On Cryptocurrencies and Payment Systems

Prof. Neil Gandal
Prof. Neil Gandal

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2 years ago

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Today (June 18, 2019,) Facebook formally announced a plan for a global financial system based on a new cryptocurrency called Libra.

In theory, Facebook users will be able to store, trade, and exchange the currency through Facebook applications such as Messenger and WhatsApp. This is a big deal since Facebook has more than 2 billion users. Since Western Union charges fees that can easily reach seven percent of a transfer (or more,) WhatsApp users (for example) will be able to transfer Libras among themselves and then convert the Libra into fiat money in order to spend it outside the Facebook ecosystem or put it into a bank account.

This would just be one use. Given Facebook’s size, two other possible uses are (I) payments to e-commerce companies that would directly accept the coin and (II) a payment platform, where the coin could be converted into fiat currency when purchasing from retailers that do not accept cryptocurrencies.

Facebook has attracted many mainstream partners including Visa, Spotify, eBay, and PayPal, so it is possible that Libra might evolve into a new payment system that offers financial services at much lower prices than exist today. The goal is for Libra to be a stable coin, i.e., one that does not fluctuate wildly against fiat currencies. The way it would work is that money used to purchase Libra will be put into a bank account backed by the USD, Euro, or other major currency. Thus, the currency would be 100% backed by fiat currency.

There are, of course, many questions related to privacy and regulation, but we will cover those in a future blog.

It is worth pointing out that Libra is not the only new cryptocurrency with mainstream partners. The digital currency exchange Coinbase recently released a Visa debit card. The card was first released in the UK (April 2019) and is now (June 2019) available in six additional European countries (France, Germany, Ireland, Italy, the Netherlands, and Spain.)

The Coinbase Card is a “contactless” Visa debit card that that takes the currency directly from a user’s Coinbase account. Since it is a Visa card, it will be accepted at any retailer that accepts Visa.

The retailers will not receive payments in cryptocurrencies. Instead, Coinbase will convert the cryptocurrency (Bitcoin, Ethereum and Litecoin) into Fiat money. Users will be charged a 2.5 percent fee for the conversion.

The 2.5 percent fee likely means that current holders of Visa or MasterCard debit cards might not want to hold such a Visa card. However, consumers without a Visa or MasterCard debit card may find this attractive.

These developments are probably the tip of the iceberg, and other fin-tech firms will likely try to enter the lucrative payment systems market shortly.

This is a guest post by Professor Neil Gandal (Berglass School of Economics, Tel Aviv University), advisor to the Orbs Project.

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