On June 18, Facebook finally released details of Libra, its long-anticipated cryptocurrency. But the project, as well as having regulators up in arms, is fundamentally misconceived. Absolutely everything Facebook described in its press conference on Libra last Tuesday could have been done on a conventional financial computer network system — and better.
Facebook’s planned payment system had long been spoken of as a cryptocurrency, in the manner of bitcoin. This made no sense: Money transmission has strict regulatory requirements, and bitcoin and its many descendants explicitly aim for the precise opposite of these. Libra’s back-end software is “blockchain” in that some of the transaction processing is distributed. Libra is, however, very bitcoin in its aspirations: the anarcho-capitalist dream of private money without governance or outside regulation. And Libra has certainly demonstrated one of the main characteristics of blockchain projects—grandiose claims and egregious nonsense.
Libra is not a bitcoin-style cryptocurrency gamble; you won’t make a fortune or lose your shirt. The promise for consumers is PayPal but on Facebook. Convenience is king. Users will deal with individual service providers, the first being the Facebook subsidiary Calibra; they deposit conventional currency and get Libra tokens in return. The Libra white paper certainly speaks at length of the future possibilities of a permissionless, decentralized, and independent Libra.
But for the moment, what we have is a fully centralized system of permitted providers for a project dominated by Facebook. At some unspecified future time, Libra hopes to offer services such as “paying bills with the push of a button, buying a cup of coffee with the scan of a code or riding your local public transit without needing to carry cash or a metro pass.” For the world outside the United States, Libra’s fabulous future is literally the present. America’s payment systems are bizarrely underdeveloped; chip-and-pin, the norm in Europe since the mid-2000s, was only broadly introduced in the last couple of years in the United States. Citizens of other developed countries are frequently amazed that Americans don’t routinely use touch-to-pay and that they still use paper checks at all. Libra has no convenience to offer international users, and everything described could—and has—been achieved through conventional methods.
That makes it all the more odd that Libra’s ambitions are international. The front page of Libra.org speaks of 1.7 billion unbanked people globally. “Banking the unbanked” has long been a concern in international development, and the phrase was co-opted by bitcoin advocates around 2013. At no point has any bitcoin advocate put forward a coherent plan—the mere fact of bitcoin would somehow fix the problem. Libra’s plan is an unspecified implication that it can provide lower fees, apparently just by existing. It’s literally the bitcoin claim, with the buzzword changed.
David Marcus, the Facebook executive in charge of the project, told the press last week that the problems of banking the unbanked were technical — that banks were unable to move money fast enough without a blockchain. This is completely backward. Experts know how to move numbers on a computer. The slow part is settlement and compliance: making sure that money transmitters are solvent, honest, and not fronting for drug runners. Banking the unbanked is a slow, one-on-one social process. Libra’s public relations material describes this as if it were entirely a technical problem — and none of it is.
The real motivation for the project seems to be ideological. Marcus was formerly at PayPal, and he understands payments and regulation. But he’s been a bitcoin fan since 2012 and was on the board of the cryptocurrency exchange Coinbase in 2017.
Marcus had been thinking about something like Libra for several years and had discussed the project with Facebook CEO Mark Zuckerberg since January 2018. Zuckerberg was interested in the project and the ideas—“a high-quality medium of exchange for the world, on a blockchain that could scale,” as Marcus described it in a press conference on June 17.
Facebook is under increasingly close attention from governments deeply suspicious of its track record on privacy, election manipulation, and fake information and its repeated defiance of calls to appear before elected representatives. Yet Facebook and its closest partners seem to think that they are large and powerful enough to swing a coup against the concept of government control of money. Libra directly states that its intent is “to shape a regulatory environment” —not to comply with the existing regulatory environment. Regulators will need to bend to Libra.
The Libra token is a foreign exchange derivative, synthesized from a basket of national currencies. Libra wants to operate as a shadow bank, issuing Libra-denominated liabilities that are explicitly intended to function as money. Libra “will create a mirror banking system using your money,” said Carlos Maslatón, the head of treasury at the bitcoin payments provider Xapo, explaining the service in a private WhatsApp chat group.
