“Move fast and break things”, Facebook’s motto until 2014, was the mantra of the “disruptive innovation” era. Five years on, the naivety of this starry-eyed approach has become painfully obvious. Disruption, it turns out, causes damage. So far, the list of things Facebook has broken in its haste includes journalism, personal privacy, Myanmar, and democracy; will the global financial system be next?
Facebook launched its new digital currency Libra and digital wallet system Calibre in June with the question: “What if everyone was invited to the global economy, with access to the same financial opportunities?” It seems, on the face of it, like an obviously wonderful plan: it’s hard to argue with the idea that everyone should have access to the same opportunities.
There’s a lot to like here. Cryptocurrencies really do have the potential to dramatically expand financial access for everyone, particularly in parts of the world where government interference in money systems is heavy-handed and unproductive. The costs of transferring money across borders are absurdly high, and it’s the world’s poorest people who pay the highest costs. Making cross-border transfers cheaper and easier will undoubtedly improve lives.
The major barriers to greater adoption of digital currencies so far have been not only their volatility (looking at you, Bitcoin), but also the fact that they are complex and difficult to understand and use, locking out precisely the people who could benefit most. Between Facebook’s global reach and its undoubted skill at making products people want to use, they have an excellent shot at actually making Libra fly.
It may not be as easy as they think, though. People’s behaviour around money is complex and not always easy to understand, particularly when you are working across cultures. In regions where many people don’t have formal bank accounts there are already very successful local mobile money transfer systems, East Africa’s Mpesa being one of the most well-known examples. These services are well adapted to their local markets, compliant with local regulations and well supported. Can a single digital currency system possibly deliver a service that will work as well in Dhaka, Mombasa, or Lima as it does in San Francisco?
The problem becomes particularly acute at the point where digital currency must be swapped for real currency, which most people will want to do. The scope for money laundering and other criminal activity is huge, and Libra’s proponents say they have been in talks with “local convenience stores and money exchanges” to ensure anti-laundering checks are carried out – but it’s frankly hard to believe this is possible on a global scale. Calibra’s VP of produce Kevin Weil recently asked TechCrunch to imagine a situation “where if you want to cash in or cash out, you’ll pop up a map that highlights physical locations around that allow you to do it. You select one that’s nearby, you select an amount, and you get a QR code that you can take to them and complete the transaction.” Weil’s faith that the entire planet works like California is touching, but misplaced.
Even if Libra can succeed on a global scale, there is another problem: getting around central banks and governments, which are already struggling to control cryptocurrencies. It’s tempting to cheer them on for precisely this reason – government controls aren’t popular anywhere – but there is potential for unleashing a disastrous cascade of unintended consequences.
Libra is a “stablecoin”, backed by a reserve of real currencies and other assets to prevent the kinds of wild price fluctuations that have bedevilled Bitcoin – but this reserve does not amount to the kind of liquidity backstop that a global currency requires. As Columbia University’s Katharina Pistor has pointed out: “The idea of a private, frictionless payment system with 2.6 billion active users may sound attractive. But as every banker and monetary policymaker knows, payment systems require a level of liquidity backstopping that no private entity can provide.” If there’s ever a run on Libra, will it have to be bailed out by central banks?
In effect, Libra is creating a set of obligations on the entire global financial system – without submitting itself any kind of regulation, control or accountability beyond the figleaf of the Libra Association. No wonder governments and central banks are rushing to pour cold water on the idea.
Then, of course, there is the problem of Facebook itself: The company has become a perfect example of the harms that can be caused by large monopolies answerable to nobody but their shareholders. The concentration of even more power in the hands of Facebook and companies like it serves nobody.
Facebook says, and possibly even believes, that Libra will be “positive for people”. Given their track record so far, the rest of us can be forgiven for taking this serene self-assurance with a very large dose of scepticism. The way things are going, Facebook might even achieve the incredibly unlikely feat of making government look attractive again.
As published on AccountingWeb – July 2019