Facebook released on June 17 its white paper explaining a new global digital currency, Libra, which it plans to launch in the first half of 2020. Libra will be managed by a ‘not for profit’ Swiss-based Facebook-led consortium of ‘for profit corporations’ (Uber, eBay, Lyft, Mastercard, and PayPal are among its founding members).
THIS initiative has received mixed reactions. Some, including the Bank of England, have cautiously welcomed the move. Mark Carney, the governor of the Bank of England, is willing to have an ‘open mind’ but does not want to offer an ‘open door’, highlighting the need for tough regulatory rules. Most commentators would like it stopped. For example, the US congresswoman and chair of the House Financial Services Committee, Maxine Waters, called on the company to put a stop to the project until the Congress and regulators could review it.
The latest critique of Libra is president Trump, who said that he was ‘not a fan’ of cryptocurrencies, which facilitate illegal activity. He added, ‘If Facebook and other companies want to become a bank, they must seek a new banking charter and become subject to all banking regulations, just like other banks, both national and international.’
President Trump’s comments come a day after Federal Reserve chairman Jerome Powell had told lawmakers that Libra could not move forward unless it addressed concerns over privacy, money laundering, consumer protection and financial stability.
The US administration’s stance was made clear by te Treasury secretary Steven Mnuchin in a White House briefing. Pointing to ‘national security issue’, he declared, ‘We will not allow digital asset service providers to operate in the shadows and will not tolerate the use of the cryptocurrencies in support of illicit activities.’
However, as the G20 finance ministers agreed, regulation of cryptocurrencies will require a global coordinated effort among national and international authorities as the operations of big tech companies span different regulatory perimeters and geographical borders. This is unlikely when president Trump is bent on going alone with his ‘America first’ policy.
What is Libra?
Unlike other cryptocurrencies with no intrinsic value, Libra will be backed by ‘a basket of bank deposits and short-term government securities’. That is, when anyone buys Libra, the Facebook consortium will acquire a matching amount of securities in a range of fiat currencies, reversing that process when Libras are being redeemed. Thus, it is claimed that Libra will be more stable although it might fluctuate significantly relatively to individual fiat currencies.
The Libra consortium plans to move towards a ‘more decentralised’ system over time, making it resistant to censorship or regulation. That is, it will be an unregulated or a ‘shadow’ payment system.
FACEBOOK claims that Libra will be more efficient and timely than the range of existing payment platforms which are not only fragmented but also costly as their core participants are highly-regulated financial institutions, with prudential and expensive compliance requirements such as anti-money laundering, consumer protection and privacy laws. By avoiding these expensive webs of regulation, Facebook’s Libra could reduce the friction costs of payments, particularly cross-border transactions.
Facebook promises that the Libra system will be able to process 1,000 transactions per second; it will be user-friendly and have virtually zero transactions cost. In the first quarter of 2019, Facebook had 2.38 billion monthly active users. Libra will allow Facebook’s billions of users to make financial transactions across the globe almost instantaneously. As Libra becomes a popular medium for exchange, the Facebook-led Libra consortium may decide to offer more financial services, in particular credit.
Thus, Libra can potentially shake up the world’s banking system. But it may also disrupt and circumvent central banks and governments.
CRITICS have raised concerns over privacy, money laundering, consumer protection and financial stability of the Libra cryptocurrency. They have pointed to Facebook’s years of disregarding privacy, exploiting user data, and failing to control its platform. Facebook has been investigated for massive privacy violations, anti-competitive practises, eroding the free press and fomenting ethnic cleansing. There is also possibility that the new money will nurture illicit activities and markets.
According to the Bank for International Settlements, cryptocurrencies issued by the big tech companies, such as Facebook, could rapidly establish a dominant position in global finance through the advantages afforded by the data-network activities loop. This poses a threat to competition and stability.
Matt Stoller, a fellow at the Open Markets Institute and one of Facebook’s leading antitrust critics, described Libra as a ‘totally insane idea. It’s like a private global International Monetary Fund run by techbros, except it needs reserves so it’ll need a giant bailout during a crisis’. He highlighted four core problems with Libra.
First, trust: Facebook cannot be trusted with the complicated and difficult task of organising a compliant payment system to prevent illicit financial activities, eg, money-laundering, terrorist financing, tax avoidance and counterfeiting and so on.
