Libra: For better or worse?

Libra, a digital currency created by American online social networking company, Facebook is targeting 1.7b people around the world without a bank account.

Once it is launched next year, it will be used for everyday transactions through Facebook, Whatsapp or Instagram. Not only will you send money to family, friends or your employees on these social media platforms, you will also use it outside the network of these apps to buy a plate of food at a restaurant or clothes at a shopping mall.

What is Libra?
When Facebook thought about Libra, it was thinking about the ease of transactions in the age of smart mobile phones. Its creators stress that 31 per cent of the global populations is unbanked.
For those with access, money transfers are slow. Typical cross border payments are completed in three to five working days. Costs are high, averaging 7 per cent internationally.

“This is 30 years after the web was invented and mobile broadband is available to so many people. So we felt it was time to try something new and this is the beginning of a long journey to launching this digital currency,” Mr David Marcus, Libra’s project head, says while speaking to foreign media outlet CNBC, in mid-June.

The digital currency built on blockchain technology and partnering with 27 companies including PayPal, MasterCard, Visa, Uber is said to be different from traditional cryptocurrencies.

“Cryptocurrencies are investment vehicles or assets rather than being media of exchange. This is really designed from the ground up to be a great medium of exchange, high quality form of digital money that you can use for everyday payments, cross-border payments, micro transactions,” Mr Marcus says.

Part of his justification for the digital currency is that micro transactions are aspects discussed for decades but have not materialised because of high transaction fees. His belief is that “profound changes will happen” with this new development.

Concerns
However, global regulators, American lawmakers as well as President Donald Trump have raised concerns about the currency. They will not approve the digital coin until Facebook proves it can safeguard the platform and also rule out unlawful behavior. Facebook has in turn vowed to wait for approval from authorities in the United States of America.

In Uganda, whereas commercial bank accounts currently stand at 11,326,201, approximately 19 million people are connected to the internet according to Jumia’s 2019 mobile report. About 25 million Ugandans own a mobile device and 2.5 million use social media, with Whatsapp and Facebook enjoying most popularity.

Smartphone ownership
As regards smart phone ownership, adoption was recorded at a 36 per cent rate in Africa, about 255 million smartphones. In Uganda, the numbers are soaring thanks to the drop in prices by a half in the last three years, to around Shs300,000.

Ten years ago, Africa launched an all-inclusive mobile financial service platform serving the bottom of the pyramid to include the unbanked thus driving financial inclusion.

In Uganda, the platform is one of the fastest growing financial drivers with features that allow borrowing, paying school fees, tax payment, bill payment and SACCO collections among others.
Information from State Minister of Finance for Planning Mr David Bahati indicates the volume of mobile transactions has hit Shs80 trillion in 10 years.

“10 years later, will Over the Top companies offer the same solution effectively?” Mr V.G.
Somasekhar, managing director Airtel Uganda says, “Mobile financial service accounts are handset agnostic – they can be accessed using any type of phone regardless of generation; 2G, 3G or 4G. With less than $10 (Shs40,000), you can buy a phone. At the point of SIM registration, the customer is guaranteed access to mobile financial services. In the case of Over the Top companies, access is limited to smart phones. If the model is to only serve the social media subscribers, it will exclude the majority of African population.”

Disruptive technologies
Since the announcement on Libra, the banking industry has remained in silent mode. But during a workshop on regulation of emerging disruptive technologies held in July, a Bank of Uganda official was worried that such blockchain and cryptocurrencies could impact Uganda’s economy.

“People are creating coins left, right and centre. If these coins are going to be used a medium of exchange, that means there are going to be many Central banks. Whoever has the money creates the roles. How far is this going to go and who is going to regulate since Bank of Uganda is not creating coins? Governments are going to lose power,” the Bank of Uganda official says.

Mr Fabian Kasi, who oversees management of Centenary Bank, says every business leader is paying attention and studying the development for possible collaborations. He sees possibilities for a cashless economy and suggests financial institutions find a way of remaining relevant.

“People here use Facebook and Whatsapp. This is what will be driving that kind of currency so we cannot ignore it,” Mr Kasi says.

“The role of Bank of Uganda is to regulate the financial system, there are rules they will use to regulate it, or any remittances. But what they are saying is that if it is not regulated, it is speculative and would not advise people to use it.”

For Mr Solomon Rukundo, a researcher at Mawazo Policy Institute, concerns centre on a belief that disruptive technologies are extremely hard to tax partly because of the pseudonymous nature of users.

“We are not prepared, as regards our laws right now and our technology. We would have a hard time but we can be prepared,” Mr Rukundo says, “If they (disruptive technology like Libra) are seen as a positive, then you want them to grow. You have to amend the tax laws to make it easier then. If you rigidly enforce tax laws as they are now, it is impossible to enjoy the benefits for which people use such technologies.”

Regulation
Mobile financial services are regulated and supervised by telecoms and central banks. Safety and security encourage trust which promotes financial inclusion yet Over the Top companies remain largely unregulated in Africa. Emerging concerns centre around hacks, money laundering, tax evasion, credibility of the currency and data privacy among other things.

It is good to regulate with foresight and allow people to fit innovations within your regulations, says KTA partner Kenneth Muhangi. He persuades regulators to start discussions and accept Libra should it be approved. Or to even come up with Uganda’s coin.

“Why wait for these problems to happen,” Mr Muhangi says, “They need to be alive to the fact that technology will happen. We have the National Payments Bill that has elements on electronic payments. I believe Bank of Uganda gives licences to anyone who wants to trade in virtual currencies. It does not mention cryptocurrencies per se but if you look at the definition, it is a virtual currency.”

Many have said the biggest test for Libra is whether it can be trusted by the people it targets. But mobile financial services once in the same position later gained traction and acceptability. Telecoms attribute this to the secure nature of operations.

Libra is already claiming high security. What is likely to give it bigger edge, is its potential to create an economy where we exchange value in a faster and efficient way, Mr Japheth Kawanguzi, the country team leader Innovation Village believes.

Tit bits from Libra White Paper

1. The Libra currency is built on the “Libra Blockchain.” Because it is intended to address a global audience, the software that implements the Libra Blockchain is open source, designed so that anyone can build on it, and billions of people can depend on it for their financial needs.
2. Libra is fully backed by a reserve of real assets. A basket of bank deposits and short-term government securities will be held in the Libra Reserve for every Libra that is created, building trust in its intrinsic value. The Libra Reserve will be administered with the objective of preserving the value of Libra over time.

Disruption

Where is banking industry?

In 2017, Bank of Uganda issued warnings against digital currencies including One-coin, Bitcoin, Ripple, Black coin, Lite Coin among others. It said subscribers would take a risk in the financial space where there is neither an investor nor regulatory protection.

Mobile money transactions

However, mobile money transactions remain limited to domestic remittances, basic retail payments and savings. Also, the high cost of transactions especially in the face of a tax introduced to finance the 2018/2019 budget are seen as hindrances to inclusion. For instance, using Airtel money, a customer sending between Shs125,000 and Shs250,000 pays Shs1,500 as a fee and that withdrawing that money incurs Shs3,575.

Mobile money to bank

For mobile money to bank transactions, MTN’s schedule released in February indicates a customer depositing between Shs250,000 and Shs500,000 incurs Shs6,000. The fees rise as the amounts get larger.

Mr Somasekhar makes a stronger case for mobile financial services. He says they have generated livelihoods for over 100,000 Ugandans yet over The Top services negate the role of agents.

“Africa is in the early journey to a cashless society. Currently, the bulk of transaction is conversion of cash into electronic and electronic into cash, a process facilitated by agents,” Mr Somasekhar says.