Confused by Facebook’s Libra proposal for a digital currency? The commentariat seems unable to decide if it’s a giant money-laundering cum tax-dodging scam or redundant on the grounds of necessity.
You might want to look at it from Mark Zuckerberg’s point of view. The digital revolution has collapsed the cost of storing, transmitting and verifying data. So we ought to be in a new golden age of money management: instantly and costlessly sending money around the world. Er … not quite. Somehow your bank wants you to spend more time with it than you would like, preferably bringing multiple forms of ID, whenever you have a new way of using your money.
In principle, his proposal looks simple:
- a digital unit of measurement called the Libra (think of air miles or Flybuys points);
- convertible at a fixed value into a basket of ‘real’ currencies (each unit would be backed at full value by government and other securities, denominated in dollar, euro, yen etc, held by a trustee); and
- transferable via an app on your phone to your mum, your best friend or the person selling beer.
Security would be assured (fingers crossed here – remember hackers stole $81 million from the Bangladesh central bank a few years ago) by new-fangled blockchain technology; digital status reduces transaction costs to near-nothingness; and Facebook accounts become even more valuable as a source of your digital identity and reputation (so pretty good for Mark Zuckerberg too).
Some critics say that you can do all this already with the existing banking system. And they are right up to a point, Lord Copper. But only half the world’s population is thought to have an active bank account and the cost of international money transfer remains shamefully high, particularly for the poorest (around 7% is taken from the $500 billion of annual migrant remittances, according to the World Bank) It’s not the most impressive payback from the digital revolution.
Meanwhile, Facebook has generated nearly 2.5 billion active users in just over a decade. You can see the attraction of a free international bank account denominated in a basket of international hard currencies and linked to your Facebook account. But it’s natural for regulators to see innovation as the fruit of their considered decision-making, and to be correspondingly blind to the scale of suppressed opportunity.
Ahh, say the critics. It’s a dodge then: making money by getting round the anti-money laundering regulations, the banking rules designed to ensure financial stability or tax laws. Each needs to be considered:
- As your own experience queuing up to verify your identity might suggest, post 9-11 anti-money laundering rules have undoubtedly increased banking costs for legitimate users. The extent to which organised crime or terrorism have been hampered is less obvious, and it’s not at all clear that the benefits outweigh the costs. Challenge is to be welcomed. It’s also worth trying to balance the cost of stopping innovation against the theoretical possibility of harm.
- With regard to financial stability, Libra is a store of value. It’s not a fractional-reserve bank, lending out deposits for profit (and running the risks of bad debts, capital erosion and bank runs). Each unit of Libra is supposed to be backed with government bonds and like securities. So financial stability risk is more akin to that of a money market or bond fund.
- The jury is out on whether new technology makes tax evasion easier or its detection. But balance that against the plight of people in countries without good or representative governance, where the banking and monetary system serves as an instrument of state confiscation (Zimbabwe has historically been a good example). Libra could literally be a life saver for someone fleeing a place like Syria.
Perhaps the biggest uncertainty about Libra is the role of government(s). It’s not clear who must approve what (or not) for the project to go ahead. Given the need to convert Libra to ‘real’ currencies through the international banking system, some state approval is almost certainly required. Given the leading role of the US dollar and the need for US dollar clearing, it seems unlikely that the project could get off the ground without the acquiescence of the US government. An interesting thought experiment is to ask whether a country like say Switzerland could host Libra against the hostility of the rest of the world’s political actors (for example, permitting Libra to be converted to Swiss franc balances)?
The willingness of governments to tolerate Libra is of the essence, not least because it represents a challenge to them. You have to believe that the proposal is channeling Zuckerberg when it says “We believe that people will increasingly trust decentralized forms of governance”.
If the project – or something like it – gains traction, it has significant potential. First, to challenge, and perhaps even replace, the current global payments system. Secondly, to accelerate change in the current global banking model. Thirdly, to increase the range of instruments we think of as useful in storing value and exchange. But the most far reaching could be in providing opportunities for individuals around the world to protect the value of their savings, changing the balance of power between individuals and the state, and changing the balance of power between states with free and states with restrictive economic policies.
Well – no-one ever accused Mark Zuckerberg of thinking small. It remains to be seen if the American government sees his proposal as an irritation to be stamped on, an opportunity to extend Uncle Sam’s reach, or a chance to let lose a little more freedom – or even anarchy – round the globe and hope it works for the best.