Facebook has announced Libra, the cryptocurrency that isn’t really a cryptocurrency – and inquiring minds would like to know why. The answer? It’s probably an end run around regulation. This could be a good or a bad thing, for the regulatory mess in this area is significant. Moving fast and breaking things might actually be the correct way to cut through the Gordian Knot.
As an actual cryptocurrency, Libra has some problems, of course. No one is going to be mining for it, therefore no distributed network of people performing proof of work and thus taking a fee for ensuring single spend.
It is also intended to be a stablecoin, which locks out all the speculators because there’s nothing to speculate on. So it’s not really a cryptocurrency in the sense of bitcoin and the like. Given that it’s based on a basket of currencies, it’s not truly a stablecoin either, as there will be daily changes in value in any single currency as that moves against the basket.
But there are those with larger worries, or worries about larger things. The US House Committee on such things has asked that Libra be delayed until it can craft regulations.
Others have worried that if we do in fact gain a widely used non-governmental currency, then government and central banks will lose control of the money supply. Given that such control – both of the price in interest rates and the quantity in existence – is an extremely useful economic management tool, that could be a worthwhile worry. But something based on a basket of currencies doesn’t actually cause that problem because central bank manipulation of the one currency will feed through into the basket.
Viewed in the standard economic manner, it is a bit difficult to see what Libra is actually for. Facebook’s own explanation majors in guff. Our task is thus to work through why it does want it. The likely answer is that Facebook wants something that is very, very like money, but actually isn’t. That’s what slices through the net of regulation.
Facebook has long been interested in the money transfer business. It should be, too. Fees of 8% and 10% of the sum sent are commonplace and there are horror stories of up to 20% to some places. Remittances – the wages sent back by those working abroad – amount to tens of billions in individual countries, hundreds of billions for the world. If you already had a network of two billion people and rising, you’d think that was a good business to be getting into, too.
Facebook gained a European money transfer licence back in 2016. The advantage was the “passporting” rules that the City has been talking about with regard to Brexit. Have any one EU country licence and you are licensed across the EU.
This is in contrast to the US, where it’s done state by state and not all of them will even explain, plainly, what you need to do to gain such a licence. Facebook is big enough to bully its way through most of that, but even today it doesn’t have 100% US coverage.
That should be sweet then – except that it wasn’t. Facebook ceased its European payments adventure in June.
The problem wasn’t the money transfer licence – it was the set of rules that comes with the transfer of money, the “know your customer” regulations. You have to be able to identify exactly who is sending to whom, and to have at least a reasonable idea that it’s legitimate earnings that are being sent.
It is this that explains those massive fees in the extant system, for the people who operate the money transmission networks do not make “excess” profits. To an economist, this is a more-than-usual return on the capital employed.
Despite those 10% fees, Western Union, for example, doesn’t have a greater-than-average return. So those high fees are being eaten up in the high costs of doing business. They are not being charged just to let the capitalists cackle about their returns.
It’s an appealing business, with high fees but also high costs – which means that to be able to truly clean up, a new method has to be found. Move fast and break things is one way to describe it – come up with some technological advance is another. Or, of course, do an end run around the regulation that imposes the costs. Which is what I am imputing is being done with Libra.
Libra isn’t really a cryptocurrency, not in the way we’ve come to think of them. Very much more importantly, it is also not “money”. Therefore the regulations about knowing who is sending what money around don’t apply – or might not apply – to something that is very much more an accounting unit than anything else.
Such regulations will probably apply to anyone buying into, or cashing out of, Libra. But once inside the system, it is likely, the way the regulations are currently written, that transfers will be free of the costs that drive transfer fees up to those 8% and 10% levels.
We now have our technological edge, even if it is one that only applies to an accounting unit that has enough users and usage that people are willing to remain inside the system. That’s a pretty good competitive advantage for someone who already has two billion users in their network.
My reading of the whole adventure is that it’s a precise calibration to try to avoid the most onerous and expensive parts of the regulatory system concerning money transfers, by the simple expedient of creating a system that doesn’t transfer “money” around.
It’s something that has a good chance of success if Facebook and friends can move fast enough to have a decent-size user base before the regulators wake up and stop them doing so. Rather like the Uber strategy with taxi licensing, find that gap in the legal thicket, drive a coach and horses through it, then rely on being popular enough to stop the bureaucrats shouting that you can’t do it.
Whether it’s a good idea in a public policy sense is another matter, but it’s one that has a good chance of working.