A Swiss-based association formed by Western behemoths wants to spread financial inclusion in the developing world. Hold my Sanpellegrino Aranciata!
The Facebook-led Libra cryptocurrency has the aspirational goal of bringing the world’s 1.7 billion unbanked into the fold of digital finance. The Libra white paper makes it clear that it aims to serve the likes of farmworkers in Indonesia rather than college students in Toronto.
I’ve been working on a digital financial inclusion project in Jordan for the past couple of years. Below, I try to anticipate the questions and challenges that may come up should Libra try to enter the Jordanian market.
First, some background
Financial health and inclusion are problems in Jordan:
- Almost 67% of adults in Jordan don’t have a bank account at a financial institution (vs. ~7% in the US).
- Only 45% of adults in Jordan saved any money at all in the past year (vs. ~80% in the US).
To promote financial inclusion, the Central Bank of Jordan (CBJ) built a technology and regulatory framework called Jordan Mobile Payments (JoMoPay). JoMoPay allows any individual with a mobile phone and a valid piece of ID to open an e-wallet to transact financially: pay bills, send money to family, deposit wages, shop, and even take on micro-loans. E-wallets are operated by non-bank licensed companies which in turn run point of sale networks to manage user cash in/out transactions. JoMoPay is very similar to systems in other parts of the world like M-Pesa in Africa and IMPS in India.
This was a good move by the CBJ. The unbanked can easily open e-wallets, bypassing banks, and take the first steps toward more advanced financial services.
The year is 2020 and Libra comes knocking
More than 80% of Jordan’s population are active WhatsApp users, making it an attractive market for Facebook’s Calibra wallet. Here are the issues that the Libra association will face when it approaches the CBJ to approve its cryptocurrency:
Digital money is already being used in Jordan. Why Libra? Why Calibra?
With 5 licensed e-wallet operators (and more coming soon), Jordan is a crowded market for digital finance and Jordanians are quickly adopting their services. What would lure them to switch to Calibra or other Libra-based wallets? Is the native integration within WhatsApp or Facebook that appealing? Why would a user buy Libra to pay for their local phone or water bills? The answers might not bode well for Libra.
Could Libra’s low transaction costs be attractive? Jordan’s e-wallet transaction fees are very reasonable and are designed to be low enough to encourage adoption. Libra has its work cut out for it.
Moreover, the CBJ is protective of the ecosystem it has built, the jobs it has generated and the controls it has in place. The app ecosystem built on JoMoPay is regulated with strong consumer protection measures. Introducing Libra and its array of apps developed with its open source technology will raise many concerns. The safe approach for the CBJ will be to either reject Libra or allow it with restrictions.
To enter a country with an established mobile-money environment, Libra might have to morph itself to become a payments backbone rather than a consumer-facing offering. I can see cross border remittances and trade as valid use cases. Libra can act as the low-cost and stable intermediary for fund transfers between jurisdictions. Or perhaps Libra could become a technology provider of its smart contract features to already established players. Direct-to-consumer approaches and domestic transaction use cases are unlikely to succeed.
A number of developing nations (including the most populous ones) are developing their own digital/mobile money capabilities and infrastructure. They started to address financial inclusion in their own local flavor.
When it’s launched, Libra might be a bit late to the party. It is naive to assume that it will shatter what’s already in place. If it proves valuable, it will need to coexist with native solutions.
The hot Issues: taxes, social security, anti-money laundering, and anti-terrorism financing
The informal economy is large in Jordan, more than half of the labor force does not contribute to social security. A key driver for the Central Bank’s adoption of mobile banking is to formalize large swaths of the economy to raise tax revenues and build up the coffers of the social security department.
Also, a major feature of living in the 21st century is anti-money laundering (AML) and anti-terrorism finance (ATF). The CBJ, like many other central banks, looks to enhance its AML and ATF capabilities through digital and mobile banking. It’s paramount that user identities are verified and are linked to real-life persons, in fact, today in Jordan, a user must physically present a government-issued ID to open an e-wallet and is restricted to a maximum of 2 accounts.
Libra stated in its white paper that its blockchain will be pseudonymous, meaning that a user can hold accounts not linked to their real-world identities. The white paper then states that regulatory impacts will be considered. I’m not sure how Libra will reconcile these contradictory points. With the currently available information, Libra’s pseudonymity is a non-starter with the CBJ. User identities must be known and verified for taxation, AML, and ATF purposes.
Currency fluctuations and monetary stability
The currency in Jordan is the Dinar; it has been pegged to the US Dollar for almost 24 years and will continue to be so for the foreseeable future. Given that the Libra is a stable-coin backed by a reserve basket of prominent currencies and low-volatility assets, there shouldn’t be a risk to users in Jordan when they convert in and out of the Libra. This, however, is not the case in other countries with free-floating and (at times) volatile currencies, such as Egypt. Users in Egypt might get exposed to exchange rate losses. It’s troublesome that the Libra is backed by Western asset reserves while it aims to serve non-Western markets.
Foreign exchange reserves are essential for the monetary stability of Jordan. A critical mass of users buying Libra will lead to the depletion of these reserves, especially if users see it as a store of value, which is likely in a developing nation like Jordan. This is not an attractive proposition for the CBJ. Perhaps the Libra association would consider maintaining deposits in every country it operates in. I’ve already crossed the limits of my monetary policy knowledge, so I’ll leave it at that.
Whether it’s a “true” blockchain or not, whether it will fail or succeed, it’s good that Libra is shining a strong light on financial inclusion. Libra founding members certainly have a lot of issues to sort through. Most importantly, they should recognize that a lot of work is being done on the ground today and should expand their working group to include central banks and mobile-money providers from developing nations.
I look forward to writing a follow-up piece next year.
Sources: World Bank Global Financial Inclusion Index; Central Bank of Jordan; Libra.org; UNDP; Wikipedia