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On June 18 2019, Facebook announced its latest project, the Libra cryptocurrency.
For some time, there have been speculations about Facebook's Libra project and what it means for the financial market. The digital currency is set to hit the market in the first half of 2020 and will be available for customers of Facebook and its other services, including Instagram, Messenger and WhatsApp.
Since the announcement, there have been debates about how the Facebook Libra cryptocurrency will impact certain sectors, and one is money transfer in Africa.
When Facebook Libra is launched, and it does what it aims to do, what will it mean for African users?The idea is that the currency will revolutionise money saving, spending and remittances. How will it achieve that? To understand these concepts, it's crucial to look at the new cryptocurrency from different angles.
A Few Basics About Facebook Libra
Libra is a digital currency that Facebook is developing to compete with existing coins and cryptocurrencies.
With the currency, you will be able to send money or buy goods. Users will also have the option of cashing out their funds at local exchanges. Facebook and its services such as Instagram offer marketplaces where the digital currency will find great use. The Facebook Libra cryptocurrency will also be available for merchants on other platforms, meaning that its applications are virtually limitless.
As with any other cryptocurrency, Libra will allow anonymous transactions. You will also be able to use third-party wallets with the coin. Facebook is, however, developing its own wallet called Calibra that will be integrated into the app, Messenger and WhatsApp. The biggest reason for developing Calibra is to ensure the protection of customer data. Facebook reported that Calibra would be responsible for holding data for transactions, which will be separate from Facebook account information.
Facebook does not control Libra on its own.
With the various privacy issues that the social media giant has faced over the years, retaining sole control of a currency would be problematic. According to David Marcus, the VP of Blockchain at Facebook, if the social network were controlling the currency, very few people would want to join in. The solution that Facebook came up with was to create an association of founders.
The Libra Association is a non-profit made up of organisations in different fields, including technology, blockchain and payment. Andreessen Horowitz, Uber, Vodafone, Lyft, Spotify, MasterCard and Anchorage are some of the founders. Nasper, one of Africa's most valued companies, is also a founder. The minimum contribution from each member of the association was $10 million. Various other requirements apply, including 2/3 thresholds of a $1 billion market value.
A membership grants a founder one vote in the association council, shares that match the investment and optional validator node operator privileges. With each partner holding only a single vote, it prevents one entity from accumulating more power than the others. The companies will earn interest from the money that users pay when transacting with the currency. With the association handling the governance of the coin, it is expected that users will have trust in it.
The Association is meant to drive the adoption of the currency. These founders have the mandate to decide which companies partner with Libra. They will also have the responsibility to structure reward programs and other incentives for early adopters of the cryptocurrency. It is expected that some of the founders will build their own digital wallets, providing customers options for money transfer and other transactions.
Currently, Facebook has 28 members in the Association and is working on raising that number to 100. The headquarters of the association are in Switzerland, a location that was favoured for its financial innovation and neutrality. A council will be formed with representatives from every company. This council will then pick the managing director.
Facebook Libra holds at least four assets for African users which can change the financial access for many people:
- Banking the unbankable
- Disruptive remittances
- Trust in cryptocurrencies
- Stability of the coins (stablecoins)
Let’s have a closer look on it:
Banking the Unbankable
With an idea of how the digital coin works, it is easy to see the impact it will have in Africa. Facebook created the digital currency to cater to a global market. The design of the currency makes it good for more than just e-commerce. Facebook Libra will target unbankable regions where people have to struggle for banking solutions. This feat is a big one given that approximately 1.7 billion people lack access to bank accounts.
Many parts of Africa deal with poor banking infrastructure that makes financial transactions frustrating. Facebook, when announcing the currency, said that it is designing Libra to be simple and efficient. The cryptocurrency will fill the gaps where the traditional banking infrastructure has not been able to or is lacking completely.
People without banking solutions will have a way to save and transfer money at a fraction of the cost that other platforms demand. Facebook is looking to slash the transaction fees to as little as possible. High banking charges are some of the obstacles with which people in Africa have to deal. This upcoming digital currency aims at solving that.
