Libra may not deliver digital currency, but digital identity

‘In large parts of the world, Know-Your-Customer (KYC) could be replaced by Known- by-Zuck (KYZ) to the benefit of society as a whole’ ‘The Digital Currency Revolution’ by David Birch

Yesterday I explained the options for implementing a digital currency. But, you may be thinking, why am I explaining these options now? Why is digital currency on the agenda? Is it because of Consult Hyperion’s experiences as consultants to both M-PESA and Mondex, two of the most important steps on the road to central bank digital currency (CBDC)? Is it because our developers want to have fun coding it? Is it because banks and payment providers that we advise demanding it? No.

We’re talking about it because central bankers are talking about it. Mark Carney, then governor of the Bank of England, got the ball rolling last year when he said that a new form of global digital currency could be ‘the answer to the destabilising dominance of the US dollar in today’s global monetary system’ and went on to talk about the international monetary system using some kind of ‘synthetic hegemonic currency’ (SHC) instead.

Now, a globally acceptable SHC in the form of a digital currency implemented as electronic cash with a 100% fiat currency reserve and denominated in a synthetic unit of account sounds a little like Facebook’s much-discussed Libra. While Libra has dominated the headlines, it will undoubtedly be only the first of many attempts to create a global digital currency. From a payments’ perspective alone, Libra is interesting but not a revolution. I’m sure that a frictionless global Facebook payment system would be beneficial. The ability to send money around on the internet is clearly useful and there are all sorts of new products and services that it might support.

A currency, however, has more far reaching implications than a payment system. What if, for example, the inhabitants of some countries abandon their failing inflationary fiat currency and begin to use Libra instead? The ability of central banks to manage the economy would then surely be subverted and this must have political implications. Hence it is unsurprising that both the international Financial Stability Board and the UK’s Financial Conduct Authority said they would not allow the world’s largest social network to launch its planned digital currency without ‘close scrutiny’ and other regulators took a similarly stern view.

People refer to the new currency as ‘Facebook’s Libra’ but as Mark Zuckerberg testified to the House Finance Committee, Facebook is merely one of the 21 members of the Libra Associations that launched in Geneva. The association recently issued their new white paper in which they talked about creating stablecoins tied to national currencies (e.g., Lib$ and Lib£) alongside the original ‘basket’ stablecoin. The white paper says that the consortium hopes ‘as central banks develop central bank digital currencies (CBDCs), these CBDCs could be directly integrated with the Libra network, removing the need for Libra Networks to manage the associated Reserves’.

At the same time. Facebook renamed their Calibra digital wallet ‘Novi’, presumably to emphasise that their ambitions extend beyond simply serving as a personal storage mechanism for Libra value. This is where I think the effort is most interesting. Facebook’s ability to create a global standard digital wallet and activate it for a couple of billion people has much more disruptive potential than the currency basket that they are proposing for it, and that’s because the global problem of financial inclusion has much more to do with identity than it does with money. I’ve long maintained that digital wallets will get interesting when they can store more than money, just as actual wallets do. The most valuable things in your Novi wallet won’t be your Facebucks but your proof of age, your financial services passport, your trusted traveller status and your store loyalty cards. Standardising these will unlock great economic value and deliver global benefits by bringing trade (and therefore prosperity) to hundreds of millions more people than the banking system has been able to.

In case you missed yesterday’s instalment of our Central Bank Digital Currency series, about the economic, social, and political repercussions of CBDCs, check out David’s article here.

Still new to the topic of Central Bank Digital Currencies? We recommend reading Central Bank Digital Currencies for dummies – a quick guide into CBDCs from the Dutch Central Bank, an educational piece written by Harro Boven, Policy Advisor at the Dutch Central Bank.

About David Birch

David Birch is an author, advisor, and commentator on digital financial services. An internationally recognised thought leader in digital identity and digital money; he was named in the top 15 favourite sources of business information by Wired magazine and awarded ‘Contributor of the Year’ by the Emerging Payments Association. Currently he is Director at Consult Hyperion and Advisor to the Board at AU10TIX.

About Consult Hyperion

Consult Hyperion is an independent consultancy. We hold a key position at the forefront of innovation and the future of transactions technology, identity, and payments. We are globally recognised as thought leaders and experts in the areas of mobile, identity, contactless and NFC payments, EMV, and ticketing.

Happy Thursday and watch out for our next instalments of Central Bank Digital Currency series. Meanwhile, feel free to share your thoughts and ideas on the CBDC topic with The Paypers at editor@thepaypers.com.