Abstract

Facebook’s launch of Libra has been facing a one-sided regulatory challenge and her commercial intent, therefore huge resistance to the implementation can be anticipated. On the one hand, each sovereign state regulators have been assessing Libra’s impact on stability and uncertainty of their fiat currency. On the other hand, Facebook’ motivation to launch Libra is not really purely to empower the unbanked group with Inclusive Finance, which is what those opponents are doubting for. From the perspective of the unbanked group, achieving Inclusive finance is an issue of eradicating poverty. Therefore, the national digital currency (CBDC) may be a better turnkey solution, eliminating the concern over regulatory issues and lowering the threshold of users’ trust. It takes less time to implement than Libra and it’s more feasible to launch.

 

Market Analysis: 1.7 billion unbanked adults worldwide

 

Source: Global Findex Database 2017

Global Unbanked and Underbanked Reports (World Bank Report)

The World Bank’s Global Financial Index Report 2017 (hereinafter referred to as the report) shows that there are 1.7 billion adults in the world who have no access to traditional bank service and hold no account. In 2014, the figure of the unbanked population was 2 billion. Among the 1.7 billion unbanked people, China(13%) and India(11%) account for the highest proportion (mainly due to a large population base), with the population has no bank accounts of 230 million and 190 million respectively, followed by Pakistan (100 million) and Indonesia (95 million). Other major unbanked economies include Nigeria, Mexico and Bangladesh.

Considering that Facebook and Libra can’t have access to the Chinese market in the short term. Therefore, to exclude the unbanked group in China, Libra may only have a market of less than 1.5 billion. This number will decrease by 2020 thanks to the evolution of digital technology. The development of the Unbanked group thus has been declining year by year.

Distribution of characteristics of the Unbanked group: female, low income, limited education and unemployment

Source: Global Findex Database 2017

Female accounts for more than 56% of the 1.7 billion Unbanked groups. For example, more than 60% of the Unbanked people in India are female.

Source: Global Findex Database 2017

Another feature of the Unbanked group is poverty

Globally, the population from the poorest 20% of households is twice that from the wealthiest family. In addition, the proportion coming from poor family are significantly higher in the countries that are less unbanked.

Source: Global Findex Database 2017

Unbanked groups generally have lower levels of education

Among the global Unbanked group, about 62% have only primary school or lower education, while the proportion is significantly higher than 50% in developing countries.

Source: Global Findex Database 2017

The unbanked group has a higher unemployment rate

On average, the unemployment rate of adults in developing countries averages 37%, while the unemployment rate of the Unbanked group is significantly higher (47%).

Facebook/Libra users are not the same group as the unbanked population

Source: Statista

It was believed that Libra was more intended for Facebook users. As of July 19, Facebook had about 2.3 billion active users, mainly in India, the United States, Indonesia, Brazil, and Mexico. Among these countries, India and Indonesia have the largest unbanked population, being the second and fourth countries with 190 million people and 95 million respectively.

According to the “Report”, the most common reason for being unbanked is that people are lack of enough funds. Other significant reasons include the unaffordable cost of financial services, a long distance from the financial institutions, and distrust to financial institutions. In India and Indonesia, about 54% and 72% of the unbanked population respectively said that the main reason for not having access to financial services is that people are short of money. To take other major unbanked countries (Pakistan, Mexico, Nizhny, and Bangladesh) into consideration, the global unbanked population who do not have enough funds is about 327 million, accounting for 59% of the total unbanked population.

In addition, as per the “Report”, according to the survey with a focus on the popularity of the use of the mobile phones and internets in various countries, mobile phone and internet penetration rates have declined as the degree of underdevelopment has increased. In India, Indonesia, Pakistan, and some other countries, ownership of mobile phones is less than 80%. In addition, on average, in less developed countries, the proportion of people who can use both mobile phones and internets is even less than 50%, therefore it will be more difficult for Libra reach these users.

Among the 1.7 billion Unbanked groups, about 873 million (5.9 billion of the 59%) of the unbanked group cannot be empowered by Libra’s vision of Inclusive Finance, because Libra’s solution is mainly addressing the high intermediate cost, not the poverty issue that brings the problem of insufficient funds.

Therefore, knowing that the main pain point of the unbanked population is lack of funds, it seems to be difficult for Facebook and Libra to fulfill the vision of providing Inclusive Finance with affordable and trustworthy financial services.

Libra’s more potential users should be those Facebook users who already have access to the financial services, and Libra can better serve them by providing cheaper cross-border transfer fees, better payment experience and lower cost of purchase, which is consistent to what Libra’s head said, Marcus, ‘Libra is about all humans, not just the 1.7 billion unbanked group’.

Feasibility analysis: trust base is weak and the motivation to launch Libra is suspected

The services of Libra are not ready for the unbanked people: users without bank accounts will not be interested in the services of Libra, nor can they afford to the Libra Association’s services.

Source: inverse.com

The members of the Libra Association are mainly big players in their industries. They can offer direct services to end-users ranging from payment service, telecommunications to trading platforms, such as PayPal, Visa, Vodafone, Booking, and Uber, etc. The majority of these services are value-added services. However, the unbanked group is mainly from low-income families, and basically has no disposable funds to purchase their services.

It is believed that the members of Libra Association are more interested in how to improve the profit situation through the participation in Libra Association because the use of Libra as an intermediary for transactions can reduce transaction fees, such as cross-border payment related to SWIFT and payment/receipt banks who charge the communication fees.

Facebook has offended her users by infringing on their privacy and stealing users’ data: Libra’s trust base is not strong

Due to the security issues of user data, Facebook’s effort to reach the mass adoption of Libra is going to be extremely difficult.

In 2014, an app called “this is your digital life” was released on Facebook. The app collected data from 270,000 users for a personality test that promise rewards in return, but it ended up capturing data of 50 million users. Surprisingly, the data was later provided to Cambridge Analytics without the permission of both users and Facebook. They used analyses the data and came up with political advertisements, which ultimately helped affect the 2016 US election and somehow gave a hand to Trump to win the election.

Therefore, in terms of compliance, Facebook’s trust base has been greatly deteriorated after the violation of the EU’s General Data Protection Regulations (GDPR).

In addition, a survey conducted by QUICK also showed that 33.5% of respondents believe that Libra must undertake the high regulatory and security costs and it is not a smart decision to launch Libra.

Summary

From a monetary policy perspective, Libra’s launch will face huge resistance because Libra promises to be pledged to a basket of fiat currencies and short-term bonds, therefore is believed to have the potential to affect the stability of the sovereign currency. That’s why the US House of Representatives and the Senate had to carry out a protracted hearing on Libra. In addition, regulators of other major economies are also very cautious about Libra.

From the perspective of business, the root cause of the Unbanked problem is poverty. The poverty problem of each economy should be evaluated case by case, some of which are due to income problems, some are related to the trust of users to financial institutions, and some are related to religious beliefs, and so on.

To bring inclusive finance to the 1.7 billion unbanked population, the more convincing solution is the Central Bank Digital Currency (CBDC). CBDC is a centralized digital currency like Libra. CBDC has a national credit endorsement, but it will be more trustworthy than Libra which is backed by governments. The issuance of CBDC will take less time than Libra, and the implementation will be easier considering that the issuance of CBDC does not have to be restricted by unit cost to reach her each end-user, and also eliminates the regulatory concerns.