Over the past few years the rise of “Fintech”
(financial technology) has had a profound impact across the
The exponential growth of the Fintech sector has largely been
fuelled by the rapid rate at which new technology is evolving but
also by the strong consumer appetite for innovation in all aspects
of financial services
Some of the most advanced examples of Fintech innovation can be
found within the payments and money remittance space. The
development and use of cryptocurrencies and blockchain is often the
segment of Fintech that attracts the most headlines. This is
particularly so after some of the largest tech giants have recently
sought to enter the scene.
Here we address the potential for digital currencies, such as
Facebook’s newly proposed Libra coin, to facilitate cheaper and
faster cross-border money transfers. We also address the challenges
that Libra and other digital currencies are likely to face before
they begin to make a more widespread impact.
The Libra coin
Facebook’s plan to launch Libra, a new global digital
currency built on an open-source blockchain, with a payment system
embedded into its messaging services, poses the significant and
immediate question of how deeply Libra and other digital currencies
like it might transform the traditional financial services and
If realised, Facebook’s vision could mean the
disintermediation of banks and other payment providers by Libra,
through enabling instant, near-free international money transfers
for Facebook’s 2.4bn users from their mobile phones. Aside from
cross-border payments, the widespread use of e-money like Libra
could have broader implications for online commerce. The creation
of Calibra, the payment service which Facebook aims to integrate
into its messaging service, could be used for micropayments between
customers, potentially bringing a new way for users to interact
with digital content and make digital purchases.
When Facebook first announced its plans to launch Libra earlier
this summer it was reportedly being backed by over 27 partners,
including payments companies, e-commerce groups and venture capital
companies, such as Visa, MasterCard, PayPal, eBay, Lyft and
It was intended that these companies would together form the
independent consortium, the Libra Association, which would govern
the network and also provide the financial capital to kick-start
It was proposed that Libra would be backed by a pool of
currencies and assets around the world, with a view to providing a
stable and safe store of value, effectively setting it apart from
other cryptocurrencies like Bitcoin, Ripple or Ethereum, known for
their price volatility
Whether Facebook will achieve its audacious plans to launch its
own digital currency remains to be seen. Over the past month the
mission has gone awry. At least seven high profile partners have
dramatically withdrawn from the project, including PayPal, eBay,
Visa and MasterCard, citing regulatory uncertainty.
The departure of these high-profile financial firms and
mainstream companies may cause damage to the project’s
credibility or, at the very least, delay the launch.
The main challenges for Facebook and any other companies
entering into this space are seen as two-fold: regulation and
adoption. Libra continues to cause a storm of inquiries and
warnings from regulators in the U.S., as well as in the UK and
Aside from the regulatory and procedural issues faced by
Facebook in setting up a network to move money around the world,
including anti-money laundering checks, Libra may have
wide-reaching implications for the structure of the financial
Regulators and bankers alike are worried about the harmful
potential of the Libra coin:
- Will Libra be used as a vehicle for
- Is Libra a threat to global financial
- Is Libra open to data privacy
- Will Libra strip nations of control
of their monetary policy?
These concerns, amongst others, led to regulators in the G7
nations creating a working group to examine the risks of such
currencies to the financial system.
Consequently, earlier this month, the G7 group warned that
digital currencies, such as Libra, “pose challenges for
competition and anti-trust policies” and should not be allowed
to launch until all of the legal, regulatory and oversight
challenges and risks are adequately addressed.
In the U.S., there have also been hearings by the Senate Banking
Committee to understand how the currency works. Mark Zuckerberg
appeared before the U.S. House of Representatives recently and
faced some tough questions over many things, including data
What is eminently clear is that Facebook and the Libra
Association will need to work closely with regulators across the
globe if they wish to overcome the many regulatory concerns.
In addition, Libra faces the perpetual challenge that other
cryptocurrencies face: namely, the adoption of blockchain and
cryptocurrencies at scale to make a practical business case for
their mainstream use. In particular, there is the difficulty of
convincing merchants to agree to accept payment in the form of a
digital coin whose value would fluctuate against the local currency
of the assets used to back it.
That said, overcoming this hurdle could potentially signal a new
era in which digital currencies become the predominant medium of
Cross-border payments and remittances
Decentralisation in financial services through technologyenabled
innovation is not a new phenomenon, nor is the idea that
distributed ledger technology is capable of transforming many
facets of finance, such as retail and wholesale payments, trade
finance, capital markets, lending and insurance.
The impact on financial services is likely to be particularly
hard-felt in the payments industry, given the potential application
of blockchain technology to the settlement of interbank payments
This is particularly so given the inefficiencies, slow speed and
high cost of the current banking system.
If counterparties were to exchange digital currencies rather
than fiat currencies, that is, without having to go through a
central regulating body like a bank, payments could be made and
settled in a matter of minutes, if not seconds, via blockchain.
Moreover, the distributed nature of blockchain would mean that a
digital record of payments would exist that is both transparent and
Some initiatives that leverage distributed ledger technology, of
course, already exist. Ripple, for instance, connects financial
institutions and payment providers via their own global payments
network and enable transactions using fiat currency or Ripple’s
own XRP cryptocurrency.
Similarly, central banks and other financial institutions that
have previously lagged behind the curve are showing signs of
increasing blockchain adoption and a readiness to engage
with the new era of digital currencies. For example, thirteen of
the world’s biggest banks are preparing to launch digital
versions of major global currencies in 2020
Despite the upsurge of blockchain-based payments solutions,
there remain significant barriers to adoption at scale. One issue
is that the transparent nature of blockchain means there are
limitations to anonymity in scenarios where sensitive or private
data is involved. In response, several companies are exploring the
“tokenization” of sensitive data to preserve
Another challenge is the inevitable friction caused by the
conversion of crypto assets and fiat currencies, particularly given
the inherent volatility of cryptocurrencies.
This is, however, where Libra is perhaps different and could (if
successfully launched) raise the credibility of cryptocurrencies.
The proposal is to create a digital currency that is fully backed
by a reserve of real-world assets which would effectively minimise
volatility, although would not entirely eliminate it, given that
the value of Libra would inevitably fluctuate as the value of the
underlying assets moved.
The future of cryptocurrencies
Despite Facebook’s recent set-back, Libra still draws
support for its potential to revolutionise finance ―if it can
satisfy the regulatory and other concerns being raised.
It has been widely acknowledged that Libra represents a
significant step forward in the process of extending financial
inclusion and reducing payments’ friction, which have been the
aim of many entrepreneurial minds for decades.
We must wait to see whether Libra becomes the global currency
and de facto money transfer standard that it aspires to be and,
importantly, what final form it takes when it is ultimately
launched next year, if it is launched at all.
Notwithstanding this, Libra has already succeeded in focussing
the minds of policymakers and regulators around the globe and
boosting awareness and the adoption and development of
cryptocurrencies and security tokens more broadly. This may still
serve as a watershed moment for digital currencies.
Insurers should carefully watch this space to see whether Libra
does become the digital currency that brings cryptocurrencies to
As we discussed in our previous article (
Cryptocurrencies – to insure or not to insure?), insurance
demands are only likely to increase as the crypto and blockchain
markets continue to mature. It will be interesting to see whether
insurers’ appetites to write crypto-related risks expand as and
when the industry and regulation become more stable.
1. The substance of the article was first discussed in
the Jusletter IT Journal and has been updated accordingly (https://jusletter-it.weblaw.ch/en/issues/2019/26-September-2019/
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.