Paul Ulrich

The View | Why Facebook’s Libra cryptocurrency has banks and regulators scrambling to respond

The cryptocurrency could massively disrupt the existing system, by undermining government sovereignty over local currencies and allowing capital flight, even threaten half of banks’ turnovers

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David Marcus, the head of blockchain at Facebook, testifies at a US Senate Banking Committee hearing on Tuesday on the proposed launch of Libra coin. Libra, which promises to be the first stable digital currency available for international use, independent of any one regulator and tradeable at the retail level, has regulators scrambling to respond. Photo: Bloomberg

Paul Ulrich

Published: 12:00pm, 17 Jul 2019Updated: 10:19pm, 17 Jul 2019

Facebook’s announced plans to launch a global digital currency, Libra coin, is reminiscent of Apple’s announcement in early 2007 that it would launch the first iPhone later that year. Both initiatives improved rather than disrupted existing products and came from an established company in a different industry. The iPhone was a better version of Nokia’s smart handset, while Facebook is offering to retail consumers cryptocurrency, which some banks are already using in wholesale settlements.

As industry boundaries blur, regulators scramble to keep up. Amazon has applied to offer telephony services, Singtel may apply to become an online bank, and JPMorgan Chase has plans to upend health care. In Hong Kong, HSBC will face competition from Tencent and Alibaba, whose subsidiaries have virtual banking licences.

Why are established companies moving into new industries? Modern communications technology has made automation essential for firms to retain their competitive edge. Any product or service with a digital component, no matter how regulated, is fair game for new entrants, new market structures, and new rules of competition that may require new regulations to keep the playing field level.

Regulators have not yet decided how to regulate platform companies that no longer merely sell widgets but instead form, and benefit from, new markets that their platforms facilitate. These companies connect consumers to third-party sellers, to one another, and often to advertisers by reselling consumers’ data. Mobile operators embraced the first iPhone via exclusive resale deals and customer contracts to subsidise handsets in return for subscriptions to operators’ service. Both Apple and mobile operators profited from such arrangements.

However, iPhone’s creation of a platform for app developers disrupted the mobile industry. Start-ups like WhatsApp and Instagram offered free services that reduced profits and prices for voice telephony and mobile roaming. Even before Facebook paid billions to buy them, these free services, with their troves of data and ability to bind consumers to a company’s ecosystem, disrupted the price-sensitive consumer segment of mobile users.

Now Facebook is disrupting again by copying the best attributes of cryptocurrencies, blockchain platforms and decentralised systems. To keep from getting disrupted, Facebook’s centralised operation is developing its own decentralised platform with a consortium, including payments companies and telcos. The move is a gentler version of the “kill zone” that big internet players used for years to acquire or smother start-ups that could challenge their dominance.