On Tuesday, Facebook, in partnership with a host of other big and powerful companies, including Uber, Spotify, PayPal and VISA, announced that it would lead efforts to create a new global currency called Libra. “We believe,” says the organization that will govern the currency, “that the world needs a digitally native global currency that brings together the attributes of the world’s best currencies: stability, low inflation, broad global acceptance and fungibility.”
As far as I know, Facebook aims to create a new payment and currency system using blockchain technology. Facebook is launching a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The current standards for the currency will be managed by a non-profit organization in Switzerland called the Balance Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of companies that helped set it up.
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There are already such alternative currencies – called cryptocurrencies – such as Bitcoin and Ripple, but this one will be different. Today, cryptocurrencies are only backed by the willingness of users to accept them, not because they have intrinsic value or are backed by a government. This makes these currencies unstable. Libra, however, will be reserve-backed: if a user purchases a Libra dollar, that dollar will likely be held in reserve somewhere, ready to be honored when someone sells that Libra. Additionally, while most cryptocurrencies are difficult to use, Libra promises to be user-friendly and integrated with Facebook and WhatsApp.
Or so goes the story. Many details of this endeavor are not public or have not been decided. But creating a global currency is a bold move on Facebook’s part, given that this announcement comes as Facebook is being criticized or under investigation for massive privacy breaches, anti-competitive practices in the advertising market, erode the free press and foment ethnic cleansing. However, this is consistent with Facebook’s goal of continuing to connect the world regardless of the consequences, creating a medium of exchange that can potentially bypass central banks, banking regulators and existing monetary systems.
There are four main issues with Facebook’s new currency. The first, and perhaps the simplest, is that organizing a payment system is a complicated and difficult task that requires huge investments in compliance systems. Banks pay attention to details, comply with regulations aimed at preventing money laundering, terrorist financing, tax evasion and counterfeiting. Recreating such a complex system is not a project that an institution with the level of confidentiality and technical problems like Facebook should lead. (Or worse, failing to recreate such safeguards could facilitate money laundering, terrorist financing, tax evasion, and counterfeiting.)
The second problem is that, since the Civil War, the United States has a general ban at the intersection between banking and commerce. Such a barrier has been reinforced on several occasions, such as in 1956 with the Bank Holding Company Act and in 1970 with an amendment to this law during the conglomerate craze. Both times, Congress prevented banks from engaging in non-banking business through holding companies because Americans historically did not want banks to compete with their own customers. Banking and payments is a special activity, where a bank has access to the private trade secrets of its customers. As a congressional travel agent said in 1970 when he opposed the right of banks to enter his business, “Every time I deposited checks from my clients,” he said. , “I provided the banks with the names of my best clients.”
Imagine Facebook’s affiliate, Calibra, knowing your account balance and spending, and offering to sell a retailer an algorithm that will maximize the price of what you can afford to pay for a product. Imagine this cartel having this kind of financial visibility not only on many consumers, but also on businesses in the economy. Such conflicts of interest are the reason payments and banking are separated from the rest of the economy in the United States.
It is also possible that insiders belonging to the Libra cartel will exploit their access to information, business relationships or technology to gain advantages. There are many ways in which a new monetary system could benefit large companies over everyone else, especially when large ones sit on the board of governors of the payments system. For example, one of the incentives being discussed to get people to use the currency, it’s discounts on Uber rides; if that happens, Facebook would give Uber an edge over other ridesharing companies.
The third problem is that the Libra system – or indeed any private monetary system – introduces systemic risk into our economy. The Libra currency is, presumably, backed by bonds and financial assets held in reserve in the Libra Reserve. But what happens in the event of theft or system penetration? What if all users want to sell their Libra currency at the same time, forcing the Libra reserve to hold an asset discount sale? If the Libra system fits into our global economy as Facebook hopes, we will have to consider a public bailout of a privately run system.
Sorry, but no thanks: we shouldn’t be setting up a private international payments network that needs taxpayer support because it’s too big to fail.
And the fourth issue is that of national security and sovereignty. Allowing an open flow of money across all borders is a political choice that is best for governments to make. And the openness is not always good. For example, most countries, especially the United States, use economic sanctions to prohibit individuals, countries or businesses from using our financial system in a way that is harmful to our interests. Sanctions are enforced through the banking system – if you can’t bank in dollars, you can’t use dollars. With the success of a private parallel currency, government sanctions could lose their bite. Should Facebook and a qualified majority of venture capitalists and tech executives really decide if the North Korean sanctions can succeed? Of course not.
An unauthorized monetary system based on a consensus of large private actors through open protocols sounds good, but it is not democracy. Today, US banking regulators and central bankers are hired and fired by publicly elected leaders. Libra payments regulators would be hired and fired by a self-selected business board. There are ways of characterizing such a system, but democracy is not one of them.
Years ago, Mark Zuckerberg made it clear that he didn’t think Facebook was a business. “In many ways, Facebook looks more like a government than a traditional business. noted Mr. Zuckerberg. “We really set policies. He has always acted as a potential sovereign power. For example, it is trying to set up an independent Supreme Court type tribunal to manage content moderation. And now he’s setting up a global currency.
How we structure money and payments is a question for democratic institutions. Any business big enough to create its own currency is just too big.
Matt Stoller is a member of the Open Markets Institute.
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