Libra Is Doomed to Fail in Its Current Form — Richie Hecker

2019 has seen growing enthusiasm around Facebook’s digital currency Libra. However, upon analyzing its perspectives, Richie Hecker, an entrepreneur and management consultant at Traction & Scale, warns about Libra’s possibility to fail.

Libra advantages and disadvantages

Libra involves a digital token backed by a reserve of assets and a payment system designed for immediate money transfers globally. “Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.” the project’s white paper reads. Its functioning is akin to PayPal’s Venmo or Zelle peer-to-peer payment service.

As it is stated in Libra’s whitepaper, the currency will be backed by ”basket of bank deposits and short-term government securities”. Hecker says that it ”is not clear on exactly what assets will be inside of a Libra. This lack of clarity over what assets it will comprise will likely lead to regulatory, jurisdiction vs jurisdiction hell.” He notes that its uncertain nature (whether it is a currency, a derivative, a security, a commodity pool, or something else) will motivate regulators to investigate it and will possibly promote fights between different jurisdictions. Inevitably causing Libra to fail in its current form.

Even if Libra will manage to outline its legal jurisdiction, it will be ultimately difficult to reach its goals, some of them being banking for those 1.7 billion left behind, stable assets on extremely volatile market and cheap and fast payment system.

In order to bring banking to the unbanked Libra will need to comply with KYC and other existing regulations, which will make it similar to most banking systems. The on/off ramps are different, but regulations are similar.

One more challenge for introducing Libra is the “last mile”, which will require the organization to build its own in-person network or establish partnership with existing payment and ATM operators. “In some countries, replicating local withdrawal networks will prove challenging.” Hecker notes. “…a new offering could lead to a price war that could help customers or to Libra taking losses to subsidize growth. This is the equivalent of Western Union lowering its fees to add more value back to its customers. This could be a great value-add.”

One of big opportunities of Libra is working with retailers and others to sell goods according to their net income and consumer’s behavior. This can be achieved with Facebook’s well-developed ecosystem.

Most countries with volatile currencies will likely place restrictions on Libra transactions. For example, the government can set a definite limit of Libra bought or transferred each year (Chinese regulators allow to transfer no more than $50,000 per person per year abroad).

One more important note made by Hecker concerned lack of regulations regarding Libra. Without them the currency will be plagued by fraud with scammers creating apps to trick people into sending Libra to their accounts.

Libra has many advantages as well as challenges to resolve, and the best way to deal with them is following the path of the father of payment networks – Visa. Visa started as Bank Americard inside Bank of America as an internal credit system, and evolved to a large public company.

How to get the best out of Libra

First, at the start the currency should be backed only by U.S dollars or other single currency. This will allow Libra to comply with the U.S regulatory framework and pass all regulatory scrutiny. If other assets will be included in the basket, it may cause troubles with regulatory approval.

Second, Libra needs a regulatory body which will allow for resolving fraud disputes. Libra is close to this model, proposing a single database for all data.

“Facebook has such a large network that implementing a low-fee payment system would be a huge first step. They can invite others onto the platform and finally turn it into a consortium once the bugs are removed and it has passed regulatory scrutiny. In fact, Facebook already has the infrastructure for this – payments inside of messenger. They already have an anti-fraud system and it is tied to your Facebook ID.” Hecker states.

Third, after that Libra can allow building applications on top of the existing payment system, which will not be difficult in terms of regulations.

These steps will allow Libra to be launched smoothly, avoiding troubles with regulators.