It’s only so often that a ‘shift in the force’ happens in the financial world. Think Nixon taking the U.S. off of the gold standard. Or Bitcoin ushering in the era of cryptocurrency. It allowed people to store and trade wealth cryptographically, beyond the reach of the banking system and largely the government.
Last week we saw another of those events with Facebook and an association of companies announcing Libra. A cryptocurrency that could possibly become a major part of the future of money. It’s set to launch next year.
Update July 2, 2019
On July 2, U.S. Congress wrote to Mark Zuckerberg, Sheryl Sandberg, and the Chief Executive Officer of Calibra, David Marcus, requesting a halt to the development of Libra.
Update July 17, 2019
The U.S. Senate Banking Committee held hearings yesterday to review the new cryptocurrency. The decision as to whether or not to approve the is still a long way off. However, the committee did appear to lean towards the need for the U.S. to lead in the crypto marketplace under a regulated approach vs allowing foreign entities to gain a foothold with Western consumers and thus have little or no say in its regulation.
To say that this has spooked regulators and existing financial players would be to understate things. Bloomberg might have nailed it best when they called Libra a “grandiose ambition of establishing an alternative global financial system.” Wired echoed that, saying it has “the potential to remake global currency and financial systems.”
It’s actually more of a Paypal-like Fiat currency than a cryptocurrency. It’s not really blockchain, decentralized or beyond the control of government. Actually anything but. The Calibra Association (Libra’s governing body) has pledged open books with law enforcement and governments specifically to show they have nothing to hide. They also want to ensure it does not become a haven for those seeking to launder money or to use it for illicit purposes.
Libra’s value is tied to a basket of world currencies to purportedly ‘ensure’ a high degree of stability. And because of that stability is expected to be coveted in countries with little or no stability today. Central banks are rightly concerned that just like the U.S. dollar, it may become the default shadow currency for much of the 3rd world and emerging countries.
Before we get to why, let’s look at some of the ingenious ways Mark Zuckerburg and company intend to change the global financial scene with just a money remittance license issued out of Switzerland.
The Money is in the Marketing
Whether this succeeds, is ultimately overshadowed by a competing system, or is hamstrung by the world’s western central bankers (who are clearly worried about losing control), you’ve got to give Zuckerberg and Co a A++ for boldness. When you’re up to your neck in antitrust and associated investigations, why not swing for the fences and try to reinvent the global banking system?
It seems that in marketing, nothing seems to work quite so well as altruism and playing the ethics card. That’s perhaps why Facebook has been so quick to point out that 1.7 Billion people around the world do not have a bank account. As they’d like you to see it, they see this instability as the root of the world’s woes. So it is one of the stated problems Libra sets out to rectify (in addition no doubt to Facebook’s credibility problem today).
To be fair, being unbanked is truly a fundamental problem for the stability of close to 25% of the world’s population and the countries they belong to. A lack of financial stability is a key reason people and countries remain mired in relative poverty at the low end of the food chain.
Think of it. People who live in an unbanked cash world typically have no credit and thus nothing to fall back on in an emergency. They are also subject to routine robbery, both at home and on pay day as – well, they are paid in cash. So the availability of having one’s money tied to something with an audit trail that only they can direct is highly appealing. And without the need to qualify for a bank account, it has the ability to change the financial lives of much of the 3rd and emerging world, likely adding to global stability. Perhaps this is why the country today with the highest adoption of cryptocurrency is… wait for it – Somalia.
Why Libra is different and expected to be a stable currency
Firstly, as it’s White Paper indicates, Libra is backed by real money. In other words, you deposit a dollar in a Libra wallet and you get a dollars worth of the new cryptocurrency. Crypto that, at least in theory, should hold its value consistent with other world currencies. After all, what they pledge to do with the money is use it to create a one-to-one reserve, not a fractional reserve.
The plan is to take the consumer’s money and invest it in a basket of short term government debt based on major global currencies in return for their cryptocurrency and the interest that money would normally make. The interest they make goes to pay expenses and dividends for the initial stakeholders. They would like you to think of it more like a Global Treasury Bill fund that is stable but makes no interest, rather than a penny stock – which is/was more like Bitcoin, as it is really not backed by anything tangible.
According to the Calibra Association, that ability, of turning real money into digital bits and back again, will enable all sorts of new abilities. Abilities that don’t exist today in much of the world that have the potential to change the lives of likely billions of people around the world. Why? Because Libra will have a low cost financial ecosystem, much like apps in the App Store.
If Libra flourishes and an ecosystem of financial applications and services grow around it, it brings with it the possibility to dramatically propel the development of a large part of emerging consumers and economies around the globe.
