Libra could be the start of an alternative financial system, beyond the reach of government—and a boon to prosperity.
FROM WALL STREET JOURNAL | JULY 26, 2019
The ambition is grand: “Reinvent money. Transform the global economy. So people everywhere can live better lives.” So said Facebook last month in unveiling Libra, its new digital payment service. The company heralded it as “a simple global currency and financial infrastructure that empowers billions of people.” If fully launched, Libra would allow Facebook users to buy and sell goods and services around the world and across borders using a digital cryptocurrency governed by a collective in Switzerland. It would be linked to but distinct from the dollar, the euro and other currencies and maintained not by a government but by the behemoth Silicon Valley tech company.
The reaction from governments around the world has been swift and negative. “My determination to make sure that Facebook’s…Libra project does not become a sovereign currency that could compete with the currency of states is…absolute,” declared the French finance minister. “Because I will never accept that corporations could become private states.” In the U.S., both the Senate and House held hearings and grilled Facebook executives. For his part, President Trump tweeted his objections to cryptocurrencies, “whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity.”
It’s worth emphasizing that these are reactions to an initiative that has been announced but not implemented. The logic seems to be that, because Libra is new, untested and potentially disruptive, it should be banned or highly regulated lest it do harm. Distrust of Facebook and the other tech titans is also a factor, of course.
Is the prospect of a wider role for Libra and other cryptocurrencies really so dark? True, these new technologies, if fully developed, could upend the monopoly of state-licensed banks, state-issued currencies and the tax and regulatory framework that undergirds them. They could place vast amounts of digital commerce beyond the reach of governments, which in turn could erode the ability of states to collect taxes and provide for the common good.
But that’s not the end of the story. Like earlier technologies that seemed threatening at first, cryptocurrencies could be a great boon. Their wider adoption could create a parallel financial infrastructure that might unlock untapped global reserves, enabling peer-to-peer transactions without the friction of banks, borders and exchange rates. Today’s layers of payment systems and banks all add time and costs. With Libra (and other cryptocurrencies), transactions become more seamless. Making myriad activities cheaper, faster and easier could facilitate economic activity in countries like India, where hundreds of millions of people remain outside the banking system. What governments lose in tax revenue on transactions that they can’t track might be regained from greater economic activity and prosperity.
Remember that bitcoin, the progenitor of Libra and other cryptocurrencies, is only a decade old. Launched in 2009, bitcoin is based on what was then a novel software protocol known as the blockchain, which allows for each transaction to be authenticated and protected.
Bitcoin is costly to mint and cumbersome to use, however, and so far lacks a killer app to make possible its wide-scale adoption. Hence the proliferation of myriad “alt-coins” such as Ethereum, whose champions tout their advantages over bitcoin.
The result of this early competition was a speculative bubble that crested at the end of 2017, with the price of an individual bitcoin rising to almost $20,000, along with equally vertiginous gains for other cryptocurrencies. Their total global market capitalization grew to nearly $800 billion. Today, it hovers below $300 billion.
Until now, the market for cryptocurrencies has been dominated by a few large investors. Libra has the potential to be a step change. Two of the limitations of crypto have been the difficulty of using it and its unsettling volatility. By embedding Libra in a social network platform with more than 2 billion users globally and attaching the value of the coins to a basket of existing currencies, Facebook could solve that challenge.
Today, if an American wants to hire a team of software engineers in Bangalore, there are multiple ways to do it, using apps that connect them and payment services to provide for funds. But behind such transactions is an architecture of payments, exchange rates, licensed and regulated banks, and government rules, all of which add costs and friction.
Now imagine a world where that transaction exists entirely on a social network platform. You could hire someone to do data entry in India or Nigeria or Indonesia who doesn’t have a bank account but does have a social media account. You could be on your computer in Austin, see an ad on Facebook for a perfume being sold in a Paris boutique and buy it using your Libra account, with no link to any bank account and no one collecting sales tax unless you declare it.
That is far different from what exists today, even with payment services such as PayPal. Those services are almost all linked to banks, which in turn are regulated by governments. Libra can cut out that middleman and also make a range of transactions that much harder for governments to track and tax.
In the long run, Libra and the legacy cryptocurrencies could potentially replace not just existing payment systems, not just traditional banking, but the sovereign power of states over currency. That is what politicians and regulators suspect and fear. For its part, Facebook says that is has no intention to overturn the current system, and its Libra consortium currently includes major payments players such as Visa and PayPal. The company is attempting to allay the concerns of both governments and established banks.
But it’s fair to wonder where it all might go. One of the hallmarks of modern banks is the ability to issue credit; one of the capstones of modern state power is the ability to issue currency and to license and regulate banks. Libra at present isn’t a form of credit, and it is tied to a basket of currencies. You might be able to use Libra to buy a Xiaomi electric scooter or cellphone directly from a Chinese seller, but you won’t be able to pay your taxes with it.
Why then are governments in such a tizzy? Because they understand that once in place, there may be no way to prevent a sophisticated, widely adopted cryptocurrency system from evolving into something much more far-reaching.
Would that be a bad thing?
States have been the foundation of economic prosperity for the past century. The creation of regulations governing the marketplace, the launch of a global monetary system after World War II, the taming of banks and the establishment of relatively stable currencies in affluent countries—all were part of the mix.
No one would argue, however, that this system has solved all problems or that most societies are at peak prosperity. Will states and banks in their current form, or some new financial technology, lead to the next great wave of economic improvement?
Libra may be a failure, or it may face so much opposition that it never launches. The fierce response to it is certainly a reflection of Facebook’s wider problems and the troubling history of cryptocurrencies. But it is also the reaction of a complacent establishment to a radical and potentially revolutionary technology. Perhaps it is time to shift our attention from the admitted risks of cryptocurrencies to the astonishing opportunities they could create.