The new ecosystem that Facebook is setting up will eliminate most of the hurdles that people in Africa face when it comes to money transfer, especially across continents (see the Bitcoin to Rand example of South Africa).
Solving the unbanked issue in Africa seems ambitious for a single currency to take on considering many other products have tried. However, the pull that Facebook holds as a product may just give this project the push it requires. The social media giant boasts over 2 billion users across the globe and Africa is one of its fastest-growing regions.
Note that Facebook has several network apps, including Whatsapp and Instagram that have their own audiences. If Libra attains the adoption that the Association is working towards, then it may just succeed at providing solutions for the unbanked population in Africa.
The Disruption in Remittances
Another area that the currency looks to change is remittance.Money transfer from overseas other the African continent is big business. It is a sector that only a few providers such as Western Union and MoneyGram, have dominated for a long time. The advent of digital wallets and mobile money changed that.
Every year, Africa receives a considerable amount of money from relatives and friends abroad who send money. In 2018, Sub Saharan African received $46 billion in remittances, according to a World Bank report.
People sending money use different platforms, depending on the need. Virtual wallets and apps such as Azimo and WorldRemit have made it fast and easy for individuals to send money.
Some of these money transfer services are generic, while others are designed for specific purposes. For example, you can find an app that allows you to pay for bills directly from overseas. Not many of these services work with cryptocurrency, though.
Since digital coins like Bitcoin gained popularity, there have been attempts to use this type of currency for remittance.
Azimo is one platform that has been experimenting with cryptocurrency. However, the instability of this kind of currency and lack of trust have made it difficult for blockchain to infiltrate this sector.
What Facebook aims to do differently is to entice customers with low transactional costs. Exploitative remittance charges remain a huge problem for senders and receivers of funds in Africa. Some services ask for as much as 7% for every transaction.
By charging only a small fraction of the costs that people are used to, Facebook can attract a decent number of customers who are looking to save money. The minimal charges mean that you can send large amounts home.
Libra will also make it easy for users to spend their money. Once funds are in an account, recipients can buy goods and services directly without having to withdraw the money first. This convenience will simplify transactions considerably.
What it means For the Competition
Remittances have become some of the biggest contributors to the GDP of many African nations. For this reason, they present an important market that Facebook intends to exploit to make money transfer efficient and safe.
However, Africa already has payment methods that have been serving the people for a long time. What will happen to them? Whether Facebook's new cryptocurrency disrupts an existing money transfer solution will depend on the design of a particular service.
Conventional remittance services will be hit the hardest if Libra achieves adoption. These are companies that are not technology-based, and these are Western Union and MoneyGram.
Remittance platforms that were built on technology such as Azimo might not have as hard a time. The existing structure of online money transfer services and mobile apps makes it easy for them to adapt to a new commerce ecosystem.
The other area to consider is the blockchain marketplace. With the increased use of digital currencies like Bitcoin, Ripple and Ethereum, cryptocurrency wallets are quite popular.
Paxful, Luno and LocalBitcoins are some of the services that people use to send and receive cryptocurrency across Africa. With the introduction of Libra, some of these services will feel the disruption.
If the new market entry succeeds, it would mean better efficiency than some of the current services. Many of the Bitcoin marketplaces are peer-to-peer platforms that connect buyers and sellers. They act as escrows.
Libra removes the intermediate service and allows the recipient to access funds directly. Besides minimising the work and time it takes to complete a transaction, this system will help save money.
The Challenges for Facebook Libra
Being part of the financial inclusion in Africa comes with serious obstacles. Facebook's new digital coin will be entering a market where mobile money is currently dominating. The social media giant will have to find a way to penetrate this market.
M-pesa is Africa's poster child for mobile money transfers. It set the pace for other services in the region and opened new doors. In 2017, the East African region had over 190 million mobile money accounts.
