Today, prominent figures in fintech and banking spoke at the IMF’s ‘Big Tech and the Future of Finance’ seminar, part of its annual meeting. Calibra head David Marcus, Bank of England governor Mark Carney, Infosys founder Nandan Nilekani, and Havard economic professor Jason Furman discussed digital payments, stablecoins, and the Libra cryptocurrency project.
The role of big tech firms like Facebook breaking into the finance world was the underlying thread of today’s conversation. As the European Central Bank (ECB) said previously, the release of Libra has driven central banks to redouble their efforts to develop central bank digital currencies (CBDCs).
The three steps to enabling financial inclusion
Indeed, bodies including the ECB and Bank of International Settlements have concluded that stablecoins could have a significant role in the future, so how could they be implemented?
Infosys’ Nandan Nilekani previously led an initiative in India, where he was a cabinet minister, which saw the government provide 1.2 billion people with a unique digital ID. “And that is the foundation for e-KYC, so that you can open a bank account in two minutes,” said Nilekani.
This ID system allowed millions of unbanked citizens to open an account in “the world’s largest financial inclusion program”. The first step to launch a stablecoin is a digital ID, according to Nilekani. His project, which issued 1.5 million IDs a day, showed that it’s possible.
The next step is payment infrastructure, which worked in India for smartphones and featureless phones. Even where people do not have devices, “they can use their ID, go to a merchant, do a biometric authentication […], and withdraw money,” Nilekani said.
Finally, the last step is data mobility. For example, if a small business wanted to apply for a loan, it would need to access and share bank statements and tax details. Again, the Indian project built the infrastructure.
Nilekani explained: “this is the first time in the world that any country has a complete architecture for financial data mobility, for every resident and every business. This is done through an entity called an account aggregator, which is a data access fiduciary, […] a regulated entity that is given a license to operate by the central bank.”
But Nilekani argued that this can be done without blockchain or disruption. As happened in India.
Could Libra follow suit?
So even with the systems in place today, it looks like financial inclusion through digital solutions like stablecoins could be possible. Especially for Facebook, which holds identity data and a vast userbase. But could it be implemented in the same way?
David Marcus agrees that “it’s a three-tier problem; one is connectivity to identity.” For the second point of accessibility, Nilekani had pointed out that smart phones were only owned by a third of the Indian population. Marcus said that Libra is currently focusing on people with smartphones but without bank accounts. He gave the example of eight million unbanked US citizens, who sometimes choose not to open accounts.
“They prefer to live on the edges of the current financial system because unpredictable costs are actually worse than [predictable] very high costs,” he stated. So to have digital money which requires no bank account and has low fees could be a way forward.
Marcus added: “Now you can have a fully-featured smartphone for less than $30. And people who can identify themselves are not necessarily people who are banked.”
Furthermore, blockchain could help with standards: “there’s an opportunity in improving the efficiency of anti-money laundering and counter-terrorism funding by […] leveraging the openness of a distributed ledger,” he added.
Libra has a lot to consider
While policy expert Furman was “excited” about the promise of bringing cheap financial services to the unbanked, he outlined some possible issues. One is interoperability and enabling competition; another is regulation. “We can’t do [the] break things and fix it later ethos when it comes to the global financial system. So I think you want to have both of these thoughts in your head as you approach the sector,” he said.
Carney went a little further. If Libra became successful and integral to people’s everyday lives, then it would have to be operational 24/7. How would revenue cover those costs? There’s also the question of how it’s backed. If it’s backed by a basket of currencies, what happens when that basket is rebalanced? Would consumers be affected by instability?
However, he did say, mirroring his comments on Libra earlier this year: “there is an upside from [Libra] having a basket currency. If it is adopted in that way, it would be part of rebalancing the system away from the hegemon right now, which is the US dollar, to something more balanced.”
Furman also discussed the possible international reach of Libra. Most people use payment systems for domestic purchases, not cross-border. “They’re buying things denominated in their local currency,” he said. “In domestic purchases, not cross-border, Libra’s going to have a fluctuating exchange rate [for] every domestic currency.”
David Marcus later pointed out that he recognized the international ambitions related to China’s CBDC: “We see what’s happening in China with their [CBDC], which I think is actually misunderstood.”
“I think their goal is not domestic. It’s really broad and it has the objective of rewiring the financial networks of a lot of countries with digital assets that they control. I think you’ll see a lot of projects that will have a more disruptive mindset.”