When Facebook announced its first foray into the digital financial space with its new digital currency Libra last month, the digital development community collectively sighed and Twitter lit up with both praise and concern. While it’s easy to get out the pitchforks for something like this—and in many ways rational, given how Facebook was manipulated to exacerbate the Rohingya crisis, used by Cambridge Analytica, and part of a myriad of other breaches of trust in which Facebook has proven itself a questionable steward of its self-built digital nation—I’m not going to take a side on whether Libra is good or bad. Rather, in this blog, I will lay out some key questions and considerations that need to be fully addressed.
As members of the digital development community, it’s important for us to educate ourselves on this new digital currency. If Libra does manage to get past the significant regulatory hurdles in its way, it will most likely be popular, especially in the communities we serve. Facebook is the internet for most folks in emerging markets; as mobile internet penetration has increased, the reach of Facebook has expanded to the point of near ubiquity. Additionally, inexpensively moving cash in and between emerging markets is one of the hardest problems that we have yet to address, even with immense investments in mobile money infrastructure by major mobile ecosystem players and financial institutions. If Facebook succeeds in making Libra a core part of its user experience, given how big this bet is, we’re going to have to deal with it.
Here’s five things I’ve been thinking about as I read more about Libra and the Libra Association, a not-for-profit membership organization founded by Facebook subsidiary Calibra and 27 others to steward the Libra currency:
1. Know Your Customer (KYC): KYC is one of the trickiest parts of financial services and digital inclusion. While you don’t (generally, yet) need to pass KYC to use cryptocurrencies, you will need to be authenticated per KYC protocol to use Calibra, Facebook’s e-wallet built by the Calibra subsidiary. KYC is notoriously taxing when serving less mature markets and can hinder financial inclusion. A post by the Center for Global Development articulated this challenge well: “On the supply side, expensive customer identification and due diligence procedures can render low-income customers unprofitable, constraining the size of the viable market; on the demand side, lengthy or inconvenient onboarding procedures can deter potential customers from signing up for financial services.” As currently designed, you can still use Libra (the currency) without an ID and transact through to-be-developed wallets not owned by Facebook. Regulators are still determining whether this will be allowed, but assuming it is, I doubt that immature digital users would download a wallet outside of the Facebook-controlled one. There wouldn’t be seamless integration with other Facebook owned applications like WhatsApp or Facebook itself, which is the real value proposition of Libra from a user experience perspective.
In any case, before I nerd out entirely, the tl;dr is: identification is a huge barrier to financial inclusion, and even Facebook can’t hack that. I’ll be watching closely to see how Facebook and the Libra Association members tackle KYC in a way that lowers barriers to financial inclusion rather than propagating them.
2. Cash-in, Cash-out (CICO): Cash is still king in emerging markets. As a Brookings study found, even in areas with flourishing mobile banking usage, people tend to cash in every time they want to make a mobile payment, and to cash out immediately and in full every time they receive digital money. A lot of this is driven by deep mistrust in financial institutions and human idiosyncrasies about money, cash, and technology that digital payment ventures sits squarely in the middle of. Beyond the KYC challenges discussed above, CICO requires a huge investment in agent networks (brick-and-mortar institutions), as well as transaction volume and liquidity to sustain their market share. This trifecta is something very few players outside of incumbent banks and telecommunications players have, and it will be interesting to see how Facebook handles it. While Calibra plans to integrate Libra into point-of-sales systems at stores, many of the markets in which we work do not have these systems equally distributed and therefore will make digital remittances difficult to access. I mention this because remittances are a big social use case Facebook is touting for Libra, but it’s unclear to me if it has thought of the broader ecosystem. This agent network/CICO problem has been a thing since I started in ICT4D almost a decade ago. When I was chatting with a friend who works in cryptocurrencies about this concern, he said “Yeah, but WhatsApp will solve this!” Don’t think so…but prove me wrong, Facebook!
3. User education: Experts in financial inclusion note that user education is a key part of any financial inclusion effort, and doubly so when it comes to the unbanked, newly banked, and otherwise financially unserved populations. I wonder how the Libra Association will go about educating new users on the benefits of digital financial services, and beyond that, educating users about scams and other fraud issues that have emerged globally with the advent of digital financial services. Facebook’s attempts to educate users on its main platform about parallel issues, like misinformation, have been spotty at best and ineffective at worst. Can it do better when it comes to people’s money than it has with people’s lives?
4. Digital divide: Let’s imagine that Libra takes off and the world rapidly moves into a system of seamless Libra transfers through Calibra and other e-wallets, quickly jumpstarting a whole ecosystem of services such as Libra-based savings and lending products that radically improve the lives of previously unserved or underserved populations. Now imagine you’re a woman who is not allowed access to a phone, or a farmer in a deeply remote area with limited mobile coverage, or, like these examples, one of the estimated 50 percent of the world’s population still without access to the internet. With widespread adoption of Libra, these people will be even further behind than before. If this experiment succeeds, Facebook and its partners should commit to investing some of their profits in rural connectivity and user education, as a way to actively decrease the digital divide.
5. Implications for Digital ID: If you squint (and read the Libra documentation super carefully), you can see where Facebook is headed with this: equipping the nearly 1 billion people around the world without any proof of identity with a self-managed, digitally-enabled ID. This would be a revolutionary game changer that tackles issues such as KYC and a myriad of other challenges that come with not having an identity. If you’re interested in this topic, the MIT Technology Review has an excellent piece on this that details the potential impact. For me the question remains: With the growth of Libra, will Facebook be ready to take on the responsibility that comes with managing people’s identities?
This will be the first post in a series on Libra.