Since Facebook launched Libra, a not-for-profit initiative to create a digital currency and global payments system, there has been much hand-wringing over the potential risks posed by digital disruption in the financial sector. But not nearly enough has been said about the dangers associated with the status quo.
WASHINGTON, DC – By announcing the launch of the Libra Association on June 18, 2019, Facebook and other members of the association started a vigorous debate about the role of digital technology in payments, currencies – including those issued by central banks, more than 80% of which are exploring the concept of central bank digital currencies (CDBC) – and other areas of the global financial and monetary system. The conversation has since moved from the abstract to the concrete. Businesses, policymakers, and other stakeholders are now weighing the opportunities and risks associated with open and competitive innovation in a domain bereft of new thinking for more than 50 years.
As a result of this sclerosis, existing payment systems, particularly for international transfers, run on dated, expensive, and analog rails with low levels of interoperability. And yet, despite the inefficiency and inherent risks of the status quo, dominant players until recently have had no incentive to change it. The world has continued to be plagued by high rates of financial exclusion, because among the only ways that people can access the financial system is through brick-and-mortar channels and plastic cards with expiry dates (assuming they can qualify).
Digital-native payment services and regulation-compliant payment networks like the one the Libra Association is building promise to change that by creating a new digital commons. By spurring sorely needed competition, these efforts will drive both public- and private-sector innovation.
Lost amid the apprehension over the risks the Libra project is said to pose is the fact that the status quo creates risks of its own. By failing to ensure accessible, inclusive, and low-cost payment options, it leaves a void that inevitably will be filled by non-compliant or non-conforming digital alternatives, or by “walled garden” payment networks. After all, of the 1.7 billion people who reside on the margins of the current payment systems, more than one billion already have access to low-cost Internet-connected mobile phones. These people do not accept the idea that access to low-cost, real-time payments is a privilege afforded only to those born in the “right” countries or postal codes. They are not alone in demanding financial inclusion as a basic human right, and they will use the tools at their disposal to secure their interests.
The current system is a recipe for financial exclusion, because it forces those who can least afford it to pay the most for even basic services. Neither the Libra Association nor any other organization can remedy this on its own. But the broader Libra payment system, together with a diverse coalition of partners who are committed to promoting responsible financial-services innovation and competition, could materially improve the situation for billions of people. And it can do so in a way that does not violate the rules that keep the global economy safe and stable.
The key is to get the incentives right. Unlike many other digital initiatives, which often ask for forgiveness rather than permission, those of us building the Libra payment system have a strong interest in striking the right balance between public interests, regulatory compliance, and social impact. Each of these goals is viewed not as a potential tradeoff, but as a core mission objective. To succeed in creating a more equitable global payment network, credible regulation and public license are a must.
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Although much attention in recent years has been devoted to cryptocurrencies and digital-payment tokens, the real breakthrough innovation is one that will remove the barriers between payment networks and people. Digital-native payment systems are not an attempt to “reinvent money,” though that has been one of the more common misinterpretations since Libra was announced. Rather, what is being reinvented is how people will spend, send, save, and secure their money.
In the year 2020, someone should be able to rely on compliant, low-friction, high-security networks to send a payment as easily, securely, and widely as if it were an email or text message. Imagine the uproar if it cost $30 to send an email message between different providers, or if there was a different fee depending on the speed of delivery? Attempts to enable such capabilities are not a threat to established business models or payment networks. If anything, they represent opportunities to tap into new markets and consumers, and should lead incumbents to ask themselves why so little has been done in this domain until now.
Some have argued that an open digital-payment network would imperil the global financial system and offer a new space for nefarious actors to operate. But that is already true of the current system, which has proven highly susceptible to crises and instability. Existing rules are routinely circumvented through the use of cash and opaque payment networks that provide cover for tax evasion, money laundering, and other illicit financial activity. The Libra Association is committed to compliance and protecting the integrity of the financial system.
Another common argument is that if digital stablecoins were to become ubiquitous (owing to their convenience), they could erode the effectiveness of monetary policy. But, at least in the economic considerations for the Libra project, the payment system is being specifically designed to help complete the financial system, not to compete with it. That is why we have put consultations with regulators, central banks, and lawmakers at the beginning of the process, rather than at the end.
By offering a powerful new payment option, we hope to drive further innovation in the field, including from central banks themselves, whose own digital transformation aspirations can be accelerated by an upgradable, public, and compliant payment network. We should all have the same goal: to remove the long-standing barriers to financial services that have left billions of people on the margins of the global economy.