Today the lack of access to modern financial products for billions of people who live in developing nations with unstable currencies holds those people and entire nations back. In much of the world, the lack of something as basic as a credit card to purchase physical goods on Amazon, or online services to compete with the rest of the world, tethers that population to yesteryear.
In essence, this lack of accessibility effectively keeps those without, stuck while the rest of the world surges forward. That could change with this new cryptocurrency. It represents the ability to take cash, they literally may have under the mattress, and convert it to spendable crypto with virtually no fees – all without the need to qualify for a bank account or credit card.
In effect, the availability of having money tied to something that only you can direct without that need to qualify for a bank account has the potential to change the fundamental aspects of the poor around the world. In practice, real time payments have shown to break down inequality.
Do we really want corporate control over the world’s money supply?
The cryptocurrency is not controlled by Facebook however (even though they will likely be doing the lion’s share of development). The parent association named Calibra is expected, once it launches in 2020, to be controlled by around 100 major players so as no one company has the ability to really control it’s future.
But Facebook Inc does have 2.7 Billion users globally. It is larger than any country in the world. So the question we really need to be asking ourselves is “Is it in societies best interest to allow corporate control over a large part of the money supply?”
Facebook hardly has a stellar reputation. They have a history of acting first and asking for forgiveness later. This approach has proven questionable in the social media space so it’s only fair to look upon the initiative with prudence. After all, critics might argue that Facebook’s mantra to date seems to have been something to the tune of “In Surveillance Capitalism we trust.” So irrespective of pledges to keep Facebook and Calibra separate, with this type of history, do we really want a fox guarding the hen house?
And given that Visa and Mastercard are also founding members of the association, naysayers might argue this is more about the enslavement of the 3rd world rather than it’s liberation. One can only assume that by signing up through Facebook’s new platform people are effectively also going to soon be able to open a type of pay as you go credit card funded via Libra.
The Dystopian Concerns
None of this even touches on potential for a dystopian social credit type situation to emerge down the road. As this Bitcoin meme making the rounds points out, the potential to attempt to curb one’s behavior based on access to one’s own money is not too far of a stretch of the imagination.
It’s a rough time to be a regulator and/or central banker
Stuck in the middle are Western government representatives. They see both the advantages to such an alternative payment system and the potential pitfalls.
Despite typical western hemisphere arrogance, the reality is that alternative payment systems around the world have leapt ahead of the way money moves in much of Europe and America. From M-Pesa in Africa, to Alipay and We Chat pay in China, alternative payment systems are greasing the wheels of emerging economies at costs of roughly 0.1% on average vs rates that are dramatically higher in the West. This friction has a cost on both consumers and economies. Central bankers and finance ministers recognize this and don’t want to be left behind.
Accordingly, central bankers are promising ‘strenuous oversight.’ But the reality of any proactive oversight in non-authoritarian nation states is unlikely. After all, it’s taken years for governments around the world to figure out even the basics of how today’s social media surveillance economy makes money. Not to mention the ramifications of bad actors using it to manipulate people and elections. And as with social media, we simply cannot foresee the long term effects. Once this horse is out of the barn there is no going back.
Then there is the very real possibility of Libra working so well that it acts with gravitational force to pull liquidity out of the system, effectively turning it in to a competitor to central banks when they need to raise ever more money through bond offerings.
An existential threat to incumbent financial services players
All of that said, Libra also represents an existential threat to many existing incumbents in the financial industry. Consider just the payday loans market and the international money transfer industry as examples. Both charge obscene fees, basically for the privilege of access to one’s own money.
Foreign exchange, an industry in which the banking industry is deeply involved, takes 7% on average. Currency kiosks in major airports around the world routinely charge as much as 15% to change currency from one country to another. Payday lenders, which charge as much as 400% a year, are certain to be disintermediated.
All of these income streams are at risk when consumers can do a peer to peer transaction through a platform as ubiquitous as Facebook – virtually eliminating the need for the fees.
Governments around the world will be watching this closely. And they may yet try to hamstring it’s rollout in an attempt to maintain the status quo. Cryptocurrency for example is banned in India and China whose central governments feel it has the potential to undermine taxation, social control and stability.
Yet the benefits are too appealing to take a pass on. And once this type of a payments system entrenches itself, there is not going back.
Though there is much to play out and yet to be seen, one thing is certain. We’re entering a crux point in our financial history. In a sense the West cannot afford to do nothing while the rest of the world forges on. Without central economic monetary control however, the more decentralized finance becomes the more risk we run of losing control of it in the long run.