Last week, Facebook unveiled a blueprint for its highly anticipated cryptocurrency, Libra. The digital currency is aimed at making financial transactions, such as transferring cash or buying products online, as painless as sending a message on Whatsapp.
The currency is due to be launched in the first half of next year and has as its founding partners 28 international companies including Mastercard, PayPal, Xapo Holdings Limited, Naspers, Uber Technologies, Spotify AB and Visa. Facebook is looking to secure 100 partners before the currency is launched to bolster both its credibility and reach.
Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people. To achieve this, the digital platform is targeting some 1.7 billion people across the world who do not have access to any sort of banking system (a majority of who are Africans) by providing them access to global financial services.
“Success will mean that a person working abroad has a fast and simple way to send money to family back home, and a college student can pay their rent as easily as they can buy a coffee,” Facebook said in the white paper. Backed by a reserve worth over one billion dollars in international currencies and assets, Facebook wants to disrupt the current world financial system with Libra.
While this innovation comes with several opportunities for significant impact in Africa amid growing interest in cryptocurrency, there are some concerns over the digital currency, existing challenges as well as its implications for players in the current financial system in Africa.
Scepticism on digital payments
In achieving its objectives for Libra, Facebook will face some hurdles starting with confronting existing social behaviour which is characterised by a reluctance to try out crypto or any type of digital payment propelled by an enduring preference for cash in Africa. This is influenced by fraud fears, security concerns and the seemingly unstable nature of cryptocurrencies.
But the key to overcoming this hurdle in pushing for the adoption of Libra is Facebook’s credibility, the General Manager of Luno Africa (a cryptocurrency firm), Marius Reitz explains.
“It’s fair to say the last few years have brought their own share of ‘crypto hypes’ but the strength of Libra lies in its credibility. In Facebook, you not only have a globally-recognised company but you also have an affiliation of well-respected financial players such as Visa and Mastercard, he said.
More so, Luno’s survey of 7,000 people from across Africa, Europe and South-East Asia shows that Africans are more open to cryptocurrencies than their counterparts from other continents. When asked the question “Do you think a single global currency would make the current financial system better or worse?” almost three times as many respondents from Nigeria and South Africa said it would make it better compared to the United Kingdom.
While no currency can be permanently stable, there is some degree to which investors can predict the volatility of the coin. And so far, Libra is ranked high on the stability scale. This is because the cryptocurrency is pinned against a pool of international currencies (the Dollar, Pound, Euro, and Yen, etc) and short-term government securities.
“A lot has been said about how decentralised cryptocurrencies (in particular, coins pegged to real-world currencies and assets) have unlocked an enormous amount of value to consumers in emerging markets. With Libra, backed by the universality of Facebook, there is reason to believe the new currency will bring these benefits to more people than ever before,” Reitz added.
Low understanding of crypto
Amidst mistrust and reluctance, there may be some considerable interest in cryptocurrencies among Africans but this is hindered by a low understanding of how the technology operates. A Kaspersky study reveals that only 19 percent of South Africans fully understand how cryptocurrencies actually work while just 34 percent of the population having a basic understanding of this technology.
Also, about 70 percent of the South African population has never purchased cryptocurrency, which further illustrates how far this technology has to go in order for it to be regarded as a standard form of investment or payment, especially in Africa.
“It is a challenge but one that can be overcome,” Reitz told Ventures Africa in response to the lack of understanding of digital currencies by Africans. This is buttressed by a Luno research which shows that African markets view money more seriously than developed markets. Thus, Africans are more likely to do more research into creative ways to maximise the use of cryptocurrencies, which bodes well for the adoption of Facebook Libra.
“That’s where companies can be proactive in providing education,” Reitz continued, “For example, at Luno, we hold workshops throughout Africa to raise understanding around cryptocurrencies. It’s about ensuring this happens across the board for consumers, the media and broader stakeholders.”
Fears over illicit use
Many people are of the opinion that making transactions easier with Libra also means making funding of illegal acts such as drug dealing and terrorism easier, a claim Reitz dismissed as a “misconception” about cryptocurrencies.
“The reason for this misconception is because many people think cryptocurrencies are anonymous, when in fact it’s the opposite. All transactions are transparent for the world to see,” he said, adding that once a link to the currency is made, every transaction on the network can be tracked which makes it a particularly “bad tool” for illicit use.
“Like any other form of currency, there is always potential for illicit use. However, as more data becomes available, what we are noticing is that these illicit use cases are quite small in comparison to the potential for positive use cases,” the Luno manager added.
In line with Reitz assertion, the Libra blueprint reveals that each time a transaction is submitted it first needs to be verified by at least two-thirds of the Libra Association before it is approved. Once approved, the transaction is permanently written into the Libra blockchain, which is an unalterable public ledger of transactions.
Implications for existing financial institutions
The unveiling of Libra has sent shock waves across Central Banks and financial institutions in emerging markets. While it is unclear how it will affect everyday transactions, it is almost certain that there will be some disruption with implications for existing finance companies, both traditional and modern.
For instance, Libra is hoping to serve as a more effective cross-border money transfer service based on the promise of speed, lower costs and increased convenience for both senders and receivers. Actualising this means a threat to remittance companies, such as WorldRemit and even traditional giants like Western Union and Moneygram.
Furthermore, the idea of people easily sending and receiving money from anywhere in the world while using their Messenger and Whatsapp apps, as declared by a Nigerian Financial Expert, Kalu Aja, also poses a threat to central and commercial banks as well as governments.
In the view of Reitz, Libra builds the case for financial institutions to embrace the innovation crypto brings. This is because Money (and the way that it is used) is changing and decentralised cryptocurrencies can help upgrade the current system.
“We believe most of the innovation will come from where crypto companies, financial institutions and regulators work together … Whilst Libra brings a huge endorsement from a major company, these institutions can also play a huge role in boosting trust within the system. We’re all aware of how much of a barrier this is in Africa at the moment so the knock-on effects in the industry could be huge,” Reitz opined.