On June 18, Facebook, in partnership with a surfeit of other large and powerful corporations, including Uber, Spotify, PayPal and VISA, announced that it would lead the effort to create a new global currency called Libra. “We believe,” says the organization that will govern the currency, “that the world needs a global, digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance and fungibility.”
As far as I can tell, Facebook aims to build a new payments and currency system using blockchain technology. Facebook is starting a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The actual standards for the currency will be managed by a nonprofit in Switzerland called the Libra Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of corporations that helped set it up.
There are already such alternative currencies — known as cryptocurrencies — in existence, such as Bitcoin and Ripple, but this one will be different. Today, cryptocurrencies are backed solely by the willingness of users to accept them, not because they have any intrinsic value or are backed by any government. This makes such currencies unstable. Libra, however, will be backed by reserves: If a user buys a dollar of Libra, that dollar will presumably be held in reserve somewhere, ready to be honored when someone sells that Libra. Moreover, while most cryptocurrencies are hard to use, Libra promises to be user-friendly and embedded into Facebook and WhatsApp.
Or so goes the story. Many of the 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 is happening as Facebook is being criticized or investigated for massive privacy violations, anti-competitive practices in the advertising market, eroding the free press and fomenting ethnic cleansing. However, it is consistent with Facebook’s goal of continuing to connect the world no matter the consequences, by creating a medium of exchange that can potentially bypass central banks, bank regulators and existing currency systems.
There are four core problems with Facebook’s new currency. The first, and perhaps the simplest, is that organizing a payments system is a complicated and difficult task, one that requires enormous investment in compliance systems. Banks pay attention to details, complying with regulations to prevent money-laundering, terrorist financing, tax avoidance and counterfeiting. Recreating such a complex system is not a project that an institution with the level of privacy and technical problems like Facebook should be leading. (Or worse, failing to recreate such safeguards could facilitate money-laundering, terrorist financing, tax avoidance and counterfeiting.)
The second problem is that, since the Civil War, the United States has had a general prohibition on the intersection between banking and commerce. Such a barrier has been reinforced many times, such as in 1956 with the Bank Holding Company Act and in 1970 with an amendment to that law during the conglomerate craze. Both times, Congress blocked banks from going into nonbanking businesses through holding companies, because Americans historically didn’t want banks competing with their own customers. Banking and payments is a special business, where a bank gets access to intimate business secrets of its customers. As one travel agent told Congress in 1970 when opposing the right of banks to enter his business, “Any time I deposited checks from my customers,” he said, “I was providing the banks with the names of my best clients.”
Imagine Facebook’s subsidiary Calibra knowing your account balance and your spending, and offering to sell a retailer an algorithm that will maximize the price for what you can afford to pay for a product. Imagine this cartel having this kind of financial visibility into not only many consumers, but into businesses across the economy. Such conflicts of interest are why payments and banking are separated from the rest of the economy in the United States.
It’s also possible that insiders belonging to the Libra cartel could exploit their access to information, business relationships or technology to give themselves advantages. There are many ways a new currency system could advantage large businesses over everyone else, especially when the large ones are sitting on the board of governors for the payments system. For instance, one of the incentives being discussed to get people to use the currency is discounts on Uber rides; if this happens, Facebook would be giving an advantage to Uber instead of other ride-sharing businesses.
The third problem is that the Libra system — or really any private currency system — introduces systemic risk into our economy. The Libra currency is backed, presumably, by bonds and financial assets held in reserve at the Libra Reserve. But what happens if there is a theft or penetration of the system? What happens if all users want to sell their Libra currency at once, causing the Libra Reserve to hold a fire sale of assets? If the Libra system becomes intertwined in our global economy in the way Facebook hopes, we would need to consider a public bailout of a privately managed system.
Sorry, but no thanks: We should not be setting up a private international payments network that would need to be backed by taxpayers because it’s too big to fail.
And the fourth problem is that of national security and sovereignty. Enabling an open flow of money across all borders is a political choice best made by governments. And openness isn’t always good. For instance, most nations, especially the United States, use economic sanctions to bar individuals, countries or companies from using our financial system in ways that harm our interests. Sanctions enforcement flows 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 supermajority of venture capitalists and tech executives really be deciding whether North Korean sanctions regimes can succeed? Of course not.
A permissionless currency system based on a consensus of large private actors across open protocols sounds nice, but it’s not democracy. Today, American bank regulators and central bankers are hired and fired by publicly elected leaders. Libra payments regulators would be hired and fired by a self-selected council of corporations. There are ways to characterize such a system, but democratic is not one of them.1 comment on this story
Years ago, Mark Zuckerberg made it clear that he doesn’t think Facebook is a business. “In a lot of ways, Facebook is more like a government than a traditional company,” said Zuckerberg. “We’re really setting policies.” He has acted consistently as a would-be sovereign power. For example, he is attempting to set up a Supreme Court-style independent tribunal to handle content moderation. And now he is setting up a global currency.
The way we structure money and payments is a question for democratic institutions. Any company big enough to start its own currency is just too big.