Facebook's plans for a new cryptocurrency – the Libra – has attracted a lot of attention. What could these plans hold in store for the banking industry, asks Swiss Finance Professor Teodoro Cocca in his second contribution for finews.asia.
Teodoro D. Cocca is a professor for banking at Johannes Kepler University in Linz and adjunct professor at the Swiss Finance Institute. He is a regular contributor to finews.asia. His latest article is published on finews.first, a forum for renowned authors specialized in economic and financial topics.
The Libra announcement was truly revolutionary in the sense that it was made by a private company. Coming from a private firm, fundamentally the idea is unbelievably subversive because issuing money has always been the prerogative of the state.
As if this wasn’t enough in itself, Facebook – in the immodest fashion typical for Silicon Valley – linked the project with the claim that it will enable billions of people to make frictionless payments with a cryptocurrency that is fully secured by assets. There's no doubt: the white paper published on June 18, 2019, is quite something. Libra is much like a global monetary union on a private basis. Wow, this is pretty visionary!
«Libra has a number of attributes that make it stand out as being potentially a competitive payment solution»
At first sight, Libra will mainly affect the already hard fought over payments business and put pressure on local P2P-payment and cross-border-payment providers. But Libra will hardly be the last attempt at a revolution in the payment business.
It stands to reason that Libra and the many other innovative payment solutions that are already in use (such as Bitcoin and Alipay) will see new competitors emerge. The question is which will prevail. Most customers probably have already lost track of the availability of products given the flood of new solutions.
Still, Libra has a number of attributes that make it stand out as being potentially a particularly competitive payment solution. Libra isn’t only backed by Facebook, but by a potent consortium of companies from the «new» and the «old» world. The combination of big tech (Facebook, Uber, Spotify, etc.) with established global players (Visa, Mastercard, etc.) is the new strategic element.
«There's not a single bank (!) involved in the initial development of the idea»
«Big fintech» may turn out to be a strategically more serious challenge than the current fintech wave which is being dominated by tiny companies. The big absentees on the consortium are easily identified. Notably, there's not a single bank (!) involved in the initial development of the idea – even if this will soon change for sure. But in any case, the biggest absentees are tech giants Amazon and Google. Which can only mean that they are working on their own plans. Their plans may give the cards a shuffle again. Time will tell.
Facebook already has a huge pool of clients (for instance, some 90 million small- and medium-sized companies worldwide and 300 million daily users in Europe alone), which made be the perfect basis on which to establish a complete e-commerce platform around Libra.
«The regulatory questions look challenging»
To put in more fashionable terms, it is possible to create an eco-system around Libra that may lead to entirely new financial services based on the huge data pool of the payment history saved on the blockchain (as for instance real-time credit ratings or smart contracts derived automatically to monitor the credit rating of traders). A big and attractive innovation sphere of services could emerge around such an e-commerce platform.
The regulatory questions look challenging. Libras are being issued after the deposit of, say, Swiss francs and the subsequent mining of coins. These are then stored in the consumer's digital wallet. It is hard to imagine how a standard rule can be found that would be valid across the globe. Therefore, Libra will not likely be able to do without national specifications.
«The bankers on Bahnhofstrasse are well advised not to dismiss Libra as a Zuckerberg utopia»
Another core issue is the question about who will take charge of the compliance with money laundering regulation in this eco-system (for instance know-your-customer rules). One paragraph in the white paper that has been ignored so far may present a visionary perspective. One of the goals of the project is to establish a standard digital identity. If Facebook is good at something it is the analysis of personal data – would it be possible to develop a KYC-rating for each user based on this?
The conclusion from this is that the reactions from regulators, politics and the competition may yet comprise an element of surprise. In the short run, Libra may not have much of an impact on banking. But bankers are well advised not to dismiss Libra as a Zuckerberg utopia.
«A second-generation wave of fintech is approaching»
Cryptocurrencies such as Libra show that means of payments without the implication of a bank can gain a significant level of trust and, more and more, are part of the new reality.