Second, conflict of interest: Commercial companies involved in Facebook’s Libra consortium will have extraordinary financial visibility into not only many consumers but also businesses across the economy. Thus, insiders belonging to the Libra cartel will be able to exploit their access to information, business relationships or technology to give themselves advantages.
Third, heightened systemic risk for the global economy: governments will need to consider a public bailout of a privately managed ‘too big to fail’ system if there is a theft or penetration of the system, or when all users want to sell their Libra currency at once. That is, should Libra ever face a run, central banks would be obliged to provide liquidity beyond the capacity of any single central bank or government.
Fourth, states’ ability to pursue sovereign policy making: Libra payments regulators will be managed by a self-selected council of corporations, not by democratically accountable governments. Thus, these powerful companies will set policies. Years ago, Mark Zuckerberg said, ‘In a lot of ways, Facebook is more like a government than a traditional company… We’re really setting policies.’
Privatisation of monetary policy
WHEN Libra gains popularity and the Libra consortium decides to offer other financial services, it would essentially mean that a self-governing club of private ‘for profit’ companies had created its own central bank and fiat currency. This would erode the control of central banks and governments over monetary policy.
Chris Hughes, a co-founder of Facebook, warned that Libra could shift power into the wrong hands. He said: ‘If even modestly successful, Libra would hand over much of the control of monetary policy from central banks to these private companies.’
Therefore, Facebook’s plans, if successful, will not only capture the banking industry, but also will privatise monetary policy. There is no reason to believe that Facebook would discharge this responsibly in public interest.
Not for profit misnomer
FACEBOOK says that the Swiss-based consortium governing Libra will be a ‘not for profit’ foundation. But this is a complete misnomer. With Libra becoming popular, people will exchange their national currencies — dollars, euros, renminbi, and rupees — for Libra to buy and sell products priced in it. They may choose to keep Libra instead of exchanging it back for their own currencies. This means, the Libra association will be able to earn income by investing Libra users’ money. It may also be tempted to issue extra Libra to earn seigniorage as central banks do on national currencies.
Facebook and the Libra association will also profit from regulatory arbitrage, given that the earnings on the assets backing Libra will ultimately flow to Facebook and its partners. The arbitrage between regulation and no regulation, or even just less regulation could be highly profitable. Even if Libra remains just a payments system, fully backed by fiat currencies in reserve, decisions of the consortium about which currencies and assets to buy will move bond markets and currencies.
Using financial information data of Libra users, Facebook and its partners’ profits will grow rapidly, left to do so as loosely checked and regulated. This is already evident from the profit growth of today’s big tech companies like Facebook and Google.
SO FAR commentators focused mostly on developed countries. But Facebook’s initial target is developing countries’ 1.7 billion people without banking services.
Developing countries will be in a most disadvantageous position. They lack technology and computing capacity needed to manage the currency and the privacy of users’ data. Developing countries already lose trillions of dollars through illicit fund transfers, and Facebook’s new money will likely accelerate that.
Developing countries are also constrained by spillovers from macroeconomic policies in major advanced countries, making their financial sector vulnerable to shocks and currencies more volatile. With Libra gaining global dominance, they will lose whatever limited capacity they have to pursue independent macroeconomic policies.
Facebook could tempt people to ‘dollarise’ into Libras (ie, ‘Librarise’) in countries with weak currencies, ceasing to use the national currency for accounting and invoicing purposes. That would hugely complicate monetary policy and stability.
Therefore, the idea of an unregulated global payments system owned and directed by a group of for-profit corporations led by Facebook issuing its own currency should be alarming, especially for developing countries. It will make it harder for them to achieve transformative, sustainable and inclusive development.
STOPPING Facebook’s initiative until all its ramifications are understood and appropriate regulatory measures are in place will not solve the underlying flaws of the existing payments and financial systems that encourage such moves.
One such problem is exorbitant transactions cost due to a lack of competition in the existing currencies and financial arrangements, serving as a means of payment and a store of value. Inadequate regulation of the companies that control transactions too is a contributory factor.
Governments and central banks have also lagged behind technological developments, and are slow in creating their own digital currencies to enable low-cost real time transactions.
Therefore, policymakers must urgently act to prevent anti-competitive behaviour of financial institutions and create publicly owned digital currencies to supplement traditional payments system or monetary instruments. They also need new laws and global treaties to mitigate potential negative fallout and curb the power of the organisations issuing global digital currencies.
Anis Chowdhury, an adjunct professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok.