Facebook’s new blockchain-based digital currency will likely win Reserve Bank approval because it will be backed by bank deposits and government bonds as assets, analysts say.
Regulators around the world have been cautious about cryptocurrencies because of their decentralised nature and volatility in the price of bitcoin, which has gone to a high of R255,000 and low of R45,000 in the past two years. Cryptocurrencies have also faced allegations of fraud and cybersecurity risk.
The Bank is looking into policies and regulations for cryptocurrencies. In 2017, it established a financial technology, or fintech, division to analyse innovations, products and services, including cryptocurrencies, and to assist policymakers to draw up appropriate frameworks.
Using the logic of the old gold standard, Libra, which is set to launch in 2020, will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.
The Bank told Business Day that “given the rapid pace of fintech developments, specifically around crypto assets, the Bank together with fellow co-regulators have been monitoring these developments closely.”
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It said “a joint policy paper by authorities on crypto assets is in progress and will address the risks arising from such assets”.
The Libra Association, which includes Visa and Mastercard, is going to be seeking regulatory approval from authorities globally, so they will be approaching the Bank among others for interchange approval into local currency, said Arthur Goldstuck of World Wide Worx.
“There is a very good chance they will want to be one of the central banks that accept Libra,” he said.
Goldstuck said since Libra will be pegged to major currencies like the US dollar to ensure its value does not vary widely, it was likely to be regarded as formal currency with the Bank likely to allow interchange between the rand and Libra.
Neelash Hansjee, analyst at Old Mutual Equities, said it would make sense for the digital currency to get approval, especially given the stability Libra is promising.
He said volatility in other cyptocurrencies over the years has made them an unreliable form of payment or store of value.
The mechanism of how to change Libra into rand is an important consideration for adoption in SA, Hansjee said. If Libra is considered a formal currency, for example, it will be subject to the country's exchange controls.
Richard de Sousa, senior partner at AltCoinTrader, a cryptocurrency exchange in SA, said “if successful Facebook will be opening the biggest bank in the world”.
“We need to understand that it is not a decentralised cryptocurrency, but more of a stable coin that will be backed by a basket of fiat currencies.”
A Facebook spokesperson said while Libra is an “asset-backed cryptocurrency similar to existing stablecoins, unlike existing stablecoins Libra is not ‘pegged’ to a single currency and does not have a fixed value in any real-world currency.
“Because the Libra Reserve [which backs the Libra currency] is a blend of multiple currencies, Libra’s value will fluctuate in any given local currency, and exchanges will charge a spread above or below the value of the reserve.”
The Bank says as these systems are still in their conceptual phase and further details need to be considered, it would be premature to comment on the effect of such developments at this stage.
“People have not begun to understand what a big impact this is going to make on the global financial sector. Everything as we know it is about to change,” said De Sousa.
“The only possible reason this project can be stopped is if the Federal Reserve, reserve banks or regulators step in and understand that they are about to monopolise the entire financial sector and stop it,” he said.
Nigel Green, the founder and CEO of deVere Group, an independent financial advisory organisation, says Facebook’s jump into cryptocurrencies is another nail in the coffin for traditional banks.
Merchant acceptance
He says the role of traditional banks will decline at a quicker rate than many had previously predicted. Facebook’s Libra cryptocurrency will be able to transact across traditional payment rails. They have partnered with PayPal, Mastercard, Visa and Stripe and others to fuel merchant acceptance of the digital currency.
“If you have cryptocurrency on these payment methods, the purpose of and use for traditional banks will surely shrink. Cryptocurrencies and fintech solutions are already taking business away from banks. They are filling a gap left by the traditional way of doing things as the world speeds up and becomes increasingly globalised and digitalised.
Technology giants entering the cryptocurrency sector indicates that digital money, as a concept, is fully mainstream and inevitably the way the world is going. “Where Facebook leads, others will inevitably follow and this will quicken the pace of mass adoption of cryptocurrencies.”
Naspers, through its PayU business, is a member of the Libra Association.
“The Libra Association aligns perfectly with PayU’s vision of creating a world without financial borders where everyone can prosper,” said PayU global head of mergers & acquisitions Fady Abdel-Nour. “Recent history has taught us that the success of Libra will depend to a very large extent on adoption by users,” he said.
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