Starting in 2020, Facebook wants to offer its customers a global high-tech currency and infrastructure. The US IT giant says that this will provide many people around the world with easy and cost-effective access to the monetary and financial system. The new blockchain-based money is called “Libra.”
Technically, it is something akin to a crypto-money-banknote covered by a basket of official fiat currencies (such as US dollars, euros, and the like). The heart of the Libra project is the “Libra Association” (LA). The non-governmental association, based in Geneva, Switzerland, is supported by founding members such as eBay, Facebook, Mastercard, PayPal, Spotify, Uber, Visa, as well as other renowned firms, and will be responsible for the operation and further development of Libra.
Libra will be created by participants depositing fiat currencies such as US dollars or euros with the LA, and the LA will then grant the depositors a corresponding Libra amount in a digital wallet, which can be used for payments via the Internet, smartphone, credit card or WhatsApp and messengers, i.e., Facebook’s chat services. The chances of success seem to be pretty good for the Libra: Electronic payment is a world-wide mega-trend. People seem to have become increasingly open to new technological ways of making payments. And if money can be sent to and fro via social media, many potential customers will presumably like it very much.
Traditional banks have good reasons to worry. The Libra is about to siphon transactions out of bank accounts and put them into the LA’s hands. Not banks, but the LA will collect the fees and will receive precious data on who pays what, when, and where. The banks will be left even more in the cold should customers begin to use the Libra for savings purposes as well. Because then they would also lose the time and savings deposits with which they refinance their balance sheets at low costs. Or think of the credit business: The LA may at some point also provide its customers with short-term consumer loans.
In any case, from a customers’ perspective it is a good thing if and when the competitive pressure in the banking business gains momentum; as is well known, competition stimulates the search for better products and lower prices, which benefits the customers. The now heightened competition from the fin-tech industry is undoubtedly quite a challenge for many banks. Not least because for decades state regulation has kept unwelcome outside competition from their backs, thereby, however, weakening their innovative strength. But our sympathies have to be first and foremost with the people demanding banking and financial services, not with the banks delivering them.
The critical question, however, is this: Is the Libra really good — or sound — money? Unfortunately, this question cannot be answered in the affirmative. The reason is this: The quality of the Libra depends on the quality of the underlying fiat currencies — and fiat currencies do not make for good money, as should be well known by now. Fiat currencies are inflationary; they enrich some at the expense of many others. The issuance of fiat currencies causes distortions in the credit markets, which provokes speculative bubbles and triggers booms and busts, and last but not least, fiat currencies lead the economies into over-indebtedness.
Against this backdrop, it becomes evident that the Libra will suffer from all the economic and ethical deficiencies that come with its underlying fiat currencies. For instance, the Libra will be inflationary money to the extent that the US dollar, the euro, and all the other underlying fiat currencies are subject to inflationary measures by central banks, resulting in the Libra losing its purchasing power in step with the fiat currencies. In extreme cases, if the official currencies were to go under, the Libra would follow suit. The Libra is, therefore, not a real alternative to official fiat currencies, but rather a more straightforward and more cost-efficient way to use them.
The LA is supposed to keep the fiat monies paid-in by customers as a “reserve.” This should make sure that the Libra can, at any given point in time, be exchanged back into national fiat currencies at its equivalent value. To this end, the LA wants to hold the reserve in fiat currencies-denominated bank deposits as well as in high-quality interest-bearing securities. To the extent that the LA decides to keep debt securities, the result would be a kind of “fractional reserve.” In this case the Libra would even carry a payment default risk — which would strike if and when the LA could not, due to market stress, for example, exchange its bond holdings into fiat currencies at face value.
With the investment of the reserve, the LA hopes to earn interest income. But this is likely to be difficult. After all, central banks have slashed interest rates to extremely low levels, and there is no sign of a move away from this kind of monetary policy. Should monetary authorities impose negative interest rates on bank deposits, this would affect Libra holders directly: Because if the LA is forced to pay for its bank deposits, the owners of the Libra will have to pay the bill. So anyone who thinks that the Libra might offer an escape from the bad fiat currencies is mistaken. The Libra is a fiat money clone; just like fiat currencies the Libra is fake money.
Unfortunately, the Libra project does not appear to be driven by the desire to provide the people in this world with better money. The fact that the Libra will be run on a private (“permissioned”) blockchain does not change anything. The Libra is just the upshot of an entrepreneurial attempt to profit from the global market for payment services (and later perhaps also from the credit markets), and, of course, to collect as much precious transaction data as possible. If Facebook and the others wanted to offer the world a better, actual good money, the choice is obvious: It would be a 100 percent gold-backed Libra. But who knows: Maybe this will be the next step, initiated by Facebook, Amazon, or any other company because there sure is a vast market for sound money out there.
Dr. Thorsten Polleit, Chief Economist of Degussa and macro-economic advisor to the P&R REAL VALUE fund. He is Honorary Professor at the University of Bayreuth.
The above article is provided courtizy of Mises.Org.
At this stage of the game, we are not fans of Libra. It may provide a cheaper way to transact and buy things on the web, but we have to ask, “at what cost?” The true innovation of cryptocurrencies is that they are not controlled by a central authority. This is good thing as cryptos that stick with this principal cannot be corrupted or inflated away.
Since Libra will be backed by fiat currencies, the pruching power ofd Libra will fall as central banks around the world use the only tool they have… the printing press (paper or electonic).
In addition, one has to ask will the details of your transaction be private. Given Facebooks track record, one has to suspect that they will find out who buys what from whom and for how much. They will aggrigate this data and sell it to retailers and manufactures so they can design custom advertisements just for you.
This possibility goes much further than what Facebook does now. Facebook collectes data on what you do online, what you purchase, who your friends and family memebrs are, what they do and what they purchase and from whome. But they can only do this now if you are a facebook user or if they can get a cookie on your browser.
With Libra, they will find a way to track what you do, even if you never have anything to do with facebook.
They have another issue, as well, and that is technology. We read that Libra will be run on a block chain. Let’s say compromises are made and Libra is fully decentralized and made secure so that third parties cannot spy on what you are doing. Libra will have to let anyone place a node on the network. Those people will have to be compensated in some way, otherwise there will not be an inventive to hose a node. But block chain slows down everytime a node is added to the network as there is someone else who has to confirm the ledger.
Innovations in consensus and cryptgraphy are coming fast and furious. It does not seem to us that Facebook and its consortium are even close to keeping up.
There is one last item that makes us suspicious of Libra. There are already other stable value coins out there that Facebook could use right now. Some examples are BITUSF from BitShares, which is pegged to the USD. Other coins that are tide to the USD are Tether, wich is the currently the most populat stabel value coin. TrueUSD, MakerDAO (DAI) USD Coin, Basis, Carbon and Havven are other stable value coins slowly gaining some followers. So why is the consortium of current players not persuing to join one of these alternativers. What features do they lack that the Facebook consortium wants? These are and may other questions need to be asked. The answers may not be what you want, but they are probably what you should expect.