A second-generation wave of fintech is approaching, with the mega global players of Silicon Valley developing alternative eco-systems that include financial services without a direct implication of a bank. If you look at it that way, the Facebook plan is a strategic provocation.
Teodoro D. Cocca is a professor for asset and wealth management at Johannes Kepler University in Linz. Before joining the university in 2006, he worked in investment and private banking at Citibank for a number of years. He was a researcher at Stern School of Business in New York and a lecturer at Swiss Banking Institute in Zurich. The Swiss, who has Italian roots, is adjunct professor for private banking at Swiss Finance Institute (SFI) in Zurich. He advises financial firms and government bodies in Switzerland and abroad. Since April 2011, Cocca has been a member of the board at VP Bank in Vaduz and heads the bank’s strategy and digitization committee. A new book, «Digitization in Private Banking» (in German) is out now at Frankfurt School publishers.
Previous contributions: Rudi Bogni, Peter Kurer, Oliver Berger, Rolf Banz, Dieter Ruloff, Werner Vogt, Walter Wittmann, Alfred Mettler, Peter Hody, Robert Holzach, Craig Murray, David Zollinger, Arthur Bolliger, Beat Kappeler, Chris Rowe, Stefan Gerlach, Marc Lussy, Nuno Fernandes, Richard Egger, Maurice Pedergnana, Marco Bargel, Steve Hanke, Urs Schoettli, Ursula Finsterwald, Stefan Kreuzkamp, Oliver Bussmann, Michael Benz, Peter Hody, Albert Steck, Martin Dahinden, Thomas Fedier, Alfred Mettler, Brigitte Strebel, Peter Hody, Mirjam Staub-Bisang, Nicolas Roth, Thorsten Polleit, Kim Iskyan, Stephen Dover, Denise Kenyon-Rouvinez, Christian Dreyer, Kinan Khadam-Al-Jame, Robert Hemmi, Anton Affentranger, Yves Mirabaud, Katharina Bart, Frédéric Papp, Hans-Martin Kraus, Gerard Guerdat, Didier Saint-Georges, Mario Bassi, Stephen Thariyan, Dan Steinbock, Rino Borini, Bert Flossbach, Michael Hasenstab, Guido Schilling, Werner E. Rutsch, Dorte Bech Vizard, Adriano B. Lucatelli, Katharina Bart, Maya Bhandari, Jean Tirole, Hans Jakob Roth, Marco Martinelli, Beat Wittmann, Thomas Sutter, Tom King, Werner Peyer, Thomas Kupfer, Peter Kurer, Arturo Bris, Frederic Papp, James Syme, Dennis Larsen, Bernd Kramer, Ralph Ebert, Marionna Wegenstein, Armin Jans, Nicolas Roth, Hans Ulrich Jost, Patrick Hunger, Fabrizio Quirighetti, Claire Shaw, Peter Fanconi, Alex Wolf, Dan Steinbock, Patrick Scheurle, Sandro Occhilupo, Will Ballard, Michael Bornhaeusser, Nicholas Yeo, Claude-Alain Margelisch, Jean-François Hirschel, Jens Pongratz, Samuel Gerber, Philipp Weckherlin, Anne Richards, Antoni Trenchev, Benoit Barbereau, Pascal R. Bersier, Shaul Lifshitz, Klaus Breiner, Ana Botín, Martin Gilbert, Jesper Koll, Ingo Rauser, Carlo Capaul, Claude Baumann, Markus Winkler, Konrad Hummler, Thomas Steinemann, Michael Welti, Christina Boeck, Guillaume Compeyron, Miro Zivkovic, Alexander F. Wagner, Eric Heymann, Christoph Sax, Felix Brem, Jochen Moebert, Jacques-Aurélien Marcireau, Peter Hody, Ursula Finsterwald, Claudia Kraaz, Michel Longhini, Michael Welti, Stefan Blum, Zsolt Kohalmi, Karin M. Klossek, Nicolas Ramelet, Søren Bjønness, Lamara von Albertini, Andreas Britt, Gilles Prince, Fabrizio Pagani, Darren Willams, Salman Ahmed, Stephane Monier, and Peter van der Welle, and Swetha Ramachandran.
