive project that will change the financial industry and can change the world.
Impact On The Financial Sector
Banks in Germany and Europe would not be endangered by Libra in the short term. That’s because the euro is Germany’s legal tender. In the short term, it seems inconceivable that Libra — as a diffuse basket of financial assets — could be used on invoices or in accounting.
However, there are two essential aspects that could also cause problems for banks in Germany: The first aspect concerns Libra. Germany conducts considerable international trade, naturally in different currencies, primarily in US dollars. Would there be any argument against Aldi, for example, paying these bananas in Libra when Ecuador imports bananas? The Libra amount would have been transferred from Aldi to Ecuador within milliseconds — a process which now takes days. All this is speculation. But in the medium term, Libra would not gain some importance with regard to foreign trade. This business would then be withdrawn from banks.
The second aspect does not concern Libra as a project, but the technology behind it: blockchain technology. This will radically change the German and international financial and banking scene in coming years. For example, sooner or later, shares and other securities will be listed on blockchain systems as well as the euro. For banks, especially 500,000 employees in the German financial sector, this is largely unknown. This is unfortunate, as there are numerous business opportunities in the blockchain sector today — including the Libra project. Those who don’t act courageously will face risks within a few years. Then the headwind will come and one will have to watch how margins and sales will shrink.
The keyword: digital transformation. Even if this term in many institutions triggers fear and resistance, digital transformation must be tackled with verve, as technological progress has never been and digital change is unstoppable. Let’s do it!
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Jonas Groß is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His interests are primarily cryptocurrencies. He also analyzes the impact of blockchain technology on the monetary policy of global central banks in his PhD. He mainly studies innovations such as digital currencies (CBDC) and central bank cryptocurrencies (CBCC). You can contact him via mail (firstname.lastname@example.org), LinkedIn () and via Xing ().
Prof. Dr. Philipp Sandner is head of the Frankfurt School Blockchain Center (FSBC) at the Frankfurt School of Finance & Management. In 2018, he was ranked as one of the “Top 30” economists by the Frankfurter Allgemeine Zeitung (FAZ), a major newspaper in Germany. Further, he belongs to the “Top 40 under 40” — a ranking by the German business magazine Capital. Prof. Sandner’s expertise includes blockchain technology, cryptoassets, distributed ledger technology (DLT), Euro-on-Ledger, initial coin offerings (ICOs), security tokens (STOs), digital transformation and entrepreneurship. You can contact him via mail (email@example.com), via LinkedIn () or follow him on Twitter ().
Felix Bekemeier is a project manager and research assistant at the Frankfurt School Blockchain Center (FSBC). His interests include microeconomic analysis of agent behavior in DLT networks, use of case development, monetary theory and policy, and regulatory strategy. You can contact him via mail (firstname.lastname@example.org) or on LinkedIn ().
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