Saturday 14/12/2019

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The limits of Facebook's Libra

Chief Economist

"Reinvent money. Transform the global economy. So people everywhere can live better lives." The mission of Facebook’s new coin is a working example of golden circle marketing. However, there are clear economic limits to what it can achieve. It will not end up replacing national currencies.

Hear, hear! Libra will be a stable global cryptocurrency, based on a basket of real financial assets and supported by decentralized blockchain technology. It will provide billions of people cheaper access to basic financial service. For this is what The Libra Association, an impressive consortium of tech companies, preaches. And many believe: “Libra is the killer currency of the 21st century. It will stop irresponsible money printing central banks blowing economic bubbles. Down with government tyranny!”.

But how revolutionary is Libra? I believe this project is primarily an extension of the existing Facebook commerce: a business model that builds on a gigantic network on which advertisers promote their merchandise for a fee. The commercial process is simply stretched further. Indeed, at the outset, the tech-consortium will pay traders to offer discounts.

New money?

Moreover, it does not fully meet the three necessary characteristics of a modern, well-functioning currency.

First, it has to be a generally accepted payment method. The Association has the scale, knowhow and means to win over plenty of users. At least, if they take privacy protection seriously (which is still a big issue). In that sense, it has a good chance of lowering the cost of cross-border payments. Second, it has to be a stable unit of account. Yes, the intrinsic value of the currency basket backbone may be stable, but so far this is a value proposition without any explicit guarantee. The foreign-exchange risk also remains. Suppose that a Belgian citizen exchanged €100 into 100 Libra (assuming a 1 to 1 exchange rate). And imagine that exchange rate movements meant that 100 Libra were now worth €90. Unless all goods became priced in Libra (very unlikely), that person would be worse off. Third, money should be a way to build savings. In Libra’s White Paper there’s not a word on earning interests. It looks like Facebook & Friends will put profits into their own pockets.

Conclusion: Libra is a digital payment method. But if you buy Libra, you acquire in fact a money-market fund subject to foreign exchange risk. Besides, it is no cryptocurrency: the coin is neither decentralized nor borderless.

Financial stability

The stability of the value of Libra can be questioned too. The least developed regions may abandon weak currencies and local financial systems might be destabilized. And how about bank lending and money creation? Are we really giving control to giant private companies like Facebook? The Libra Fan Club is in favor. Though many forget what caused the Great Recession of 2008: yes, shadow banking. Another important argument to consider is that history has shown us that a stable monetary system calls for a lender of last resort. Only a government can take on this leading role.

Of course, all this doesn't change the fact that we are going to shift to electronic payments. Think about Sweden’s progress towards a cash-free society: in 2018 only 10% of payments were in cash. There’s no stopping the rise of e-money. You might argue that the advance of crypto-coins is also unstoppable. Good point. But, it’s far more likely that we’ll end up with a digital central bank coin instead of the Libra or a private crypto coin (like the bitcoin). The government quietly observes how technology evolves, but in the end, through legislation and regulation, it will always succeed in controlling the rules of the game to keep the monopoly on the issuance of money. A positive aspect of the Libra is that it puts pressure on central banks to create their own digital currency. Indeed, research is already in full swing.

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