What Facebook's Libra project may mean for Latin America

For several years now the specter of an incursion into Latin America’s traditional banking sector by a global tech giant, or BigTech as they are known, has hung over the region.

The threat has grown as concerns over fintechs – which are today seen as potential partners rather than major competitors – has receded.

With the announcement of Facebook’s Libra project, fears over market disruption have heightened although a central question is how big the shockwaves, or jolt, would be.

At the heart of the project is a digital wallet that would allow users to save, send and spend a new digital currency, branded Libra, without the need for a bank account. Essentially Facebook and its 27 partners – which include two disruptive LatAm tech firms - appear set on bypassing traditional financial services market infrastructure.

As details are still thin, it is difficult to say exactly what the cryptocurrency-based project means for developing regions such as Latin America. But it should help boost low levels of financial inclusion in the region, where half of the population is unbanked.

Indeed, in a statement announcing the project, Facebook said basic financial services are still out of reach for a huge chunk of individuals and SMEs globally. It added that US$25bn is lost by migrants every year through fees charged on remittances – a key source of income for Central American and Mexican families. 

Manuel Beaudroit, chief marketing officer of Latin American bitcoin exchange and blockchain-powered payments solutions firm Bitex, said Libra could play an important role in this area, citing high internet penetration rates in the region.

“The implications are huge,” Beaudroit told BNamericas. “There is an opportunity in terms of the people who, today, are excluded from the financial system.”

One big question is whether people, once signed up to Libra, would graduate to traditional financial products like those offered by high street banks.

“When we talk about financial inclusion it’s not just about payments; it’s loans, mortgages, investment, etc,” said Beaudroit. “It is definitely a first step. I think it will have a positive impact if people adopt it.”

While fintech companies, digital banks and government-led initiatives such as Chile’s Cuenta RUT basic savings/debit card account are helping close the gap, a venture led by Facebook – which has 1.56bn daily active users globally – could accelerate the pace.

Mercedes Aramendía, a Uruguayan lawyer and academic who specializes in the areas of public policy and ITC, told BNamericas that Libra addresses a clear need.

"While it is still too early to determine the impact of the project, it would seem to hold many advantages over the current, traditional financial system, learning from existing solutions such as the Chinese app WeChat, through which various operations and payments can be made," Aramendía said.

“Libra appears to address the realities of the current digital era in which the trend is towards all objects becoming connected. This would allow payments to be made in a simpler, quicker and more decentralized way while eliminating borders,” said Aramendía, who also provides consulting services to Uruguay’s fintech chamber. “It also addresses an economic and social need: bringing low-cost financial services to unbanked people. In this way it facilitates social, digital and financial inclusion, democratizes services and empowers people.”

António Soares, global licensing portfolio manager at European digital payments solutions giant Worldline, told BNamericas: “This is a game-changer in the industry and it will have implications which are still difficult to foresee.”

WHY?

There is clearly a large degree of altruism in the project, a desire to improve peoples’ lives, especially those in developing regions.

But money and the myriad spinoff business opportunities the project would generate are also at stake. Libra, unlike typical cryptocurrencies, would be backed by hard currency. If, for example, around half of Facebook’s daily active users each buys US$20 worth of Libra, billions of dollars would be sloshing around.

The blockchain-based project is being led by the Libra Association, a group comprising Facebook and the 27 partners which have each invested US$10mn. None of them are banks although Visa and Mastercard and five venture capital firms are among those on board.

Facebook hopes to have 100 members by the time the project launches, scheduled for 1H20.

Other tech giants, such as Google and Amazon, may join the fold, BNamericas has learned.

Soares said a major question concerns what move banks will make, suggesting that the remaining 70-odd places may be reserved for traditional lenders.

He said: “The most important thing is what will be the involvement of banks in this. Banks have two options: enemies, trying to oppose this, or join it.

“If the global banks enter this then I think this will probably be unstoppable.”

Aramendía said the nature of Libra makes it an attractive venture for potential stakeholders.

“If the project advances positively and becomes widely adopted, it will facilitate social inclusion and the democratization of financial services, boost digital payments and be scalable to various sectors of the economy, while the use of blockchain technology will provide security and traceability.”

MERCADOPAGO, XAPO, PAYPAL

Argentine firms are flying the flag for Latin America in the Libra camp. Digital wallet MercadoPago and digital wallet Xapo – which allows users to send, receive and save traditional currencies or bitcoins, among other services, such as a digital vault – are part of the association.

Beaudroit said his initial theory behind Xapo’s involvement is that the company can provide know-how in the area of digital vault services provision. In terms of MercadoPago, he said the platform may authorize users to credit their digital wallets with the cryptocurrency.

Meanwhile another Libra Association member, PayPal, which has myriad partnerships with financial services ecosystem players in Latin America, told BNamericas in a statement: “PayPal believes in democratizing participation in the digital economy, for people across the board and for companies of all sizes.

“PayPal is pleased to join other leading technology and financial services companies to create Libra, with the objective of exploring a new global digital currency, developed on blockchain technology.”

Other members include nonprofits and telecom companies.

REGULATORY BARRIERS

Globally, calls have already been made for authorities to examine the reach of the initiative, given Facebook’s billions of users and the fact the service is disruptive in nature.

The International Financial Stability Board and the UK’s Financial Conduct Authority, among others, have said close scrutiny of Facebook’s plans is needed.

In terms of Latin America, Beaudroit said Facebook would face regulatory hurdles “everywhere" due to its tremendous size and scope. “Mainly because what they are trying to do is circumvent the traditional financial services sector. You can make international payments without having to use correspondent banks.

“Many people will be concerned and ask Facebook to halt development because they need to understand better what it is about and what the implications are.”

In Latin America, Mexico has introduced cryptocurrency regulations under its fintech law. Others, such as Argentina, Brazil, Colombia and Chile, have advanced – or are advancing – along the regulatory highway. Some have warned citizens that the likes of bitcoin are not legal tender.

Bolivia, meanwhile, has banned activities involving unregulated currencies and warned citizens about associated risks.

“It is not going to be easy, everything in terms of financial services has been under the microscope recently,” said Beaudroit, whose company recently expanded into Chile, with a focus on the local export and banking sectors. “Everywhere [authorities] are analyzing how to face this new wave of innovation that is impacting an industry that has not changed for hundreds of years.”

This is echoed by Aramendía: “Although it is still too early to know, what is certain is that it will depend on each country. It is likely the focus will mainly be on complying with the corresponding regulations, on ensuring it is not used as a tool for money laundering and that people’s privacy and personal data are protected. Holding dialogue, liaison and addressing recommendations made by regulators will undoubtedly be important.

“As long as it addresses social needs, protects users, supports economic growth, complies with the relevant regulations and focuses on the democratization of payments and financial services, everything would point that this solution would be disruptive and revolutionize how payments are made in the region, promoting development and integration.”