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What does Facebook’s Libra mean for banks?

Today, Facebook announced intentions to introduce a digital currency initiative, “Libra,” to a moderately warm Street reception, buttressed by the credibility of its partners in the project. What exactly does this mean for banks?

FB is targeting the globally underbanked, as they claim, but this will ultimately serve as yet another shadow banking system whereby actual fiat currency is exchanged globally in an alternative medium. This is one of the first true mainstream use cases relating to digital currencies and blockchain by layering in a social network with an active merchant platform.

In this scenario, it is likely that the FB currency will operate off the distributed ledger system which typifies blockchain. Those looking to transact the digital currency are completing transactions within the ledger. The “coin” or monetary equivalent, essentially represents a spot held on the ledger which has value. In a true coin exchange, those ledger spots hold value on a secondary market – that’s the basis of bitcoin. However, in prior coin issuance, there was little real-life use case for its existence other than as an asset with prospective value.

However, what FB introduces in the coin exchange equation where others do not, is the purpose for its existence. It’s essentially an instant, secure global money exchange tool integrated into a powerful social network obviating the need for depository institutions and other legitimate fx platforms. As we know, the real change with digital currency systems, however, is the challenges in tracking global monetary transactions across an anonymous ledger for anti-money laundering purposes. In fact, the Libra white paper goes so far as to confirm this expressly, “The Libra Blockchain is pseudonymous and allows users to hold one or more addresses that are not linked to their real-world identity.” That’s a potential red flag for banks subject to the Bank Secrecy Act.

Coin exchanges have long been criticized as a haven for potential use in laundering illicit funds across legitimate established channels. The challenge for banks in this scheme will be similar to that of marijuana related businesses, in that they may be left to determine their appetite for risk in dealing with deposits received from the Facebook coin exchange as they could originate from illicit sources through an otherwise legitimate channel.

The bigger concern, however, should be that there may be no need for banks as a participant at all.

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