NRC0003 – Libra and the Future of Nepal’s Financial System
Libra and the Future of Nepal’s Financial System
Last month, after years of rumors and user speculations, Facebook finally announced the company’s plan to launch Libra – a new cryptocurrency – early next year. Though we are yet to understand Libra’s detailed arrangement, economists and policymakers have already begun discussing the potential impacts that this new digital currency may bring to the existing global financial system and on few selected major economies. This commentary discusses potential impacts of Libra on Nepal’s financial system. It focuses on four major areas that Libra is likely to have considerable effects on – transfer of remittances, impacts on the “unbanked” population, disruption of existing payment gateways and most importantly questions regarding government regulation of cryptocurrencies.
Last month, on June 18, Facebook, along with 27 founding members coming from six distinct sectors announced their plans to launch a new cryptocurrency to be called Libra early next year. Unlike traditional currencies, Libra will not be backed by central banks. However, contrasting other existing cryptocurrencies, Libra will be supported by a reserve of assets and currency’s value will be determined by a currency basket to be finalized by the Libra Associations members. This announcement has prompted a heated debate among economists, central bankers, policy makers and the techpreneurs about the future of cryptocurrency and how Libra will affect the overall global financial system.
This is What We Know About Libra
While making the announcement, Libra Association has also released a 12-page long White Paper highlighting key aspects of this to-be launched new currency. As per the document, Libra aims to be one of the simple global financial currencies and establish a global financial infrastructure that enables the Association to empower billions of people. It is built on a secure blockchain system that also allows Libra to scale up if needed. Moreover, the currency is backed by a reserve of assets that will ultimately define the value of this currency. Also, an independent non-profit association based in Switzerland will govern the Libra ecosystem.
As trust is a key factor for overall success of this new currency, the Libra Association has tried its best to have as many founding members as possible from sectors that have close links with the global financial system. Following are the founding members of the Association (in alphabetical order) and the latter aims to add about 72 more members before going public early next year:
- Blockchain: Anchorage, Bison Trails, Coinbase, Inc., and Xapo Holdings Limited
- Nonprofit, multilateral organizations and academic institutions: Creative Destruction Lab, Kiva, Mercy Corps, and Women’s World Banking
- Payments: Mastercard, Mercado Pago, PayPal, PayU (Naspers’ fintech arm), Stripe, and Visa
- Technology and marketplaces: Booking Holdings, eBay, Facebook/Calibra, Farfetch, Lyft, Spotify AB, and Uber Technologies, Inc.
- Telecommunications: Iliad and Vodafone Group
- Venture Capital: Andreessen Horowitz, Breakthrough Initiatives, Ribbit Capital, Thrive Capital, and Union Square Ventures
On the operational side, Libra will be based on Libra Blockchain that is constructed by taking into consideration three core requirements of a modern digital global currency: scalability, security and flexibility. In terms of a currency reserve, Libra will be fully backup up by the Libra Reserve that will further be supported by a competitive network of exchanges buying and selling the currency coins.
As soon as the news of Libra came into public, there has been hot debates among economists, policymakers, central bankers and the techpreneurs regarding the safe regulation of this new currency, people’s trust on this system and how it will affect existing global financial system.
Though there are some good aspects of Facebook, based on the platform’s past controversies, many critics have cast their doubts over Libra’s hidden goal. Writing for the Project Syndicate, Columbia Law Professor Katharina Pistor has asked global stakeholders to halt Libra before it gets launched next year.
Furthermore, economists Joseph E. Stiglitz and Kausik Basu have raised the issues of online crimes; including those related to compromising user privacy and money laundering; and inflation respectively. Also, the former Deputy Governor of the Reserve Bank of Australia, Stephen Grenville, panics the possibility of Libra causing more severe future capital-market volatility.
To add more, Financial Times’ chief economics commentator – Martin Wolf – fears that Libra may give birth to the existence of a single bank dominated global financial system. In the same line, cryptocurrency critic David Gerard argues that Libra is based on ideological concepts that hardly work in the real world.
