Money is one of the most evolutionary items in the history of mankind. The evolutionary metamorphosis of money transcended technological evolution. From the collective belief of value on the grains of ‘salt’ to gold minted coins to the government-backed currency papers to digital balances in plastic cards; fiat Currency has been at the heart of commerce. However, in the last decade, the disruptive technological innovation of ‘cryptocurrencies’ has thrown a gauntlet down to Fiat’s unchallenged hegemony. When Satoshi Nakamoto launched his white paper on ‘Peer to Peer Electronic Cash System’ which introduced ‘Cryptocurrencies’ that were not only decentralized but autonomously self-regulated, the financial and monetary regulators around the globe didn’t at first realize the disruption level of this innovation. The paper launched ‘Bitcoin,’ a digital currency which was secured by cryptographic algorithms and using a new technology named ‘Blockchain’. Initially, it was used by tech geeks, early adopters and enthusiasts. However, Bitcoin has proved itself to be not only more than a fad, its perseverance has resulted in it also being a challenge for global regulatory authorities. Despite wild swings the net market capitalization of this non-guaranteed, un-backed, decentralized virtual currency is soaring. Its number of users is growing, as are the avenues and business opportunities (both inside and outside the financial services industry) where it is being accepted. Essentially a peer-to-peer system that preserves the anonymity of its users, hyper ledger the technology behind Bitcoin eliminates the role of the central authority, as its self-sustaining and self-regulating cryptographic algorithm that not only launches new ‘coins’ (digital coins), but also authorizes transactions, prevents the inclusion of counterfeit bitcoins, and distributes the coins to its Miners. Due to these properties, Bitcoin usage has increased exponentially.
There are over 1600 cryptocurrencies in circulation. The potential of cryptocurrencies was soon realized by the formal financial services sector and regulated financial entities like banks, who started exploring the potential of this disruptive tech. However, they started to face the challenges from regulatory bodies. Meanwhile customer focused products powered by disruptive tech from FinTechs started forcing banks to re-think their business models, and many are reacting by adopting new technologies, improving their service offerings, modifying their business models and reducing costs. Banks also started getting more concerned about the potential competition from the large technology companies like Alibaba, Tencent, Google, Amazon, Apple etc which have started offering financial products like e-wallets.
One of the most anticipated risks of the banking sector was realized when Facebook with over 2 billion usersand on track to hit 60B USD in revenue, announced launching its cryptocurrency named ‘Libra’ in 2019. This cryptocurrency will be backed by an open-sourced Blockchain and it will be governed by an independent association. The creators of Libra claim it will be relatively less volatile than Bitcoin as it will be backed by a reserve of real assets. Facebook won’t fully control Libra, but instead get just a single vote in its governance like other founding members of the Libra Association, including Visa, Uber, and Andreessen Horowitz, which have invested at least $10 million each into the project’s operations. The association will promote the open-sourced Libra Blockchain and developer platform with its own Move programming language, plus sign up businesses to accept Libra for payment and even give customers discounts or rewards. Going into a few technical details reveal that Libra would be using a version of ‘permissioned’ Blockchain where the consensus and controls of governance of the Blockchains would be granted to certain entities fulfilling a set of requirements.
The news startled the world and the prices of cryptocurrencies started to experience a surge. Bitcoin even started to regain its lost momentum after the news and the trading levels soared. The news was not only affecting the cryptocurrencies ecosystem but also regulators and policymakers, whose concerns caused some Libra founding members to withdraw. The US senate also called up Libra’s co-creator Mr. David Marcus in front for a hearing. The hearing’s tone was interesting and included comments like “Facebook now wants to control the Money Supply… what could go wrong?’ The senate hearing was filled with questions regarding risks of money laundering, terrorist financing, data privacy, consumer’s rights, etc. The senators didn’t hesitate to raise data privacy breaches and consumer rights violations on numerous occasions. David Marcus adopted a defensive and explaining position while addressing the senate’s hearing committee. Meanwhile regulators around the globe tuned in to witness the stance of the USA government to try to anticipate what the complex ambiguous future holds for crypto.
The ripple effect created by the launch of Libra by Facebook was immediately noticeable. Walmart applied for a cryptocurrency which would be a ‘stablecoin’. A ‘stablecoin’ is a cryptocurrency that is pegged with a regular currency like gold or the US Dollar. A notable difference from Libra is that users of a “Walmart Coin” could “even earn interest,” the application suggests. One of the main aims of the retail giant is that the digital currency would be storing user’s purchase history on the Blockchain which would be used to offer personalized deals and effective loyalty programs.
However we find Walmart’s reasoning fascinating. According to Walmart, “using a digital currency, low-income households that find banking expensive, may have an alternative way to handle wealth at an institution that can supply the majority of their day-to-day financial and product needs”.
It is pertinent to mention that the banks have new and fierce competitors in the formal financial services sector. This is not only a challenge for the existing market players but also the policymakers and financial regulatory bodies as well. The evolution of the disruptive tech products and services is very fast-paced, and the regulators need to catch up before it’s too late. Facebook said something similar when launching Libra: “All over the world, people with less money pay more for financial services. Hard-earned income is eroded by fees, from remittances and wire costs to overdraft and ATM charges. Payday loans can charge annualised interest rates of 400 per cent or more, and finance charges can be as high as $30 just to borrow $100. 4 When people are asked why they remain on the fringe of the existing financial system, those who remain “unbanked” point to not having sufficient funds, high and unpredictable fees, banks being too far away, and lacking the necessary documentation”.
While critics claim this is more about Facebook owning data and monetizing it and that solving financial inclusion is complex, we can’t help but think a combination of crypto currencies and social have powerful benefits for Financial Inclusion and can be a part of the solution. In tech laddering up is proven to work. In laddering people adopt a behavior one step above an established behavior, provided it fulfills a need without friction. Social is a channel that many unbanked have access to. If the user experience is managed right, banking through Facebook and Whatsapp etc with the trust of distributed hyper ledger technology, is an avenue worth exploring.