It’s not entirely surprising that, so far in the short public life of Libra, the Facebook-led cryptocurrency project launched this week, the discussion has focused on the product’s potential applications and risks. “What will Mark Zuckerberg do with our money?” is the question commentators and policymakers probably wish to have answered but are too afraid to ask.
Some politicians aren’t waiting for the experts to deliver their verdict. The French Finance Minister has already expressed antipathy toward what he sees as nascent competition against sovereign currencies. Top Democrats in the US Congress, meanwhile, want to impose major regulatory supervision and even a development moratorium until (in someone else’s words) “we can figure out what the hell is going on.” Keep in mind that Libra hasn’t yet launched and won’t do so before the first half of 2020.
But what if we took the claims of Facebook and its Libra partners at, um, face value? By the World Bank’s reckoning, 1.7 billion adults globally remain unbanked. While this figure is rapidly shrinking, with 515 million having acquired a bank or mobile money account (such as those offered by Kenya’s M-Pesa) between 2014 and 2017 alone, there remains great untapped potential for bringing inexpensive payment services to the world’s poor, especially since many of them do own mobile phones.
That’s what Libra proposes to do. It will be a digital asset whose value is tied to a basket of comparably stable sovereign currencies, such as the US dollar and the euro, and short-term government bonds. While the price of a unit of Libra will regularly fluctuate against any of the individual currencies in the basket, Libra’s proponents hope that such fluctuations will be small enough not to deter user adoption. Tying Libra to a basket rather than a single currency also makes it less likely that users who earn and spend primarily in a currency different from the one chosen will refuse to take up Libra.
To govern it, Facebook has formed the Libra Association together with other large organizations, such as Uber, Spotify, Visa, Mastercard, and Paypal, The purpose is not just to separate Facebook’s brand from that of Libra — however unsuccessfully so far — but also to take advantage of the partnership’s joint network effects. On its own, Facebook brings 2.4 billion active users to the Libra Association. With its partners, that potential user base grows by several hundred million.
As with any medium of exchange, the more people who adopt Libra, the more attractive it will become to other users. Hundreds of millions of people spend time and money on Facebook and the other Libra founding platforms. When those firms start accepting payments in Libra, the temptation for offline merchants to follow suit may prove irresistible, especially given that the two main payment card providers are also members of the Libra Association and will presumably work to facilitate adoption. That’s really the extent of Libra’s value proposition, from the evidence we have seen so far.
Warnings that Facebook wishes to supplant central banks make for interesting dystopian fiction — although currency competition can be beneficial. But they have little factual basis. Even active Libra users will retain an obligation to pay taxes in the domestic currency of their country of residence, making it very difficult to wean oneself off entirely from central bank-issued money.
Furthermore, there are many jurisdictions where foreign currencies like the US dollar circulate alongside national currencies, which may be troubled or unattractive for tourists and some businesses to hold. Libra would play a similar role and even provide a non-state alternative in jurisdictions with poorly performing central banks.
Libra’s announcement does raise pertinent questions about financial regulation, though. Ask a regulator whether the banking and payments system could use more competition, and chances are you’ll get an emphatic yes. Follow that up with the suggestion that tech firms might be well-placed to provide that competition, however, and the regulator’s alacrity may well turn to caution and even skepticism.
Policymakers’ reluctance to countenance the entry into banking of Facebook, Google, and other large internet platforms partly stems from the platforms’ size and perceived market power, although the ability to use that power to undermine competition is questionable. Additionally, it’s unclear how dominance in online search or social media could easily translate into dominance in payments and credit underwriting, for which the commercial infrastructure and regulatory environment are very different.
Many people also worry that tech companies might use the large quantities of user data they hold for deleterious ends. When pressed to offer examples of such malicious acts, however, they struggle to offer any.
For instance, how exactly is using customers’ online data, with their consent, to offer them products and services they’re more likely to buy harmful to those customers? Indeed, that’s exactly the vision behind Open Banking! Discrimination is a concern, but it’s illegal as well as unprofitable. Besides, the more competition there is in a sector, the costlier it becomes to discriminate on the basis of economically irrelevant traits such as race and gender.
The challenge of data safekeeping is a legitimate worry and one that reputedly keeps banking CEOs up at night. But it offers no grounds to object to tech firms’ entry into finance. On the contrary, the financial system would probably benefit from the involvement of companies that have long been thinking about how best to collect, digest, and protect user data.
How privacy legislation and tort law should complement each other to govern liability in cases of abuse is an important question, but tangential to the issue of whether tech firms should be able to compete for the financial business of households and companies.
In the hours following Libra’s announcement on Tuesday, commentators mocked Twitter discussions of the cryptocurrency as astrology. Sadly, many policymakers’ statements regarding Libra’s implications have likewise resembled the horoscope in their far-fetched speculation.
Ignore Libra’s marketing as a cryptocurrency and its association with Facebook, and what you’re left with is a promising partnership of leading innovative firms to offer fast and cheap payments worldwide. That’s not as revolutionary as promising to end central banking, but it could make life easier for hundreds of millions in very short order.