Stuff worth knowing from The Bankers’ Plumber
Schizophrenia often looms large when I look at new tech and new solutions in the Financial Services space. I am your typical SME; loads of years in banking, understands the legacy stuff, has changed a lot of things over time. I’m not though an outright disruptor or outsider.
Looking at new stuff, part of me says: “This makes no sense or this is no big deal”, the other part, the chimp on my shoulder if you will, says: “There is something here I am not seeing.” The unknown, unknown as it were.
So, here is my thinking on Libra from what I have taken in so far. Feedback is welcome in any form.
First Observation: Not a totally new invention. when I first heard about Libra, or “Zuckbucks” as I christened them, I thought “Thomas Cook Travellers’ Cheques 2.0” – or alternatively the cheques were Stablecoin 0.1, and “They’ll make a ton of money on the float”.
For those under 50, these cheques were physical bearer cheques that you bought before going on holiday. You pre-paid, say in USD, no doubt paying a fat commission and receiving a poor exchange rate. Thomas Cook sat on the cash until you used the cheque and it was presented for payment. Kerching.
That observation is about right; Libra will make money with your money.
Second Observation: If Libra helps make it easier and cheaper to make remittances aka sending money home, then this is good. See: “Will Facebook’s digital money Libra be good for Africa?”. Whilst in London, I have all the ease of Revolut to send money instantly, for free to our university student son. Right now, it costs a staggering $19 for every $200 in remittances to sub-Saharan Africa. That is a horrific burden for those on the giving and receiving end.
Third Observation: The basket currency idea generally makes no sense. Libra’s plan is literally that you will receive a common currency, “Zuckbucks”, for your dollars, euros and pounds. They see this as part of reducing volatility in currencies.
This makes some sense in countries with badly run economies: Zimbabwe and Venezuela are the obvious examples, where just about anything except a sieve is a better store of value than the local currency.
It makes sense if, once you have Zuckbucks, the price of everything you want to buy is in Zuckbucks. Even then though, the average Joe is going to have to deal with exchange rates. Nearly 30 years ago I moved from London to Zurich. CHF / GBP was something like 2.20. For ages, I would translate all the local prices into pounds. The average Joe is going to struggle with that one.
But, and this is a big one, it makes no sense to me if for the average Joe, there is a chance that if you put in USD 100, and then take it out, you might get something other than USD 100. Imagine the average Joe in say Waco, Texas, puts in USD 100, has a balance of 120 Zuckbucks, then realises he needs to pay his gun club membership by cheque. The world will look a crazy place if he gets out anything less than 100 USD. Try telling him: “Joe, better luck next time. Put your 98 back in and roll the dice!”. That gun might be put to use.
Then comes the big issue of whether a Zuckbuck is a security or not. If Libra is not a bank and not a payment system, then there is a risk of Uncle Sam and some of his non-American regulatory cousins deeming a Zuckbuck a security, which brings a whole lot of tax-lot accounting burdens with it. It is possible that Zuckbucks do not pass the Howey Test to be deemed a security. That said, given Facebooks’s track record, it is hard to see no US regulator claiming jurisdiction; rather some mad jurisdictional fight like in an TV episode where a bunch of Alphabet Soup teams all turn up at a crime scene” “FBI, we are in charge”, “Miami Dade Police, we are in charge”, ”DEA, we are in charge”, etc. You get the picture.
Fourth Observation: Don’t mess with money. Facebook has badly misjudged the regulatory side of what they are doing. There is an old saying that you can either ask for permission or beg for forgiveness. Facebook’s approach has, I think, added a new dimension: “Or, if you are Facebook, you somehow expect approval”.
Regulatory engagement and outreach seems not to have featured in the preparations. Various regulators and lawmakers have since signalled that this is not cricket aka not one of the available options. Bank of England governor Mark Carney was quite clear in his recent Mansion House speech that even the most moderate success would make Libra systemically relevant and with that, subject to a wide range of regulation.
In the US, demands from Capitol Hill have been made and statements from Treasury Secretary Mnuchin highlight concerns about whether Libra’s will provide all the controls around KYC & AML that are an integral part of the incumbent banking infrastructure.
This is important; it is as much about a level playing-field as it is about consumer protection.
Fifth Observation: Dependency. More dollarisation is not really a good thing. I was in South Africa recently, where a topic of conversation was the African Continental Free Trade Area and how there is a huge desire to encourage more trade in local currency as a counterweight to the increasing spread of dollarisation, i.e the use of the greenback in preference to local currency.
Libra will of course provide short-term, tactical relief in Zimbabwe, with its hyper-inflation. Substitution with Libra doesn’t seem like a great long-term strategy.
Sixth Observation: There will be a need to be some detailed discussions about about resiliency. Over at Fnality International we are very clear that what we are going to do with USC as a wholesale digital currency (W-DC) means we have to fully comply with the provisions for financial market infrastructure, the PFMI.
Seventh Observation: The structure looks pretty sound. From several of my colleagues I have heard praise for the organisational and the technical side of the set-up. They noted the use of an association and also some of the tech components.
Eigth Observation: There are opportunities to improve the customer experience, as well as efficiencies. I recommend reading: “Libra: A Strategic Perspective”. This article offers some telling insights on how Facebook might leverage its skillset to vastly improve the consumer experience aka UX.
Ninth Observation: There is a great opportunity to improve the value of and control over “Digital Identity”. There is clearly a holy grail around identity; if we could manage our own data centrally and then provide access on a “need to know” basis, then lots of administrative things would get a whole lot easier. BankID in Sweden is an example of this in action.
Now clearly, Facebook has got what the English police call “form” and their American Cousins call “a long rap sheet” when it comes to careless management of personal data. So, if this latest development leads to overall improvement in how well we can store and re-use our DigitalID, that would be a good thing. If it leads to repeat offences of misuse, both deliberate and careless, by Facebook or other tech giants, that would not be good.
In summary. The world is changing and at a tremendous pace. For my part, as a veteran SME, I just have to get comfortable with the fact that there is much about the potential of new tech that I just don’t see.
For all that change, the business of money is a very serious one that brings with it clear obligations to service and be responsible to the stakeholders: clients, business partners and regulators.
Good discipline, understanding the basic processes and a sense of proper controls will I hope get me someway to the future.
About the Author: The Bankers’ Plumber.
I help banks and FinTechs master their processing; optimising control, capacity and cost.
Right now, I am part of the team at Fnality International which is working on turning The USC, Utility Settlement Coin, Project into reality.
If it exists and is not working, I analyse it, design optimised processes and guide the work to get to optimal. If there is a new product or business, I work to identify the target operating model and design the business architecture to deliver those optimal processes and the customer experience.
I am an expert-generalist in FS matters. I understand the full front-to-back and end-to-end impact of what we do in banks. That allows me to build the best processes for my clients; ones that deliver on the three key dimensions of Operations: control, capacity and cost.
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