David Jessop

David Jessop

LAST month Facebook announced that it will roll out in 2020 a global digital currency to be known as Libra.

It is a decision that has profound implications for all financial institutions everywhere, raises new regulatory concerns for central banks and governments, and challenges Caribbean financial sovereignty.

In outline, Libra is intended to be a “global currency and financial infrastructure” powered by Facebook’s own encrypted blockchain technology. It will, once operational, offer banking through Calibra, a smartphone digital app, either on a standalone basis or through WhatsApp and Facebook Messenger.

What Facebook is proposing is a new global financial entity and a currency that will circumvent the problems of correspondent banking, exchange rate fluctuations and interoperability.

Partnered with PayPal, Visa, Uber, Coinbase, Lyft, Mastercard, Vodafone, eBay and Spotify and others, Facebook, says its new entity will create a global “stablecoin” pegged to existing assets including the US Dollar or Euro, making transactions less volatile. It will be serviced by a collective of companies operating though a “Libra Association”, a not-for-profit Swiss-based organisation.

The effect will be to provide global access to digital banking to those who are unbanked or conventionally banked. It will enable through an electronic wallet immediate transfers and payments, potentially disrupting the existing financial infrastructure in the Caribbean and elsewhere, reducing for users the cost of commercial transactions, remittances and payments.

The impact could be significant.

In the Caribbean, studies indicate that although 65 per cent of the population is unbanked, mobile penetration stands at about 74 per cent of population. Other research suggests that Facebook Messenger and WhatsApp have on average a 37 per cent national penetration rate across the region as a whole, including Haiti and Cuba: a figure that rises to over 50 per cent in some anglophone nations.

Libra also has important geopolitical implications. It will likely spur nations including China and Russia that express an interest in an alternative reserve currency to the US dollar, to develop alternative systems. Both nations are unwilling to cede control to any entity which at heart is US-oriented, so may well chose to build on other experience such as that of the Chinese Alibaba Group.

Libra will undoubtedly also be challenged by commercial banks which are developing their own systems. More significantly, it will have to overcome regulatory hurdles, antitrust and information privacy concerns, as the EU and other regulators expand existing investigations into the company’s ability to control and digitally harvest user information and seek to breakup up its dominance.

Notwithstanding, the Caribbean is woefully unprepared for where Libra leads.

If governments and their central banks are to retain some semblance of financial sovereignty, they need to move to adopt harmonised regulatory standards and pay much more attention to the interests of the region’s established remittances transfer companies. They also need to consider, the potential role that recent start-ups like Bitt Inc and others might play, companies that understand the economic and political importance of regional financial services companies not being eclipsed by powerful external providers.

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Bitt, a Barbados-based fintech company, envisages central banks issuing digital currencies, enabling eventually the free movement of capital across the region through bilateral digital currency swap agreements.

Its CEO Rawdon Adams believes that as Caribbean currency unification is unlikely in the near future, such an approach would obviate existing correspondent banking arrangements for intra-regional transactions.

To this end, the company is working with the Caribbean Development Bank, the IDB, Caricom as well as with other interested fintech companies and academics to explore though a working group the creation of a “Caribbean Settlement Network”. This, Bitt Inc suggests, would be an inclusive not-for-profit regional public entity that would facilitate Caribbean businesses’ and residents’ ability to conduct intra-regional digital financial transactions instantly on smartphones or tablets at a fraction of the current cost of wire transfers or other remittance channels.

All this comes at a time when the issue of the withdrawal of correspondent banking services and de-risking by foreign banks seems to have fallen off the regional agenda.

Facebook’s announcement suggests that there is a need to rapidly explore and develop Caribbean owned digital currency solutions.

Sophia Chote’s column returns on July 28

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