Libra Shrugged — Chapter 6: Banking the unbanked

Excerpt from Libra Shrugged: How Facebook Tried to Take Over the Money by David Gerard


Without the help of all, he can do nothing, although his strong-boxes are full of gold.

— Peter Kropotkin69

Banking the unbanked — reducing financial exclusion — has been acknowledged as a public welfare issue for decades, in both rich and poor countries. If you’re not in the system, you’re not part of society.

Facebook and WhatsApp have billions of users in the developing world — but these users don’t generate much income for Facebook. A lot of them don’t even have bank accounts. Maybe Libra could get these users into an economy that Facebook could tap into.

The problems Facebook claims to solve with Libra are real. International remittance fees are around 6.7% of the money being sent. Mobile money is the cheapest channel, with fees of around 3.3% — with the poorest and least-connected paying the most.70

Facebook was clear in Libra’s mission statement:

Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people.

Facebook’s very first promise was that Libra would give the unbanked meaningful participation in the financial system — and so it was vital that everyone should support Libra to this end. But they didn’t specify at all how Libra would do this.

The missing white paper

Most other concepts in the main Libra white paper had secondary white papers that went into more detail — but Facebook’s plans to bank the unbanked didn’t. The Libra plan has never been set out in writing.

It was near-impossible to get meaningful detail from Facebook on just how Libra would bank the unbanked — almost as if they weren’t quite sure either.

Around the June 2019 announcement of Libra, Kevin Weil — Calibra/Novi’s vice president of product, and one of the three listed authors of the Libra white paper — spoke of WhatsApp users in developing countries sending each other photos of money transfer receipts. His press slogan at the time was: “We want to make sending money as easy as sending a text message.”71

Weil would later talk at conferences about the idea of Libra as a universal standard payment system — like the Internet, but for money — and that this would help bank the unbanked. He put these plans “decades” out, which made his ideas conveniently untestable, and not just vague.72

Blockchains and banking the unbanked

At the pre-announcement press conference for Libra on Monday 17 June, David Marcus said that Libra would solve the problem of billions of people not having bank accounts. He told the press how the problems of banking the unbanked were technical — that banks were unable to move money fast enough without a blockchain.

This is completely backwards. Banks know how to move numbers between computers. The slow part is settlement and compliance — making sure that everything is done in order, and making sure that banks, and money transmitters in general, are solvent, honest and not fronting for drug runners.

The phrase “bank the unbanked” was picked up by the Bitcoin subculture in about 2013, as something that Bitcoin would obviously do. Later cryptocurrencies made the same claim.

Nobody in Bitcoin, or any later cryptocurrency, has ever presented a coherent path from the existence of their crypto to financial inclusion.

Facebook seems to have lifted the claim directly from the Bitcoin subculture — and they supplied just as little detail.

The Libra plan as presented was — in its entirety — that a blockchain-based currency accessible on a phone would solve the problem. This would enable a system to evolve that would do the hard bits — because a blockchain could apparently do this with lower fees, just by existing. It’s literally the Bitcoin claim, just with a different name for the coin.

Banking the unbanked in rich countries

The Libra white paper conflated the unbanked in developing countries with the unbanked in developed countries — specifically, the US. This is a completely different local problem.

The poor have enormous trouble getting bank accounts in the US. Banks will often refuse customers who they think might cause the slightest regulatory trouble. And if you’ve ever had a bank account shut, you might not be able to get a new account.

The practical solutions that work to get the US unbanked into the system are sociological, and involve one-to-one on-the-ground work — walking people through basic financial literacy, and how to find an account that works for them.73 In many countries, banks are required to offer no-fee basic accounts.

And there’s nothing wrong with the US dollar for banking the US unbanked — creating a new currency is not in any way a necessary step. If Facebook really cared about banking the unbanked, it could have set up a foundation to do this any time in the past ten years.

Banking the unbanked is a social process. Marcus and the white paper speak as if any of this is a technology problem — and none of it is.

Banking the unbanked in poor countries

The poor are poor, not stupid — and their living conditions are different in each country. You can’t impose a system top-down from your office in Menlo Park — you need to work locally.

The Libra white paper figure of 1.7 billion unbanked comes from the World Bank report The Global Findex Database, 2017: Measuring Financial Inclusion and the Fintech Revolution.74 Chapter 6 is “Opportunities For Expanding Financial Inclusion Through Digital Technology” — this is where Facebook read up on the problem.

But page 89 points out that a mobile phone isn’t enough — you need financial infrastructure on the ground, and a reliable system to cash out through. Page 93 notes that three-quarters of those 1.7 billion people don’t have Internet access, even if they have a mobile phone — and whether it’s a smartphone that can run apps, such as the Calibra/Novi wallet, isn’t specified in the Global Findex Database.

Consider M-Pesa — a service from mobile phone provider Vodafone, one of the initial Libra Association members. M-Pesa started from the ground up in Kenya in 2005, for a customer base with 2G mobile phones with no data and no apps, and a 72% adult literacy rate. M-Pesa’s slogan was “Send money home” — domestic remittances. Users of Vodafone’s local operator Safaricom could put money on account at a Safaricom shop, send a text message, and the receiver could show the message to get the cash from another Safaricom shop.

This sounds simple — but an easy system for users always has a complicated system at the back end. As well as technology, the project had to deal with finance, culture, politics and regulation — running a network of agents, giving agents incentives that worked and didn’t distort the system, balancing and redistributing cash on hand, and limiting fraud.

