Move fast and break things — our mantra in Facebook’s early days — was an appropriate slogan for a college social network. It’s not appropriate for the global monetary system.
This week, Facebook and 28 other partners announced a plan for a new digital currency called Libra that could be used to send money around the world. If things go according to plan, some of the world’s largest corporations will oversee this new currency, through an independent association based in Switzerland that has a membership fee of $10m.
If even modestly successful, Libra would hand over much of the control of monetary policy from central banks to these private companies, which also include Visa, Uber, and Vodafone. If global regulators don’t act now, it could very soon be too late.
I’ve been a cryptocurrency sceptic, believing that the instability and regulatory challenges are just too sizeable. But Libra is different because it is a “stablecoin”, with a value pegged to a basket of currencies and other assets. Anyone, whether they use Facebook or not, can buy in with a local currency and cash back out at any time.
Vital decisions about Libra’s administration, security and underlying assets will be made by the Switzerland-based Libra Association — essentially Facebook and its largely corporate partners. To avoid complaints that setting up this coin would give a single company dangerous powers, Facebook has smartly limited itself to a single vote on the commission.
That doesn’t make the prospect of Libra’s success any less frightening. This currency would insert a powerful new corporate layer of monetary control between central banks and individuals. Inevitably, these companies will put their private interests — profits and influence — ahead of public ones.
Let us imagine that Libra works as planned. Hundreds of millions of people around the world will be able to send money across borders as easily as they send a text message. The Libra Association’s goals specifically say that ability will encourage “decentralised forms of governance”. In other words, Libra will disrupt and weaken nation states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations.
The Libra Association promises to choose stable currencies and assets unlikely to suffer inflationary crises. The sponsors are right that a liquid, stable currency would be attractive to many in emerging markets. So attractive, in fact, that if enough people trade out of their local currencies, they could threaten the ability of emerging market governments to control their monetary supply, the local means of exchange, and, in some cases, their ability to impose capital controls.
Decentralisation is a popular Silicon Valley buzzword but it has decidedly failed in monetary policy. Centuries of financial instability led to the gradual emergence of today’s network of central banks. After many mistakes, we have learnt that we want a central bank to act to increase or decrease the monetary supply in moments of contraction or expansion. This power to help keep an economy stable is something we should be reinforcing and improving, not endeavouring to demolish.
What Libra backers are calling “decentralisation” is in truth a shift of power from developing world central banks toward multinational corporations and the US Federal Reserve and the European Central Bank.
Developed world central banks will understandably prioritise their own economies. Meanwhile, the fewer rupees or lira a country’s citizens hold, the less power the national central bank has to set monetary policy, making it harder to stimulate the local economy in times of economic stress.
In the recent Greek crisis we saw first-hand what happens when emerging markets prematurely give up local control of their currency. As a member of the eurozone, Greece lacked control over its monetary policy and had no way to appropriately devalue its local currency after the financial crisis. A decade later the Greek economy is still 25 per cent smaller and its unemployment rate is the highest in the eurozone. Libra could render other central banks equally powerless in the face of recession.
The Libra Association could also wield significant power over the workings of global finance. Unless regulators jump in quickly, these for-profit companies will set the standards for identity verification, at least in the short run, as well as defining the rules and enforcement around the privacy of transactions and what to do in case of theft.
Facebook and its partners will decide which banks, payment processors and distribution agents to work with, making or breaking companies in some markets overnight. This will entrench existing players rather than creating a truly decentralised system.
Many will say these fears are overblown: it’s not clear if Libra will even get off the ground. But if we’ve learnt anything about Facebook, it’s that we should not underestimate its power to transform how people interact. The company’s decision to offer live broadcasting made it possible for teenagers to stream bullying, terrorists to livecast an execution and a gunman a mass shooting. It has similarly transformed mobile messaging and news and journalism faster than many imagined.
Governments around the world cannot afford to adopt a wait-and-see approach. The G7 has already set up a working group to review the project in conjunction with the IMF and central banks. Regulators in emerging markets should slow down Facebook’s push by preventing local banks and payment processing networks from accepting Libra. If a Libra user can’t move the coin into a local bank account or cash it in for local currency, it’s unlikely to take widespread hold. This need not be a permanent ban. It simply buys time for all of the implications to be thought through.
At the same time, US and Swiss regulators have a central role, for they are likely to be the ones setting standards for know-your-customer, anti-money laundering and financial stability requirements. Watchdogs have underestimated Facebook’s power in the past, allowing it to swallow potential rivals Instagram and WhatsApp. This time the scrutiny by the appropriate government regulators should be nothing short of exhaustive.
The writer, a co-founder of Facebook, is co-chairman of the Economic Security Project