Why is Zuckerberg inventing a currency?

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There’s now a 21st-century twist to this tale. Last week came the news that Facebook is launching an electronic currency – called ‘Libra’.

Like the Pound (£), the Dollar ($), the Euro (€) and the Yen (¥), the Libra will have its own symbol – an obscure character called the triple tilde, which looks like this: ≋

Unless you’re a mathematician studying the geometrical concept of congruence, it’s unlikely that you’ve ever seen a ‘≋’ before. However, if the Facebook project succeeds it might not be long before you see it everywhere. Though it may flop or stay stuck in some niche application, there’s a chance that Libra could become a global currency – and, perhaps, the universal means of exchange.

But why would anyone want to convert their £ or $ into ≋?

Libra is a blockchain-based cryptocurrency, and if ‘crypto’ is your thing there are various options to choose from. A few of these have become pretty significant – most (in)famously, Bitcoin. However, they also have limitations as a mass medium of exchange – including obscurity (not enough people have even heard of them, let alone accept them as payment), complexity (just too difficult to use), insecurity (vulnerability to hacking and other criminal activity) and volatility (wild swings in value compared to conventional currencies).

Can Libra overcome the limitations? Well, for a start, it has Facebook behind it – plus Facebook’s partners in this venture, which include Uber, Vodafone, PayPal and Visa. If anyone can create and promote a digital currency that is widely used, user-friendly and secure, it’s this lot. But what about the volatility problem? What’s to stop privately controlled, electronically-issued scrip from crashing in value?

An extremely useful TechCrunch briefing by Josh Constine explains how Libra would anchor itself:

“The idea is that you’ll cash in some money and keep a balance of Libra that you can spend at accepting merchants and online services…

“Each time someone cashes in a dollar or their respective local currency, that money goes into the Libra Reserve and an equivalent value of Libra is minted and doled out to that person. If someone cashes out from the Libra Association, the Libra they give back are destroyed/burned and they receive the equivalent value in their local currency back. That means there’s always 100% of the value of the Libra in circulation, collateralized with real-world assets in the Libra Reserve.”

Assuming that all works, the next question is: why use it as opposed to all the other online payment systems out there? The big promise with Libra is that transaction fees will be much lower than for, say, credit cards. This would cut costs for vendors – and reduce the friction of online commerce. Constine points out that Facebook already has a relationship with 7 million advertisers and 90 million small businesses. The other participants in the venture can contribute millions more relationships. If transaction costs (in hassle as well as money) really are significantly lower than established systems, then that’s a potentially enormous number of vendors who’d not only accept but encourage payments in Libra.

Then there’s the billions of people in the world who have limited or no access to financial services. The involvement of nonprofit organisations dedicated to financial inclusion (such as Women’s World Banking and Kiva) points to a global and humanitarian level of ambition. An especially interesting market is made up of the world’s 100 million+ migrant workers – who in 2018 sent $689 billion back home (including $529 billion to low and middle income countries). Transaction costs on these remittances are notoriously high and reducing them substantially would make a huge difference to the recipient countries. It would also spread Libra’s reach across the planet.

So, yes, Libra has the potential to become a global currency used by rich and poor alike. A pre-emptive backlash is already underway. The currency has acquired some unfortunate nicknames such as ‘Facebook crypto’ and ‘ZuckCoin’ – attesting to fears that the Silicon Valley behemoth and its CEO, Mark Zuckerberg, are already too powerful. Do we really want to give it – and him – control of the world’s money supply, too?

But, hang on, Libra hasn’t even been launched yet. Even if it realises its wildest ambitions, it seems unlikely that the custodians of the world’s official currencies – in particular, the government of the United States of America – would tolerate a genuine challenge to its monetary power.

Another source of partial reassurance is Libra’s ownership and governance structure. Josh Constine explains that “Facebook won’t fully control” the system:

“…but instead get just a single vote in its governance like other founding members of the Libra Association, including Visa, Uber and Andreessen Horowitz, which have invested at least $10 million each into the project’s operations.”

Furthermore, efforts are being made to address concerns over privacy and control of user data:

“Facebook is launching a subsidiary company also called Calibra that handles its crypto dealings and protects users’ privacy by never mingling your Libra payments with your Facebook data so it can’t be used for ad targeting. Your real identity won’t be tied to your publicly visible transactions.”

Even better, the underlying software is open source. So, conspiracy theories aside, this really doesn’t look like an attempt to establish top-control over the global economy.

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So, nothing to worry about, then. In fact, something to look forward to – a super-efficient payments system minus the rip-off merchants. But before we see Zuckerberg as a Christ-like figure, over-turning the money-changers’ tables, here are three little things that might just cause concern:

Firstly, Facebook doesn’t need exclusive control over Libra to become enormously more powerful. Consider the World Wide Web, which established a user-friendly and seamless means of exchanging information. The Web is governed on a model that is even more ‘open’ than Libra, yet that didn’t stop the tech giants (including Facebook) from establishing a dominant position.

Libra, if it succeeds, would establish a user-friendly and seamless means of financial exchange. The world apart that is Chinese internet provides a model of what happens when the distinction between the tech and finance industries is erased. For instance, the Chinese mobile payments market is fifty times bigger than in America and WeChat (the closest equivalent to Facebook) has a commanding position as the “app for everything.” Libra could create similar conditions in the west and Facebook would be ideally positioned to take advantage.

Secondly, the fact that Libra itself is designed to keep information about individual payments secure, anonymous and decentralised is not necessarily good news. One way of getting the notoriously undertaxed tech sector to pay its fair share is to use levies to target it’s revenues at source – e.g. as generated by advertising clicks or online sales. That could prove more effective than trying to apply corporation tax to the industry’s well-massaged and footloose profits. All the time that the tech giants know exactly where each dribble of revenue comes from, the law can be used to verify the taxes that ought to be paid on it.

That however could be rendered impossible by a completely anonymised and opaque transactional system. Expect tech-savvy governments to pay very close attention to how the technology evolves – privacy must not become the enemy of transparency.

Thirdly, what if those controlling Libra decided to behave really, really badly – i.e. like the monetary authority of a sovereign state? The early indications are that the system is intended to operate within very strict limits. As described above, Libra will only be issued in exchange for an equivalent amount in a hard currency like US Dollars. This is to create confidence in Libra as a reliable store of value, without which it is unlikely to achieve widespread acceptance.

But imagine a future in which Libra or some rival system is well on the way to becoming a de facto global currency. The closer it gets to achieving the status of a universal means of exchange, the more it will become its own guarantee of value – valuable not because it is exchangeable for other, more conventional currencies, but because enough people need and want Libra. At that point, its controllers will be tempted (or may even be pressured) to turn on the metaphorical printing presses and issue Libra backed up by nothing except public faith in the system.

One method might be to set up a Libra bank that creates currency out of thin air, lends it out and then destroys the money when it is repaid (but pockets the interest paid by the borrower). That might seem completely bizarre, but this is how conventional fiat currencies and conventional banks already work – in the modern world, that’s where money comes from.

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To be clear, there’s zero evidence that this is the Libra masterplan. The objective is to create a cheap, easy and reliable way of buying and selling, giving and receiving, just about anywhere in the world – a bridge between countries and their currencies, not a rival source of monetary power. The irony is that the more Libra succeeds in its stated objectives, the more it will be seen as a potential threat to the established order.

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Peter Franklin is Associate Editor of UnHerd. He was previously a policy advisor and speechwriter on environmental and social issues.

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