Even if Facebook has good intentions with cryptocurrency, Libra: the project will fail. However, there are alternatives to reach billions without access to the financial system, Initium boss Daniel Spier writes.
When a tech company the size of Facebook enters the cryptocurrency game, it is bound to make headlines. But beneath all the hype lies a deeply important issue: the estimated 1.7 billion people who do not have access to basic banking services globally.
Numerous commentators have questioned whether this really is the purpose of the project. Why would a profit-oriented multinational corporation concern themselves with a market that although numerically large, is unlikely to be lucrative? Assuming that Facebook is acting in good faith, there are fundamental reasons why «big tech» cannot provide the solution.
Painful Austerity Lessons
Unlike other cryptocurrencies which derive their value from mining, Libra will be backed by a basket of major world currencies. So if everything goes to plan, the unbanked — who chiefly reside in countries like China, India, Indonesia, Pakistan, and Bangladesh — will use a currency that is pegged in value to the economies of the developed world. History has taught us that this is unlikely to end well.
Just look at the European Union, in which 19 member states use a common currency, the euro. The European debt crisis was exacerbated by the fact that very different economies in different economic cycles were locked into the same monetary regime. Countries like Greece needed to endure years of painful austerity because the cost of servicing its debt was pegged to much stronger economies like Germany.
Cultural Clash
This brings us back to Libra. Here the proposal is to create a «global currency». So if you thought the difference between Germany and Greece was big, how about the difference between Germany and Bangladesh? And rather than having central banks directing monetary policy, it would either be non-existent – or directed by the consortium of multinationals that make up the Libra Association.
Neither scenario is particularly appealing, or democratic. Of course, there is very little reason to expect that whole countries will adopt Libra or that employers will start paying their staff in it. So Libra would in effect be a parallel system of digital credits, rather than a genuine currency.
Libra as Haven Currency?
Like bitcoin, it could potentially serve as a safe harbor during hyperinflation (if not subject to capital controls), but currency fluctuations mean it is unlikely to work well as an everyday checking account. All of this is not to say that there are no potential uses for Libra. In failed states where the financial system has completely collapsed, it would certainly be better than nothing.
It could introduce fresh competition into the currency exchange market to reduce the fees charged by companies like Western Union and Moneygram. It will almost certainly serve as the basis for a system of online microtransactions. But these potential use cases are only tangentially related to the world’s unbanked population.
Small vs Big Tech
Innovative fintech firms do have the potential to help. From online banking, to microfinance, and crowd-investment initiatives — mobile technologies can be used to significantly improve access to financial services. However, this is best achieved by smaller firms who have developed a detailed knowledge of national needs and problems — not by the one-size-fits-all approach of big tech.
This is why it is important that we deal with an unbanked sector of developed economies — fintech and blockchain. Swiss firms employing distributed ledger technology are frequently denied basic banking services, while similarly restrictive practices have been adopted throughout the developed world. So if we want to do something about financial inclusion, perhaps we should start by empowering the type of smaller, innovative fintech firms which can deliver change.
Daniel Spier is the founder and CEO of Initium, a start-up which wants to provide banking services for fledgling fintech and blockchain firms. Initium is seeking a banking license in several jurisdictions, including Liechtenstein. The principality is meant to ensure access to the wider European market for Initium. Spiers was most recently CEO of IDT Financial Services, a Gibralter-based card provider.
