— Woody Allen
Recently, I’ve had many conversations regarding the pending launch of the Facebook-backed cryptocurrency consortium Libra. The reactions have ranged from “this will change the world” to “this is the beginning of the end.” But when you think about it, these statements differ only in how they view the prospect. In both cases, just as in the quote above, the end result is assumed.
Based on the track record of Facebook and other internet companies, success here is a pretty good bet. A handful of companies have indeed changed the world and could keep doing so. Certainly, that is what Facebook et al. expect, or they would not have launched it. But if they do succeed, it raises real concerns, as highlighted by Facebook cofounder Chris Hughes in a recent Financial Times op-ed.
Hughes points out that Libra could erode central bank controls over monetary policy, especially in emerging markets, transferring economic control to private entities. He goes on to outline a number of other consequences, but this is the main one: private entities could have significant power over what is now a core governmental responsibility and would inevitably use that power in their own interests. In other words, what was good for Facebook would be presumed to be good for the country.
From a systemic perspective, I understand Hughes's points. I think he raises some real issues, especially with respect to emerging market central banks—but not only to them. If Libra really took off, it would also erode the Fed’s ability to run monetary policy here. I certainly see his point about the surprising power of network effects and how Facebook/Libra might well be able to change things faster and more completely than anyone expects. There is the real potential for a problem here.
That said, I am not (yet) that concerned. Libra is new—but maybe not as new as all that. As a way to avoid monetary policy, at least one major emerging market (India) has used gold for this purpose for centuries. I expect others do as well, although probably to a lesser extent. So, Libra, while a new thing, is not entirely a new thing.
Second, in a similar vein, there are existing money transfer networks that do the same thing now, both informal. You may remember the press about this topic a couple of years ago. The concern was about those networks—based in emerging markets—being used for terrorist financing but also about existing networks like Visa, Western Union, and PayPal. Libra would be more efficient and cheaper but not necessarily enough to break the system. This is new, in that it uses cryptotechnology, but the functionality is not all that new. Unlike Amazon or Facebook, which were first movers, there are already existing players.
The other major thing that might prevent this kind of systemic change would be the system itself. Does the Fed, for example, really want U.S. citizens to be able to transfer assets out of the U.S. financial system and avoid regulation and taxation? Does the IRS? If this were to happen, it would not just be in emerging markets, and the system itself would act to prohibit it. Remember, in the 1930s, the U.S. prohibited private ownership of gold once it went off the gold standard, for exactly that reason. It could happen again. When you add in the real possibility these networks would be used for crime and terrorism financing, governments (including ours) would be crazy to let this happen. Governments don’t care about personal information or buying books, but they care very much about money and taxes. For the first time, the internet companies would be going directly against a core governmental interest.
Which brings us to the biggest picture: to date, the internet companies have essentially had a free pass on taxation and regulation. That is changing fast (see the Warren campaign), and this technology would only accelerate that change. I suspect the next decade for those companies is going to be a lot tougher than the past two. To the extent that the Libra plan assumes the same kind of free hand, that might turn out to be a critical flaw.
To sum up, Libra might succeed. But if it does, it could become a real threat to significant core government responsibilities, to the detriment of self-governance. It could happen. But governments are increasingly aware of that and are in a position to respond to limit that risk out of their own self-interests, which should impede or at least significantly limit Libra or any similar technologies. Change is coming, but it will be slower and more painful than the rise of the social networks.