Facebook has recently announced its plan to launch Libra, an international digital currency, next year. This announcement has created waves in the tech and financial world. Is it another new gizmo, or is there something in it for the common man, in India? And is it worthwhile figuring out what the fuss is about?
The answers to both questions are yes. I think there is potentially a lot in this for the common man, and so it is worthwhile figuring out what the fuss is about, and what it means for us.
Libra is supposed to be a virtual currency that would be a non-government alternative to national currencies. But its value is not linked to rupees, or dollars, or any particular national currency. Its value would be linked to a basket of bank deposits and government bonds in heavyweight international currencies including the US dollar, Euro, UK pound, Swiss franc, Japanese yen.
At the back end, the underlying technology is going to be a limited kind of blockchain or distributed record of transactions. The transactions would take place through a digital wallet called Calibra. We are familiar with the idea – think Paytm-type wallet services at a global level.
Let’s look at the numbers. Facebook claims that globally it has around 2.4 billion users, of which about 10 percent are from India. This means about 24 crore people to start with. As per the Ministry of External Affairs, overseas Indians are estimated to be about 3 crores. In 2018, according to the World Bank Brief on Migration and Development, overseas remittances to India was of the order of $ 80 billion (Rs. 5.7 lakh crores), the highest in the world. These remittances, when taking place through formal channels, cost on the average seven percent, according to the same Brief. It is claimed that the transfer of Libras will cost just a fraction of a percent. We can see straight away the potential for huge cost savings.
There are also informal channels of money transfer, notably hawala. Hawala commissions are rumoured to be in the range of 2-5 percent, and the system assures doorstep delivery of local currency to the recipient. These channels are preferred by migrant workers, many in the informal sector, who want reliable and hassle-free means of cash transfer to relatives, and find banking channels cumbersome. Libra might be a good deal even for persons using these channels.
To be a credible player in the international money transfer market, Libra would need to ensure secure funds transfers from person to person at negligible or no cost; and enable the easy exchange of the currency into local currency and vice versa, as needed. As projected, it ticks almost all the boxes. The exception is the issue of exchangeability, which is not in its hands, as it requires regulatory approvals from the Reserve Bank.
If it does cross that hurdle, it would make a lot of sense for both senders and recipients alike. Recipients of such transfers are usually people who need the cash. They are therefore likely to value the drastic reduction in commissions that are promised. Apart from which, no bank account would be needed to come on board, only a mobile phone and internet access! Of course, if it takes off, it may severely dent the legitimate and hawala international money transfer business!
Another feature of Libra not related to the transfers per se is that the Libra Association will release the open-source code so that anyone can develop third-party apps on this platform. This has the potential to open up fresh development opportunities for our techies, and open up new horizons for our entrepreneurs.
Downsides are there of course, and many of them have been pointed out already. In today’s world, data is gold. An enormous amount of data would be captured by the Libra Association, and this has raised privacy concerns. Facebook has promised to keep the payments data separately from its social media, but authorities in the Western world are sceptical, given Facebook’s past record. Authorities would be concerned. How much this issue concerns the potential recipient of a migrant worker’s remittance is another matter.
Libra accounts may also be subject to the risk of hacking. Again, so are all digital payment accounts, including those of banks and credit cards. Safeguards will be needed in much the same way as for banks and credit cards.
Another danger highlighted is that the same channels can be used by money launderers and movement of funds by and for criminals. However, the blockchain underlying such transactions would leave a traceable money trail, and surely law enforcement authorities across the world would demand some sort of access to that trail as a condition for allowing Libra to do business. The cost savings in using Libra is unlikely to attract such elements; anonymity would be the priority concern. My guess is that tried and tested informal networks like hawala would still be preferred by criminal elements for funds movement across borders.
The real hurdle that Libra will have to cross before it can become widely acceptable as envisaged is that of regulatory approvals. Without the Reserve Bank of India (RBI) agreeing, Libra will not be interchangeable with rupees. It can still come into being, and be used, without such approvals, but the spread then would be limited.
As of now, such a currency is illegal. RBI notification of 6 April 2018 prohibits all entities regulated by it (i.e. all banks and financial institutions) from dealing in virtual currencies.
Government of India policy is also not supportive. I thought it was otherwise, and had observed on this portal in an analysis of the 2018 budget speech of then Finance Minister Arun Jaitley that Blockchain or distributed ledger technology has exciting potential applications, particularly in the financial services industry, and it is good that there is recognition of this potential and even a cautious willingness to “explore use of blockchain technology proactively”.
However, the official position seems to have hardened since. There are reports of a draft “Banning of Cryptocurrency and Regulation of Official Digital Currency Bill, 2019” which proposes to criminalize holding of cryptocurrencies (which would include Libra), making it a non-bailable offence with a ten-year jail term! This seems somewhat draconian, to say the least.
The purpose of the exercise seems to be to facilitate the development of an official digital currency, which would be a great thing, no doubt and deserves to be encouraged. But it would also deny legitimacy to holding an alternative non-official digital currency like Libra, despite its significant potential benefits in reducing the cost of international fund transfers for ordinary people. Whether it would be actually possible to stop people using Libra if they so choose to, is another matter.
With the big names and deep pockets backing the initiative, Libra is likely to see the light of day soon. There are potential benefits for people in India. Should we relentlessly block such an initiative? I don’t know whether it is feasible to stop the spread of Libra by regulatory fiat alone, or whether it’s even worth the effort. Should we not have a closer look at it, in the light of overall national interest? Would it not be better to engage with the idea to determine what safeguards are needed and possible? Regulatory safeguards may include things like data localization and law enforcement access to the record. To gain acceptance in a major market like India, there is every likelihood that the Libra Association would address our regulatory concerns seriously.
New mobile and net-based technology applications can be quite disruptive if people catch on to them. We don’t know yet whether this one will succeed or fail. There are as yet many grey areas in the proposal. We can choose to look at it with an open mind. Or, we can choose to bury our head in the sand and hope that it will go away!