Libra seems to be particularly targeting countries with lots of Facebook users and unstable currencies—the other meaning of banking the unbanked. There are obvious money-laundering hazards. “Know your customer” (KYC) rules require anyone dealing in currency substitutes to track the sources of funds so as to cut off funding for criminals and terrorists. Libra says it will keep to the highest of KYC standards—but a Libra partner in a bad economy risks compromising the compliance of the whole Libra system, given that its intent is to move money around the world at the speed of cryptocurrencies. Libra will need to keep this tight and assure developed-world regulators that it has done so, or it will place the entire Libra system at risk.
But that brings with it another hazard: the potential Libraisation of the local economy. Just as unplanned dollarization—the dominance of U.S. dollars—can cause crippling depreciation of local currencies, so could Libra—but faster. Dollarization is slowed by the requirement to procure physical dollars, but a vast supply of Libra tokens could be poured into an economy from outside, just by phone.
This will be most detrimental to those local poor who cannot pass KYC checks for access to the Libra system; it sets up a Libra economy that works only for the local middle to upper classes and rich visitors. Libra can either give 1.7 billion people access or it can maintain KYC integrity at all Libra access points—it can’t do both.
Libra intends for transactions on the main Libra blockchain to be pseudonymous; users can create any number of addresses for privacy. This appears at odds with KYC. Perhaps that only means users with sufficient funds that they wish to stash away, out of sight, on the Libra blockchain.
The Libra white paper states: “We believe that people have an inherent right to control the fruit of their legal labor” — a callback to Ayn Rand. Libra’s phrasing is an anarcho-capitalist euphemism for its members’ aspirations not to pay their taxes.
This all points to the real purpose of the project. Libra isn’t really for consumers. Libra is Facebook’s call to arms against the very notion of regulation. It wants to be too big to regulate.
Governments and regulators understood immediately what Libra was saying, and regulators are deeply concerned. It’s one thing when a questionable initial coin offering says these things, but it’s quite another coming from a company that already thinks of itself as beyond government oversight or control—as demonstrated by Facebook’s open defiance of parliamentary subpoenas from the United Kingdom and Canada.
On the U.S. House Financial Services Committee, Rep. Patrick McHenry, the ranking member, asked the committee chair, Rep. Maxine Waters, for a hearing on Facebook’s Libra. Waters concurred and wants Facebook to halt Libra. Both are worried about Libra’s systemic implications. A Senate Banking Committee hearing is scheduled for July 16.
Internationally, French Finance Minister Bruno Le Maire told Europe 1 Radio that Libra replacing sovereign currencies was “out of the question” and worried in the French Parliament about Facebook using Libra to “assemble even more data.” Bank of England Gov. Mark Carney is concerned that Libra “will become immediately systemic.” Markus Ferber, a German member of the European Parliament, warned that Libra could become a “shadow bank” —which is its explicit ambition.
Shadow banking is the creation of money as credit but outside the usual regulation of banking. Shadow banks tend to play fast and loose, because that’s their competitive advantage. This leads to problems if shadow banking gets big enough to be a systemic risk—credit from shadow banking fueled the housing bubble that was a major factor in the 2008 financial crisis. Facebook’s ideological bitcoiners want to create unregulated credit as a shadow bank themselves—because they’re sure that they’re smarter than all those conventional mainstream economists and won’t create a disaster themselves. Regulators are less sanguine.
But the first step for Libra is a convincing consumer use case. Calibra could plausibly work as a payment provider in the United States, despite Facebook’s previous failure with Facebook Credits. Libra tokens will have to be very convenient to overcome distrust of Facebook, let alone more specific regulatory qualms.
As Sarah Jamie Lewis, the director of the Canadian nonprofit Open Privacy, put it: “Can’t wait for a cryptocurrency with the ethics of Uber, the censorship resistance of Paypal, and the centralization of Visa, all tied together under the proven privacy of Facebook.”