Facebook's Move On Crypto - Can This Harm The UK Financial sector?

Cryptocurrency is a peer to peer electronic transfer of value directly from one individual to another without involving the banking system. As the banking system is not involved, the cryptocurrency can be used across the globe.

More than 100 years ago, paper currency was backed by gold, silver or any other precious commodity of equivalent value (theoretically). The paper currency could also be exchanged for metal coins of equivalent value. This backing was facilitated by the central bank of the country, which is indeed the de-facto engine of the economy.

However, today that has changed, a modern currency bill is backed by nothing but the government of the country. This would allow flexibility to governments; they can peg their currency or print more currency notes at any time.

There are refined differences between a virtual currency, a digital currency and a cryptocurrency, although their usage is done interchangeably. The Virtual currency came to existence in 2012, is unregulated digital money which is limited to its developers and specific virtual community. It doesn’t have the same attributes as that of conventional currency.

Digital Currency is a form of virtual currency that is electronically created and stored. Sometimes, they may have attributes of traditional currency.

Cryptocurrency is a sub-category of Digital currency, which uses algorithms (cryptography) to secure transactions and eliminate counterfeiting. The one important trait that is common to all is, these are not issued by central banks and therefore do not belong to the banking system of the country.

People have started to see them as an alternative to traditional money which is a legal tender beyond borders. On the contrary, some people still believe in traditional currency, gold, silver and the banking system. Both the concepts are in conflict of interests as the perspective differs. For one banking system exists, for another banking system is redundant.

Cryptocurrency feeds on the idea to take control out of the central banks and governments and giving back the control to the people.

Facebook Inc was visualised for keeping touch with distant colleagues and friends. It is a free platform and accessible all around the globe. Facebook facilitates social networking by setting up groups to organise social events, connecting and sharing with family and friends. There are more than 2 billion users and counting.

Ever since its inception in Jan 2009, the blockchain technology has been quite popular and has a high acceptance ratio in the United Kingdom. The British parliament provides an environment conducive for its fast-tracked development.

In the United Kingdom, general tariffs on forex are applicable on cryptocurrencies such as income tax, conversion charges and other fee-based taxes.

If the cryptocurrencies are used as investment instruments, the profits generated from them is taxable at the rate of 20 per cent CGT (Capital Gain tax). In addition, the traders who exercise speculative strategies are supposed to pay income taxes of up to 45 per cent.

Although cryptocurrencies can never be a part of the existing financial system due to conflict of interest with the market participants within the system, and do not fully comply with the legal framework, they are not banned either. Cryptocurrencies need time to get accepted by regulators and people so that they can adapt and identify risks associated with the new technology.

The cryptocurrency economy is in development phase across the world. There is a fair bit of competition and immense room for innovation. Initially, the services would be free of charge. A popular stock trading and crypto exchange application based in the US, Robinhood plans to roll-out services in the UK and will give stiff competition to existing counterparts such as Revolut and Freetrade.

The UK has shown good response in accepting and adapting the new technology which facilitates digital currency, which helps in reorganising the value system and could be transferred promptly. This trait has attracted the interest of people, industries, organisations and governments. With the growing acceptance ratio, the banks are considering adopting the new system which is constantly evolving. The banks such as Lloyd’s of London and HSBC are hiring expertise to run massive blockchain projects.

Meanwhile, some companies are engaged in upgrading their payment and settlement systems for the use of digital currency. As a result, Fintech start-ups have emerged significantly to cater to the rising demand across the UK and many other parts of the world. Fintech companies have started aiding the banks to speed up technology transfer and make them comfortable with the relevant technology. Furthermore, an uptrend is expected soon regarding the hiring of blockchain developers and cybersecurity professionals.

There are several challenges for cryptocurrency lying between it being used as a mode of payment and as a trading instrument for investors and businesses to make millions. Most of these challenges are not only associated with the technology used but also include security, regulatory, economic and social factors.

Tax evasion, Anti-money laundering (AML) and Terrorism are major issues which need immediate attention. These laws are being finetuned and reviewed to implement them in the realm of cryptocurrency services. Since the cryptocurrency market is undergoing constant evolution, the legal framework should be kept in check and upgraded if required under the UK standards. Furthermore, as the financial entities are already under a restructuring mode to mitigate some anticipated risks with reference to profitability, the Brexit might bring in changes to the landscape.

Facebook has now decided to enter the realm of digital currency, Libra. It is a new digital currency created by Facebook. This would enable individuals to store, spend and transfer money with negligible transaction fees for cross-border remittances. People would be able to send money to friends anywhere in the world by their phones.

The new technology has scalability and can accommodate billions of daily trades, which makes Libra a good prospect to get widely accepted. The Libra blockchain is open source, facilitating developers or coders to build applications on it, whether they are founding members or not.

Libra is backed by payment facilitators such as Mastercard, PayPal, PayU, Stripe and Visa. Few other players backing it are namely- Spotify, Uber, Vodafone, Coinbase, Xapo Holdings, Ribbit Capital, Thrive Capital and many more institutions which a part of the consortium are (28 members). It is important to note that none of them is banking entities. Libra will be backed by a pool of currencies and assets stored around the world. It will not have a fixed exchange rate against anyone traditional currency, such as dollars and euros, though it will not swing as wildly as cryptocurrencies such as bitcoin.

Facebook had been involved with regulators to discuss the impact of its project, who are paying great attention to blockchain projects. It is highly unlikely of Libra to fall into the category of security, which may require registration formalities with the regulatory body.

In addition, payments processors in most parts of the world require licensing for operations, and this can consume a considerable amount of processing time. Facebook also needs to reassure central banks that have implemented checks and balances to curb money laundering and tax evasion. The users would need to submit government identification to sign up to use the wallet and that automated systems would be in place to detect fraud. Facebook will spin off a unit, called Calibra, to manage its own digital wallet service, which will be integrated into its family of apps.

Under the proposed system, users will be able to convert US dollars and other international currencies into Libra, which will facilitate rapid money transfers and online transactions with almost no transaction fees. This will be especially valuable to the 1.7bn people worldwide without bank accounts, who will be able to carry out payments via their phones. Libra will run parallel to the existing systems independently.