Its entry into the continental finance system presents complex regulatory issues for authorities
COMMENT | SIMON M. MUTUNGI | Social media titan Facebook is set to roll out its own cryptocurrency dubbed “GlobalCoin” in 2020 with trials starting later this year. This is global cryptocurrency aims to be used across state borders. Unlike traditional cryptocurrencies such as Bitcoin and Ethereum that are highly volatile, Libra is a stablecoin that is pegged to a basket of major currencies and securities whose stable value makes the Libra stable with a conversion rate, for example, of 1 Libra equals $1 USD.
Although it is initially running in only a dozen countries, the idea behind it is to expand the concept to every country that accesses the Facebook platform. As of 2017, Africa was home to 170 million Facebook users. It is therefore suffice to note that if the Libracoin is successful, it will impact the financial system landscape on the continent. There are, therefore, political and socio-economic implications that need to be considered about this global currency idea in the African context.
Unlike other decentralised blockchains and cryptocurrencies that facilitate distributed governance and open access, the Libracoin and its blockchain are not entirely decentralised contrary to their founders’ claims. Libra is controlled by Facebook and the other 27 founding companies forming the Libra Association that run their own nodes and validate the transactions on the Libra Blockchain. This means one would require permission from this group to trade in Libra which effectively bestows unfettered control of this financial system to a small consortium of mainly western powered companies, a reminiscent concern of past colonial and present neo colonial times in Africa. So politically speaking, the Libra Association may want to address this issue by involving African authorities such as central banks as the continent is not about to cede its independence anytime.
A fundamental objective of the GlobalCoin according to the Libra white paper is to improve global financial inclusion. Approximately 1.7 billion people remain unbanked worldwide with the African banked population standing at just 34% as of 2015 according to World Bank data.
A key challenge to such low financial inclusion in Africa is the exorbitant bank fees, documentation, and banks being too far away from the people. This is where Libra comes in and considering that 94% of Africans on Facebook use a mobile phone to access the social network, this would alleviate some of the aforementioned constraints to financial inclusion. Borrowing lessons from the impact mobile money financial technologies have made on the finance sector, this statistic is foretelling as to the impact the Libracoin can have in driving Africa’s financial inclusion if successfully adopted.
An advantage flowing from improved access to finance provided by the Libracoin is that it could make remittances less costly and as fast as sending a photo from one Facebook or WhatsApp account to another. According to World Bank data, remittances to Africa grew to $37 billion in 2017 and are expected to clock $40 billion this year yet the cost of sending cash in Africa is 20% higher than any other region in the world mainly due to extortionate fees charged by some banks and remittance service providers.
Since the Facebook platform operates via the internet and is to some extent borderless, the sending and receiving of money through this channel should be cost effective and fast. The Libra is however likely to meet some regulatory resistance in some countries like South Africa that have exchange controls on how money flows in and out of their jurisdictions.
Another probable, albeit ambitious benefit is that the Libracoin perhaps sets up the infrastructure (or we could pick lessons from it and build our own infrastructure) that finally sees Africa someday implement its Afro in a digital sphere. The Afro is born of monetary union where the continent uses one currency across borders. Robert Mundell, a Nobel-winning economist, points out the benefits of such unions and states that, “if a…single currency is used, there would be a common inflation rate and similar interest rate, a considerable growth in trade, productivity and finance integration, all of which would generate a considerable increase in economic growth and well-being”. This would help realise the objectives of the recently signed African Continental Free Trade Area Agreement by facilitating intra and inter-continental trade. By pegging the Libra to the Afro, or a basket of regional currencies such as the Eco in West Africa and the Shilling in East Africa, the GlobalCoin could help traders purchase goods and services across borders without worrying about costs flowing from foreign exchange rates. This however is not to suggest that the continent is ready for the implementation of the Afro just yet.
In conclusion, Facebook’s entry into finance presents new and complex regulatory issues for authorities. For instance, Libracoin by its digital nature could easily facilitate money laundering and terrorist financing if the clients on the platform are not well vetted. Therefore while there are benefits, the risks too cannot be ignored and African governments are urged to assess and address them swiftly.
Simon M. Mutungi is a joint PhD candidate (Financial Technology Regulation) at the University of Cape Town and Yale University