Amid all these skepticisms, there are few individual critics and selected institutions that view Libra a desired disruption and they believe it will help global financial system more inclusive and less costly. The Banker, a London-based financial affairs magazine, has published an editorial saying that Libra, despite few shortcomings, will bring in more businesses for all stakeholders involved in the financial sector. Similarly, other critics praise Libra for it’s potential to reinvent the traditional costly ways of cross-border transfer of remittances worldwide and in particular, for Africa, the new currency may help the region to bring in more people into the formal financial system and also reduce the costs of remittance transfers into the region.
Libra and Nepal’s Financial System
Considering growing penetration rates of mobile phones (134.31%) and internet (61.83%), I believe there should be enough debates on Libra and all possible ways it may disrupt Nepal’s existing financial system before last month’s announcement becomes a reality in 2020. However, I do not see that much of debates happening lately – be it among the Nepal Government stakeholders and/or among the key private-sector players, including major banks and financial institutions (BFIs), investors and the techpreneurs.
To stir needed debates in this regard, from what is available so far, I can think of Libra affecting Nepal’s financial sectors in the following four areas:
- Transfer of Remittances: According to the most recent Migration and Development Brief, Nepal, with $8.1 billion remittances inflows into the country in 2018, ranks 19th worldwide and fourth in South Asia in terms of the amount of remittances it has received in that year alone. In regards to the remittances and percentage of GDP (28%), Nepal ranks in fifth place worldwide after Tonga, Kyrgyz Republic, Tajikistan and Haiti. As Libra plans to minimize the costs relating to the cross-border transfer of remittances, concerned stakeholders in Nepal should analyze how this new invention may affect one of the key pillars of Nepali economy.
- Impacts on the “Unbanked” Population: As per Nepal’s Central Bank, as of mid-May 2019, the country has 176 BFIs – 28 commercial banks, 32 development banks, 24 finance companies, 91 Microfinance institutions and one infrastructure development bank. Altogether, they have 8,319 branches across the country. Despite these developments, a large percentage of Nepali population remains unbanked. A 2014 report has highlighted disappointing facts related to Nepalis’ access to finance. As per the report, 18% of Nepali adults are fully excluded from existing formal and informal financial products and services. Moreover, 21% of local adults use informal channels while managing their finances. In the light of these evidence, key government and private stakeholders should organize frequent and intensive debates on the possible impacts Libra might bring to “unbanked” Nepalis and economy’s BFIs. While doing so, these stakeholders should also plan their actions to minimize potential risks from Libra when it goes into implementation in 2020.
- Disruption of Payment Gateways: To enhance people’s easy access to available financial products and services, in recent years, Nepali techpreneurs have come up with intermediary payment gateways. In addition to such services developed and owned by BFIs; E-sewa, iPay and Khalti are three of the most promising such platforms owned by Nepal’s techpreneurs. As Libra’s current plans are expected to disrupt payment gateways around the globe, Nepali techpreneurs working in this sector should also be cautious enough to minimize the damage that Libra may cause to their platforms.
- Regulation of Cryptocurrency: As of now, the International Monetary Fund (IMF) is yet to make an institutional position on Libra. However, the Fund has clearly stated its position on cryptocurrency earlier stating it would support government set-up cryptocurrencies. Bitcoins and similar cryptocurrencies are currently banned in Nepal. As the global financial system keeps on evolving and the IMF, the key regulator of global financial system, also encouraging central banks to adapt to changing circumstances, the concerned authorities in Nepal should also think of timely updating country’s existing financial system to catch up with the rapidly evolving global financial system.
