All you need to know about Facebook's Libra

Heike Mai, does Libra have what it takes to become a global world currency?
Heike Mai: It's still too early for a definitive answer, but one thing is clear: the hurdles for Libra are numerous and high. It is still far from clear whether it will be a success.

Then let’s dial down: what can a cryptocurrency like Libra do?
There are two basic applications: for payments – that is as a means of exchange – or for investing, similar to cash or a deposit in a bank account. Cryptocurrencies can be a useful supplement to existing payment methods such as cash and bank deposits. The question is whether it should be a government-issued or a private cryptocurrency, or even both.

How is Libra different to Ethereum, Ripple and the like?
Libra has some advantages over existing private cryptocurrencies. Firstly, it can access a potentially huge user base, so the network effect considerably increases its chances of successful market penetration. Secondly, it is supposed to be able to handle large numbers of transactions. And thirdly, the Libra system wants to invest the proceeds in hard currencies such as the euro and the US dollar to significantly limit the volatility of the Libra, that is of its exchange rate.

Before you ask about Bitcoin and Libra, there is another fundamental difference between these cryptocurrencies, apart from the peg to hard currencies. Unlike Bitcoin, which can be transferred directly without financial intermediaries, Libra is to run on a system whose organisational structure is more similar to the current banking system. This is because the Libra system is based on intermediaries who also require prior approval from the Libra Association.

Who might find Libra most attractive?
In Europe, primarily people who travel frequently outside their own country. This is because Libra will provide a cross-border – that is Europe-wide – payment facility, whether shopping online or making instore purchases in a foreign country. This can be a real competitive advantage, because even though card, online and mobile payments are widely used in many European countries, digital payments in Europe are often curtailed at national borders. In emerging markets, people who are not accepted as customers by banks or financial service providers could be enabled to make digital payments and savings for the very first time by Libra. To put it more formally: Libra can boost financial inclusion. The prerequisite, of course, is Internet access.

How is the value of Libra going to be calculated?
Based on the composition of the currency basket. Libra is therefore essentially like a share certificate in a money market fund that invests in the most prestigious currencies in the world. It is conceivable that this peg will be removed at some point, but that also depends on the monetary policy of the central banks. The Libra Association already has considerable influence because it determines the rules of the system and determines the weights in the currency basket.

What are the arguments for and against the success of the Facebook currency?
The big advantage of Libra is of course the huge network effect of Facebook and its huge market clout. The Libra wallet can be integrated into existing Facebook accounts including WhatsApp, Messenger and Instagram, making it easily accessible to billions of users. No interest is to be paid on Libra credit balances, but this could make Libra particularly interesting in developed economies if central banks drive interest rates further into negative territory – thereby punishing savers considerably. Finally, in emerging markets Libra could become a substitute for a soft, unstable domestic currency.

Exchange rate risk is one argument against Libra, however, as the exchange rate between Libra and the domestic currency will be flexible. As already indicated, the regulatory hurdles are also high.

And what should the financial sector and governments brace themselves for?
Libra will threaten the established guardians of money, the central banks, and those governments that have effectively taken the central banks hostage through their debt policies and lack of structural reforms in recent years and made low interest rates necessary. Banks are also potentially at risk, as Libra could deprive them of some of the refinancing they obtain from customer deposits. The supervisory authorities and the regulators in particular will therefore scrutinise Libra very keenly, and it will not be easy to convince them to even approve the launch of Libra. We already see this in the wide-ranging public criticism levelled at Libra to date.

And to what extent do you think Libra should be regulated?
As always, the principle of "same business, same regulation" should apply. The regulators should basically give innovations in the financial sector a chance and not ban them from the outset. Of course, clear rules are needed. Libra must comply with all relevant requirements, for example regarding laws on payments or anti-money laundering, and last but not least regarding the use of personal data. After all, Facebook is not a charitable organisation but seeks to make a profit.

On a scale from one to ten – how much disruptive potential is there in Libra?
I see many hurdles that Libra has to overcome in order to succeed. If Libra is successful, however, I would estimate its disruptive potential at seven. But even then, Libra will probably not replace the official currencies, but supplement them. As such, anyone who does not want to use Libra need not fear that they will eventually have to rely on it.