Mobile money services have thrived in Africa because they are fast, efficient and convenient. Users can receive money on their phones and withdraw from local agents quickly. Also, these systems have established networks in their respective regions.
If Facebook is to be part of that, it must find ways to offer something great to customers.
Trust is an element that Facebook's cryptocurrency has to work hard on. The company is essentially asking people to leave what they have known to be reliable and try something entirely new.
M-pesa worked because it was an African product created for the African people. Now, here comes Facebook with a digital currency that is governed by an association of different entities.
Another issue is that Libra is changing what people know about money. There is something to be said about holding cold cash in your hands. For most people, particularly the unbankable population, cash is everything. Getting those individuals to change their mindset will be part of the problem.
A huge percentage of the unbankable population that Facebook is targeting in developing markets has no education. It means that it might be taxing for the people to comprehend what the new currency is all about.
It will take considerable effort for Libra to accomplish the objectives that Facebook has set out. The project must find ways to inspire and build trust among customers. Even then, it may have to be satisfied with customers using it only for remittances and transactions across borders.
Intermittent internet interruption is another aspect that Facebook has to consider when it comes to serving developing markets such as Africa. Libra transactions require stable internet, which is a constant issue in some African regions.
Government regulations might prove to be problematic when introducing the Facebook cryptocurrency. It will be difficult to convince governments to allow operation of a currency over which they have no control. Facebook has to be ready to deal with regulators who might take time to accept the initiative or reject it entirely.
Facebook has a vast customer base in Africa and other developing regions, which is why it has a good chance of succeeding. Networks such as WhatsApp and Instagram have loyal customers that the company can use to monetise its digital currencies. The project should prepare for a tedious process that might take years to adopt.
How is Facebook Libra Different from The Other Cryptocurrencies?
Blockchain technology has evolved a great deal, and the result is a wide selection of currency such as Ethereum, Ripple and Bitcoin. You may wonder, with several digital coins already on the market, what makes Libra the exception? Why can't you just opt for Bitcoin?
Facebook's new currency is similar to traditional digital coins in that every payment goes into the Libra Blockchain. Engineers from Facebook are responsible for building the new crypto rails that make up the blockchain.
The Association handles the authentication of the ledger, which is under an open source license. Under this license, developers have to record modifications to the source code, but they cannot release it.
One difference from existing digital currencies is these of a new programming language called Move. The language is meant to boost the efficiency and safety of the Libra Blockchain.
The new rails for Facebook's cryptocurrency are single data structures, which is not the same as with Bitcoin and other coins. These crypto rails make a history of each transaction and avail that information for other network users.
Stability is another advantage that Libra has over other cryptocurrencies. The new digital currency will be a stablecoin because its value depends on the real-world assets that are in the Reserve.
The Association has a collection of assets that is made up of historically stable currencies, including the dollar, Swiss franc and yen. With these assets in place, the Association prevents the value of Libra from fluctuating.
Price fluctuations are among the biggest reasons merchants don't accept cryptocurrency. You may receive Bitcoin today at a particular value then find that tomorrow it has slumped to a fraction of what you got.
The Association is putting measures in place to ensure that the stability of the coin remains consistent. What this means is that currency will be safe to trade with in various settings if it does succeed.
The concept behind this coin is that you will be able to cash in your local currency for Libra. You can then use the digital coin at accepting merchants. Depending on how well the currency adopts, you will be able to use it with local resellers and even stores.
Various wallets will be available for transacting with the currency, including Facebook's Calibra. The social media company is partnering with different entities to create third-party wallets that will make the currency more accessible.
Facebook Libra in Africa: Conclusion
Facebook is poised to disrupt the commerce ecosystem with a new cryptocurrency. The design that Libra promises is bound to cause serious shifts in Africa.
A low-cost money transfer solution will offer competition to existing solutions such as Azimo, WorldRemit and Western Union.
Libra might also offer a reliable banking solution for unbankable populations.
To realise all this, though Libra must be able to succeed in the market and only time will tell how well it does.