- Basu, K. (2019, June 27). Why Policymakers Should Fear Libra. Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/facebook-libra-inflation-control-problem-by-kaushik-basu-2019-06
- Caplen, B. (2019, June 25). Editor’s Blog – Fear not, Facebook’s Libra is good for banks. The Banker. Retrieved from https://www.thebanker.com/Editor-s-Blog/Fear-not-Facebook-s-Libra-is-good-for-banks
- Conlin, B. (2018, July 19). 7 Unexpected Ways Facebook Is Good for You. Business News Daily. Retrieved from https://www.businessnewsdaily.com/2534-facebook-benefits.html
- Dana, J. (2019, July 05). Libra shows global remittance ripe for change. Asia Times. Retrieved from https://www.asiatimes.com/2019/07/article/libra-shows-global-remittance-ripe-for-change/
- Gerard, D. (2019, June 24). Facebook’s New Currency Has Big Claims and Bad Ideas. Foreign Policy. Retrieved from https://foreignpolicy.com/2019/06/24/971554-facebook-bitcoin-libra-crypto-bad
- Grenville, S. (2019, July 01). The Coming Libra Panics. Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/libra-capital-flows-fuel-panic-by-stephen-grenville-2019-07
- Hackett, R., Roberts, J.J., and Wieczner, J. (2019, June 17). Facebook’s Cryptocurrency Ambitions Provoke Heated Debate – The Ledger. Furtune. Retrieved from https://fortune.com/2019/06/17/facebook-cryptocurrency-project-libra/
- Inman, P. (2018, November 14). IMF says governments could set up their own cryptocurrencies. The Guardian. Retrieved from https://www.theguardian.com/business/2018/nov/14/imf-says-governments-could-set-up-their-own-cryptocurrencies
- Libra Association (2019, June 18). Founding Members. Retrieved from https://libra.org/en-US/association/#founding_members
- Libra Association (2019, June 18). Libra White Paper. Retrieved from https://libra.org/en-US/white-paper/
- Libra Association (2019, June 18). The Reserve. Retrieved from https://libra.org/en-US/about-currency-reserve/#the_reserve
- Masuku, A. (2019, July 07). Will Facebook’s digital money Libra be good for Africa?. BBC News. Retrieved from https://www.bbc.com/news/world-africa-48882301
- Noonan, L. and Megaw, N. (2019, June 18). Will Facebook’s Libra currency shake up financial services?. Financial Times. Retrieved from https://www.ft.com/content/5c0dbb2c-91eb-11e9-b7ea-60e35ef678d2
- NRB. (2017, August 13). Central Bank Circular on Bitcoin and Related Businesses in Nepal. Retrieved from https://nrb.org.np/fxm/notices/BitcoinNotice.pdf
- NRB. (2019). Current Macroeconomic and Financial Situation of Nepal (Based on Ten Months’ Data of 2018/19. Retrieved from https://www.nrb.org.np/ofg/current_macroeconomic/CMEs%20Ten%20Months%20English%202075-76-Final.pdf
- NTA. (2019, May). MIS Report Chaitra, 2075 (15 March, 2019 – 13 April, 2019). Retrieved from https://nta.gov.np/wp-content/uploads/MIS-Chaitra-2075.pdf
- Pistor, K. (2019, June 20). Facebook’s Libra Must Be Stopped. Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/facebook-libra-must-be-stopped-by-katharina-pistor-2019-06
- Stiglitz, J.E. (2019, July 02). Thumbs Down to Facebook’s Cryptocurrency. Project Syndicate. Retrieved from https://www.project-syndicate.org/commentary/facebook-libra-facilitates-crime-money-laundering-by-joseph-e-stiglitz-2019-07
- The World Bank. (2019, April). Migration and Remittances: Recent Developments and Outlook (Migration and Development Brief 31). Retrieved from https://www.knomad.org/sites/default/files/2019-04/Migrationanddevelopmentbrief31.pdf
- UNCDF. (2014). Nepal FinScope Consumer Survey 2014. Retrieved from http://www.finmark.org.za/wp-content/uploads/2015/08/BROCH_FS_Nepal_2014.pdf
- Wolf, M. (2019, June 25). Facebook enters dangerous waters with Libra cryptocurrency. Financial Times. Retrieved from https://www.ft.com/content/07c05fba-b1c4-11e7-a398-73d59db9e399
- Yadav, N. (2019, February 05). 15 Years of Facebook, 15 Years of Controversy: A Timeline of Events. First Post. Retrieved from https://www.firstpost.com/tech/news-analysis/15-years-of-facebook-15-years-of-controversy-a-timeline-of-events-6028641.html