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WASHINGTON, DC – By announcing the launch of the Libra Association on June 18, 2019, Facebook and other members of the association started a vigorous debate about the role of digital technology in payments, currencies – including those issued by central banks, more than 80% of which are exploring the concept of central bank digital currencies (CDBC) – and other areas of the global financial and monetary system. The conversation has since moved from the abstract to the concrete. Businesses, policymakers, and other stakeholders are now weighing the opportunities and risks associated with open and competitive innovation in a domain bereft of new thinking for more than 50 years.
As a result of this sclerosis, existing payment systems, particularly for international transfers, run on dated, expensive, and analog rails with low levels of interoperability. And yet, despite the inefficiency and inherent risks of the status quo, dominant players until recently have had no incentive to change it. The world has continued to be plagued by high rates of financial exclusion, because among the only ways that people can access the financial system is through brick-and-mortar channels and plastic cards with expiry dates (assuming they can qualify).
Digital-native payment services and regulation-compliant payment networks like the one the Libra Association is building promise to change that by creating a new digital commons. By spurring sorely needed competition, these efforts will drive both public- and private-sector innovation.
Lost amid the apprehension over the risks the Libra project is said to pose is the fact that the status quo creates risks of its own. By failing to ensure accessible, inclusive, and low-cost payment options, it leaves a void that inevitably will be filled by non-compliant or non-conforming digital alternatives, or by “walled garden” payment networks. After all, of the 1.7 billion people who reside on the margins of the current payment systems, more than one billion already have access to low-cost Internet-connected mobile phones. These people do not accept the idea that access to low-cost, real-time payments is a privilege afforded only to those born in the “right” countries or postal codes. They are not alone in demanding financial inclusion as a basic human right, and they will use the tools at their disposal to secure their interests.
The current system is a recipe for financial exclusion, because it forces those who can least afford it to pay the most for even basic services. Neither the Libra Association nor any other organization can remedy this on its own. But the broader Libra payment system, together with a diverse coalition of partners who are committed to promoting responsible financial-services innovation and competition, could materially improve the situation for billions of people. And it can do so in a way that does not violate the rules that keep the global economy safe and stable.
The key is to get the incentives right. Unlike many other digital initiatives, which often ask for forgiveness rather than permission, those of us building the Libra payment system have a strong interest in striking the right balance between public interests, regulatory compliance, and social impact. Each of these goals is viewed not as a potential tradeoff, but as a core mission objective. To succeed in creating a more equitable global payment network, credible regulation and public license are a must.
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At a time of escalating global turmoil, there is an urgent need for incisive, informed analysis of the issues and questions driving the news – just what PS has always provided.
Subscribe to Digital or Digital Plus now to secure your discount.
Subscribe Now
Although much attention in recent years has been devoted to cryptocurrencies and digital-payment tokens, the real breakthrough innovation is one that will remove the barriers between payment networks and people. Digital-native payment systems are not an attempt to “reinvent money,” though that has been one of the more common misinterpretations since Libra was announced. Rather, what is being reinvented is how people will spend, send, save, and secure their money.
In the year 2020, someone should be able to rely on compliant, low-friction, high-security networks to send a payment as easily, securely, and widely as if it were an email or text message. Imagine the uproar if it cost $30 to send an email message between different providers, or if there was a different fee depending on the speed of delivery? Attempts to enable such capabilities are not a threat to established business models or payment networks. If anything, they represent opportunities to tap into new markets and consumers, and should lead incumbents to ask themselves why so little has been done in this domain until now.
Some have argued that an open digital-payment network would imperil the global financial system and offer a new space for nefarious actors to operate. But that is already true of the current system, which has proven highly susceptible to crises and instability. Existing rules are routinely circumvented through the use of cash and opaque payment networks that provide cover for tax evasion, money laundering, and other illicit financial activity. The Libra Association is committed to compliance and protecting the integrity of the financial system.
Another common argument is that if digital stablecoins were to become ubiquitous (owing to their convenience), they could erode the effectiveness of monetary policy. But, at least in the economic considerations for the Libra project, the payment system is being specifically designed to help complete the financial system, not to compete with it. That is why we have put consultations with regulators, central banks, and lawmakers at the beginning of the process, rather than at the end.
By offering a powerful new payment option, we hope to drive further innovation in the field, including from central banks themselves, whose own digital transformation aspirations can be accelerated by an upgradable, public, and compliant payment network. We should all have the same goal: to remove the long-standing barriers to financial services that have left billions of people on the margins of the global economy.