Enthusiasts would have us believe that Facebook’s own digital currency, Libra, will instantly revolutionize the remittance industry upon its release in 2020 — except it won’t. A harsher reality awaits, with conversion costs, capital gains taxes and a lack of Libra-priced goods all likely to limit its appeal.
Facebook is on a mission to transform cross-border payments globally with the development of its own digital currency, Libra.
Facebook hopes to roll out Libra a year from now, in the summer of 2020, but contrary to the narrative being spun by crypto and Facebook enthusiasts, it’s unlikely to have anywhere near the industry-disrupting effects that are being touted.
Undoubtedly, Facebook has drawn inspiration from the successes of WeChat and Alipay — two apps which taken together have transformed the way money is spent, stored and transferred throughout China. But unlike these apps, which allow for the immediate transfer of China’s national currency, the yuan, Facebook is going international.
Per the sales brochure, Facebookers will be able to buy Libra with home currency, then instantly transfer funds to other Facebook users anywhere in the world, who can then choose to hold or resend the coin, spend on Facebook and associated apps, or convert Libra into local (foreign) currency.
Better still, as a “stablecoin,” Libra will be pegged to a basket of fiat currencies and will thereby avoid the wild volatility of bitcoin and its peers — volatility that has rendered those earlier cryptos inadequate as payment vehicles. And whereas bitcoin must compete to attract users, Facebook begins with 2.4 billion of them in the palm of its digital hand.
Sounds like a game changer for the payments industry! Except it’s not. There are simply too many problems with this model for it to work anywhere near as well as it’s being sold.
With two transactions to pay for, it might be that overseas transfers via Libra are more costly than those offered by existing non-bank providers
For serious overseas transfers, nearly all of Libra’s appeal hinges on how much the exchanges will charge for conversion from fiat currencies. Remember that an overseas transfer involving Libra requires two conversions. If you’re in Australia and intend to send money to the US, the first conversion would be from Australian dollars into Libra, and the second would be from Libra into US dollars. With traditional money transfers, you only convert money once — from Aussie to greenback.
With two transactions to pay for, it might be that overseas transfers via Libra are more costly than those offered by existing foreign transfer providers like XE, WorldFirst, TransferWise and CurrencyFair, all of which can process a US-bound transfer of AUD10,000 for 0.9 percent or less (as low as 0.6 percent). If fiat currency-to-Libra conversion costs turn out to be 0.5 percent each side, which isn’t unrealistic, it will be a more expensive method.
Libra will surely come into its own for smaller transfers sent by those who aren’t concerned about half a percentage point here or there, but instead crave convenience. When repaying the 200 bucks you owe your best friend, opening a Facebook contact list and clicking ‘Send’ will sure beat registering for an account with an online transfer company, waiting for account access, filling out payee forms with names and bank account numbers, and so on.
Nearly all of Libra’s appeal will hinge on how much exchanges charge for conversion from fiat currencies.
Will small Libra transfers dent revenues in the foreign exchange industry? Absolutely, but not as much as we’re being told. Already, a number of firms have transfer minimums — $500 or equivalent is typical, but this can rise tenfold for exotic currencies — making the small-transfer issue redundant in these cases, and of equal importance is the push by many of these firms into the much larger market for business payments. SMEs alone send $6-7 trillion across borders each year, and this is nearly 20 times retail volumes. To repeat what’s been said, nearly all of Libra’s appeal for larger transfers, including those by businesses, will hinge on how much the exchanges charge for conversion from fiat currencies.
Of course, the real potential for Libra — potential that eliminates half of the aforementioned conversion costs — is as a method of payment. Enthusiasts believe it could replace Visa and Mastercard at retailers and even domestic banking platforms like the UK’s Faster Payments Service (FPS).
If, instead of national currency, Facebook users could use Libra itself to pay for Libra-priced taxis and phone bills, groceries, coffee, cinema tickets and more, we might really be cooking, not only because we’d avoid that second leg of conversion fees but also because of what this would do for broader Libra sentiment and acceptance, and for our willingness to leave our wallets and contactless cards at home. But again, this is unlikely to become a reality.
To borrow an argument from Tom Holland of the South China Morning Post, because Libra’s value will continually fluctuate against national currencies, the price of goods bought with Libra will change day to day, and for many consumers, this alone will be sufficient reason not to use it.
“For Libra to work, companies would have to begin determining the prices of their products and services in Libra, and to avoid volatility between revenues and expenses, they would have to pay their staff in Libra. But neither companies nor workers would want paychecks in Libra [because] both would still have to pay their taxes in national currencies … [introducing] exchange-rate risk,” Holland says.
For Libra users, there’s also the serious matter of capital gains tax liabilities, which lawyers have warned will be a major barrier to adoption. In many countries, CGT will be due whenever Libra has increased in value relative to home currency and is then sold to fund large local purchases.
“In most countries … consumers will have to file a detailed tax return showing all their [Libra] transactions and the exchange rate at the time, and pay any tax due,” says Dan Neidle, a partner at law firm Clifford Chance. Speaking to the Financial Times, Neidle warned that heavy Libra users would likely find computing tax liabilities “a real challenge.”
Other important issues for both consumers and regulators include privacy controls and security of funds.
Getting Libra off the ground isn’t a foregone conclusion.
What’s absolutely clear is that Libra will bring to Facebook a level of scrutiny and regulatory oversight that it’s never experienced in its short history. In fact, getting Libra off the ground isn’t a foregone conclusion.
Breaking reports on Wednesday state that the US Congress has asked Facebook to immediately cease development of Libra to allow it time to investigate the risks it poses. And in the UK, when asked about Libra a fortnight ago, Bank of England Governor Mark Carney said: “We’re not going to allow a network that comes into place that is a network of criminals and terrorists.”
Speaking on Tuesday, another UK regulator, the Financial Conduct Authority’s Christopher Woolard, said: “The issues raised [by Libra] require deep thought and detail” and need to be examined by regulators and governments.
All said, Libra looks a game changer on paper but will probably struggle to find users when it’s brought to life given how entrenched national currencies are in our societies.
Large money transfers with Libra might be a goer if fiat-to-Libra exchange is sufficiently cheap, but even then, sophisticated remitters might still prefer the specialized services, support and advice offered by the industry’s top rated foreign transfer providers.
As a method of payment, it’s difficult to see why existing systems wouldn’t be preferable to Libra.
“Ultimately, Libra is not the competitor to central banks that boosters claim,” concludes Tom Holland, and that’s hard to disagree with.
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