Chain reaction

Libra’s likely volatility may limit scope to raise financial inclusion

By David Whitehouse

Posted on September 16, 2019 13:24

Blockchain may do more then Facebook’s Libra to improve African living standards.

The token, scheduled to launch in the second half of 2020, has the potential to greatly widen financial inclusion in Kenya and Africa, says Ndemo, who has been travelling the continent seeking to convince governments of the merits of the Blockchain technology on which Libra will rely.

The Libra Association says the token will provide banking to the unbanked, and offer lower transaction costs and faster settlements. The possible volatility of the token’s value will be an obstacle in meeting those aims.

  • Libra’s model is to buy interest-bearing government bills from markets such as the US, UK, Germany and Japan to back its units.

Cybersecurity investment by issuers and exchanges would need to rise dramatically to build user trust, according to Oxford Analytica in June.

Gavekal compares the plan to anchor Libra’s value to a basket of major currencies to the quasi-currency used by the International Monetary Fund, the Special Drawing Rights (SDRs).

  • SDRs have proven more volatile than developed-country fiat currencies behind them, Gavekal says.
  • This is true even for developing market currencies such as the Indian rupee, Gavekal says, arguing that the rupee has displayed less price volatility than the SDR.
  • Libra “is asking consumers to willingly adopt a more volatile currency,” according to Gavekal.
  • On top of that, there’s also the danger that Libra’s backers get greedy by buying higher-yielding but riskier assets, Gavekal says.

In effect, Gavekal says, Libra will be competing with central banks – but becoming a quasi-central bank without government support will be hard. There’s no reason to think that “governments will meekly accept competition in the currency game.”

Fiat or bust

That’s likely to be the case in Africa. While the US government does not like Libra, developing country governments are likely to hate it, Gavekal argues. The Libra Association which controls the token is not likely to buy much of their public debt.

  • That’s borne out by experience in Zimbabwe, where the government in 2018 banned the procession of the Bitcoin cryptocurrency by the country’s banks. Bitcoin, the government says, is being used for money laundering.

According to research from Ecobank in 2018, African governments and central banks are mostly adopting a ‘wait and see’ approach to crytopcurrencies.

  • Only South Africa and Swaziland have favorable regulatory stances on crytopcurrencies, the research says: most governments fear that too much exposure to a cryptocurrency will mean that any crash in the value of a token would have wider repercussion in the real economy.

Blockchain goes farming

Libra will work using a decentralized Blockchain database. Ndemo argues that Blockchain has the potential to reduce the proportion of African incomes spent on food. He compares Europe, where on average a family’s monthly spend on food is around 5% of income, with Kenya, where it is 55%. Part of the reason for the gap, he says, is the number of intermediaries in Kenya that exist between food producers and retail distributors. In some supply chains there are as many as eight, he says. Blockchain, he says, is already working to reduce food costs for Kenyan consumers.

  • Ndemo gives the example of Twiga Foods, which has partnered with IBM Research to build markets for agricultural producers through Blockchain.
  • Twiga distributes bananas, tomatoes, onions and potatoes to 2,600 kiosks across Kenya.
  • The speed of the system, Ndemo says, means that waste is reduced: old bananas can be used to make banana bread.

Ndemo also sees Blockchain as a powerful tool against corruption.

  • To be able to stand for election in Kenya, politicians need to have a university degree, to have a clean criminal record, and to have paid their taxes.
  • Some have produced fake documents in order to seem to meet those criteria he says. But Blockchain’s immutability, he argues, will make such abuses a thing of the past.
  • Blockchain is “the best way of dealing with corruption,” Ndemo says. The distributed ledger  which is at Blockchain’s core, he argues, is a machine for “automation of trust.”

Bottom Line: Blockchain can mean better supply chains and less corruption  – but Libra as a currency is likely to be too volatile for Africa.

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