M-Pesa worked because it started from what its users needed — rather than starting from a solution, like “bank accounts” or “blockchains,” and trying to find a question that solution could answer.75

By 2019, M-Pesa had 37 million customers. But it never really took off in India76 or South Africa77 because banks already had good market penetration — and it failed in Romania and Albania because the informal, off the books, cash in hand economy was around 30% of GDP,78 and people relying on shadow economies aren’t so keen on electronic trackability.79 Local conditions are local.

Another issue for the unbanked is paperwork. The Global Findex Database reports 20% to 49% of adults without a bank account don’t have the documentation needed to open one. Others report just … not having enough money to use a bank account. A Silicon Valley app and a blockchain aren’t going to solve either of these.

Cash, privacy and banking the unbanked

Physical cash has the advantage of privacy — the bank and the tax office can’t trace the movement of every note and coin. Only large transactions require notification to the anti-money-laundering (AML) authorities.

People with money, who benefit from being part of the system, don’t worry nearly as much about traceability — they care much more about convenience than whether their bank has a copy of their entire financial life. The promoters of schemes to bank the unbanked tend to be from this social class.

Privacy of cash is a feature for the poor and marginalised in the informal economy, not just for the crooks that AML rules are supposedly intended to block — because being poor is treated by the middle-class as inherently suspect, and things the poor do may be criminalised because it’s the poor doing them.

The poor would mostly love to be part of the system — they want more secure and stable material circumstances, and to feel like respectable members of society. But often, they can’t get into the system even when they want to. So the poor and marginalised need the informal and marginal economy — that isn’t fully legible to the authorities — to survive.

Making people visible to the system, but not giving them power and security within the system, is a direct threat to them. The greatest day-to-day enemy of the poor is the middle-class bureaucrat who contemptuously treats them as data to be processed, without care to their needs or circumstances. James C. Scott’s book Seeing Like A State describes the process:80

The working poor were often the first subjects of scientific social planning. Schemes for improving their daily lives were promulgated by progressive urban and public-health policies and instituted in model factory towns and newly founded welfare agencies. Subpopulations found wanting in ways that were potentially threatening — such as indigents, vagabonds, the mentally ill, and criminals — might be made the objects of the most intensive social engineering.

Several past electronic money systems failed because having your informal economy fully legible to the state is not a feature — M-Pesa’s failed push into Romania and Albania is a good example. So much is done by barter — both to stay off the books, and because they just don’t have the cash. It’s a substantially non-cash economy. M-Pesa failed to read the room.

Large parts of the Greek economy operate similarly, which is why the Greek government is so desperate to get more people off cash and onto electronic payment systems — to get transactions into legible, taxable form.

Can Libra solve any of this? There are no signs that Facebook even understands this is an issue.

Libra scales the ivory tower

Libra was created by well-off-to-rich bitcoiners from the venture capital and startup world, creating a system for people whose lives they only understood in terms of their own — and the system they came up with coincidentally looked very like a way for rich venture capitalists with anarcho-capitalist leanings to shift large sums around out of sight.

“Bank the unbanked” looked like an excuse slapped on top of that — even as the proposers seem to have been completely sincere in this aspiration.

“Banking the unbanked” is a complicated process that needs to adapt to local conditions. Facebook didn’t say anything about their plan to do this — so regulators looked at the rest of the Libra plan, that didn’t make sense in poor countries, and seemed to be a plan to set up an ill-regulated shadow bank in rich countries.

69. Peter Kropotkin. The Conquest of Bread. Chapter III part 1, p23. G. P. Putnam’s Sons, 1906.

70. World Bank. Remittance Prices Worldwide. No. 34, June 2020.

71. e.g., Nick Statt. “Facebook’s Calibra is a secret weapon for monetizing its new cryptocurrency.” The Verge, 18 June 2019.

72. Ryan Browne. “Facebook exec says libra cryptocurrency won’t spread ‘like a social network’.” CNBC, 5 November 2019.

73. Brendan Greeley. “Facebook’s Libra will not help the unbanked.” Financial Times FT Alphaville, 19 June 2019.

74. A. Demirgüç-Kunt, L. Klapper, D. Singer, S. Ansar, J. Hess. The Global Findex Database 2017: Measuring Financial Inclusion and the Fintech Revolution. World Bank Group, 2018. ISBN 978-1-4648-1268-2.

75. Carmen Nobel. “Mobile Banking for the Unbanked.” Harvard Business School, 2011.

76. Peter Vanham. “Mobile money: Kenya good, India bad.” Financial Times, 28 May 2012.

77. Lerato Mbele. “Why M-Pesa failed in South Africa.” BBC News, 11 May 2016.

78. Leandro Medina, Friedrich Schneider. “Shadow Economies Around the World: What Did We Learn Over the Last 20 Years?” International Monetary Fund, January 2018.

79. Leonid Bershidsky. “The Upside to Facebook’s Libra Disaster.” Bloomberg Opinion, 15 October 2019.

80. James C. Scott. “Chapter 3: Authoritarian High Modernism.” In Seeing Like A State: How Certain Schemes to Improve the Human Condition Have Failed. Yale University Press, 1998. ISBN 978-0-30007016-3.

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One Comment on “Libra Shrugged — Chapter 6: Banking the unbanked”

  1. First, it was “decentralization”, then it was “banking the unbanked”.

    It’s funny, how crypto is about “banking the unbanked” and “unbanking the banked” at the same time. It’s like an animal, that can be slaughtered for vegan meat. Just don’t question it ….

    Truly amazing!

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