Crypto revolution

08 Jul 2019


The writer is a development practitioner.
The writer is a development practitioner.

THROUGHOUT history, many new technologies launched with great hype have failed to live up to their potential. Blockchain and Bitcoin are examples of such ‘revolutionary’ technologies that are yet to cause any real disruption. Libra is likely to follow in their footsteps.

In 2008, a paper published under the pseudonym Satoshi Nakamoto introduced the first cryptocurrency, Bitcoin. The author(s) found that one of the greatest faults of the financial system is that we are forced to trust third parties, ie financial institutions. By creating a cryptocurrency based on Blockchain technology, they hoped to create “an electronic payment system … without the need for a trusted third party”.

This idea held great promise in the wake of the financial crisis. People’s trust in financial institutions and governments had been damaged. Bitcoin was a way out: a way to participate in the economy without being at the mercy of a flawed financial system.

Cryptocurrencies presented solutions to many problems associated with traditional currencies, reigniting the dream of the internet enabling decentralisation. No one entity could control money supply, and financial institutions would no longer mediate all transactions and get rich doing so.

Can Libra improve financial access?

Despite the excitement, there were many reasons why Bitcoin never took off. Fears of crypto-anarchy and anonymous transactions led to widespread bans. It was also criticised for its high-energy consumption. The nail in the coffin was its volatility, which effectively made it useless as a store of value.

As the Bitcoin dream fades, Facebook, along with its partners, has announced plans for a new cryptocurrency: Libra. The announcement has generated mixed reactions — from paranoia of Facebook’s deeper penetration into our lives, to hope that Facebook will solve the world’s financial inclusion woes.

The white paper introducing Libra presents it as a philanthropic mission. The sales pitch — which betrays a lack of understanding of the reasons behind financial exclusion — is that Libra will give access to 1.7 billion financially excluded people.

In Pakistan, around 100 million adults lack access to formal financial services. How many of them use mobile internet and social media apps and can grasp the concept of cryptocurrency? It is difficult to imagine how Libra is going to be accessible for this excluded population.

Women fare worse in access than men. According to GSMA, 327m fewer women than men use mobile internet in low- and middle-income countries. Women in Pakistan are 45 per cent less likely than men to own a mobile phone and 63pc less likely to use mobile internet.

Social norms are a significant barrier to women’s access to smartphones, mobile internet and social media apps. Inability to read and write and low digital literacy also prevent women (and men) from using mobile phones for much beyond phone calls. It is unlikely that there will be significant uptake of cryptocurrency — an obscure concept — amongst this population, many of whom are neither digitally ready nor financially literate.

Another big barrier is mistrust of banks. According to Gallup, over a third of adults in Pakistan do not trust financial institutions. Would they be more likely to trust Facebook — a company with a poor data privacy record and dozens of scandals and lawsuits under its belt?

Finally, physical distance from banks is a significant cause of financial exclusion. Branchless banking providers have made great progress with over 400,000 branchless banking agents across Pakistan. There is no reason to believe Libra would have greater reach and more success with this model than traditional mobile money providers.

As of now, Libra seems only to be catering to the tech-savvy people with bank accounts, who can buy the currency online. Financial inclusion aside, could Libra be a boon for cryptocurrencies? An association of big corporations proposing a stable currency could bring the legitimacy this technology needs.

But here, too, Libra falls short. For purists, Libra betrays the spirit of a cryptocurrency as it is not (yet) decentralised. Nakamoto’s rationale in creating Bitcoin was to give power back to the people and remove their dependence on third parties. With Libra, rather than trusting traditional financial institutions, we would now be asked to trust an elite group of corporations led by Mark Zuckerberg, a ‘tech bro’ notorious for breaching our trust.

From silver coins, to gold standard, to fiat currency, cryptocurrency may well be the next step in the evolution of money. Change is required in a financial system that does not work for the majority, but Libra is not the answer. Given how many of our daily interactions Facebook already surveils, misuses and monetises, Libra poses a great threat. If there is widespread adoption of Libra among Facebook’s 2bn users, it could make Facebook — and Zuckerberg — more powerful than any government or multilateral institution.

The writer is a development practitioner.

Published in Dawn, July 8th, 2019