How Facebook Could Disrupt the Global Financial System
Facebook’s Libra cryptocurrency concept may challenge dollar hegemony and the global financial system…
Not just because it has the potential to mainstream cryptocurrencies. And not just because it could bring about the advent of a global ID system.
Most importantly, the Libra Association—the conglomerate of companies responsible for governing the Libra economy—has the potential to subvert the powers of nations, and possibly central banks.
In this week’s Intelligence Newsletter, we’ll discuss how Libra could transform the global economy—if regulators ever let it see the light of day, that is…
What Is Libra?
Before we dive into how the Libra Association could disrupt the global financial system, we first have to understand what exactly Libra is.
Slated for the second half of 2020, Facebook’s Libra is a forthcoming “cryptocurrency” that intends to enable frictionless, I.D.-verified online payments around the globe, all in the quest to build a more financially inclusive world.
But the thing is, Libra isn’t really a cryptocurrency. At least not in the way that we may know them today…
Sure, in concept, Facebook’s Libra is a currency that’s cryptographically secure, but its value is preserved by the Libra Reserve—meaning that it lacks decentralization, a foundational characteristic that most, if not all, cryptocurrencies have.
The Libra Association has hinted of its desire to decentralize its Libra currency, however it appears that they don’t believe it can work.
A Cryptographically Secure Cryptocurrency
“To ensure that Libra is truly open and always operates in the best interest of its users, our ambition is for the Libra network to become permissionless. The challenge is that as of today we do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support billions of people and transactions across the globe through a permissionless network. One of the association’s directives will be to work with the community to research and implement this transition, which will begin within five years of the public launch of the Libra Blockchain and ecosystem.”
That said, it is Libra’s centralization that could lead to its success / adoption, given the volatility and nefarious activity seen with many cryptocurrencies.
So what exactly is Libra?
Libra’s value is pegged to a basket of fiat currencies and short-term government securities. Some are suggesting that it could be an entirely new asset class.
Noelle Acheson, an author for CoinDesk, wrote in an article titled “Libra Isn’t a Cryptocurrency. It’s a Glimpse of a New Asset Class”,
“Asset-backed representations of value have been currencies before – think of the dollar and other national currencies back in the days of the gold standard. But they were backed by a commodity that was not controlled by any one entity and did not have an ‘issuer.’ The Libra proposition is very different.”
Acheson goes on to explain,
“If the Libra token is officially classified as a security, as is likely, then using it in a transaction will involve a “sale” of that security, and a capital gain or loss.”
“The idea of securities as payment mechanisms is innovative and could open up a host of potential use cases.”
One such use case, Acheson suggests, could be custom-made securities for currency hedging,
“. . . We could see the emergence of custom-made securities that hedge the currency risk of the issuer. Currency hedges are a major concern for both corporates and investors – imagine a debt instrument that packages those complex equations into a stable yield, or into a pre-hedged token for use in either capital markets or supply chain transactions.”
While it could be a while before investors can get their hands on Libra inspired securities for currency hedging, Michael Casey, a senior advisor for blockchain research at MIT’s Digital Currency Initiative, says that hedging with decentralized cryptocurrencies like Bitcoin is growing in popularity.
Casey Explains the Hedging Game
“. . . just as people sought out physical assets to protect their wealth from the vulnerabilities of the analog era’s trust-dependent system – by storing value in gold, for example, or in real estate – they will now seek out similar protection in digital assets with similar properties. Bitcoin is not described as “digital gold” for nothing; it offers a level of censorship resistance and isolation from the politicization of money that the corporate-driven Libra project cannot.”
While we disagree that Bitcoin is a good way to hedge given its extreme volatility, you understand the point he’s trying to make.
The Libra Association Could Displace Nations In The Global Financial System
Composed of 28 founding members (including Visa, Mastercard, and Paypal), the Libra Association could shape up to be one of the most powerful financial organizations on the planet. It’s of no coincidence that one of this organization’s stated goals is to bring approximately 1.7 billion unbanked adults (many of whom live in developing countries) into the global financial system.
“. . . approximately 70% of small businesses in developing countries lack access to credit and $25 billion is lost by migrants every year through remittance fees.”
Translation: the developing world is an untapped gold mine for banking and lending.
Developing World Meets Libra
On paper, the Libra Association’s mission to bring cheap capital to developing countries sounds like a noble idea. After all, there’s no telling what kind of economic opportunities such a payment system could unlock for the developing world.
However, allowing a cohort of Fortune 500 companies to lend capital to developing nations en masse evokes a few concerns…
Do these customers have the financial literacy to understand the terms of these loans? Who ensures that the terms of these loans are not predatory? And most importantly, what kind of effect could these loans have on geopolitics? Given Libra’s potential upside as a convenient universal currency, it’s not hard to imagine a reality where businesses and governments in developing nations opt for Libra debt instead of U.S. or Chinese government debt.
Hopefully by the time Libra is ready to launch, the Libra Association (which should be 100 members strong by mid-2020, according to the Libra White Paper) will have the answers to the aforementioned questions.
Regulators Voice Concerns Over Libra
The path forward for Libra is not an easy one. With some crypto industry veterans estimating that Libra’s approval will require hundreds (and perhaps even thousands) of licenses from regulators all over the world, it becomes clear that the Libra Association will have to perform the “Cirque du Soleil” of regulatory balancing acts in order to get Libra up and running by next year.
And unfortunately for Facebook, regulators haven’t exactly welcomed Libra with open arms so far; nations such as France, the U.K., Singapore, and most recently Japan have all expressed concerns regarding the cryptocurrencies adoption.
However, it was U.S. lawmakers—more specifically, Democrats from the U.S. House of Representatives—who voiced the fiercest opposition to Libra, stating,
“It appears that these products [Libra and the Calibra digital wallet] may lend themselves to an entirely new global financial system that is based out of Switzerland and intended to rival U.S. monetary policy and the dollar. This raises serious privacy, trading, national security, and monetary policy concerns for not only Facebook’s over 2 billion users, but also for investors, consumers, and the broader global economy,”
Facebook’s blockchain lead David Marcus recently tried to assuage some of the fears of U.S. lawmakers by saying,
“The Libra Association, Facebook’s governing council for its blockchain network, will have even less information than Facebook Payments does, Marcus told the senators.
Because validator nodes or wallets will process and store transactions, neither Facebook nor Libra will store personal data, he claimed.”
But these reassurances have done little to win over U.S. regulators—including U.S. Federal Reserve Chairman Jerome Powell.
“Libra raises many serious concerns regarding privacy, money laundering, consumer protection and financial stability,” Powell said during his semi-annual testimony on monetary policy before the U.S. House of Representatives Financial Services Committee.
“I don’t think the project [Facebook’s Libra] can go forward” without addressing those concerns, he added later.
And if that wasn’t enough to crush Facebook’s spirits, U.S. President Trump himself took to Twitter to share his thoughts on cryptocurrencies like Bitcoin and Libra.
“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” Trump wrote on Twitter.
The U.S. President continued,
“If Facebook and other companies want to become a bank, they must seek a new Banking Charter and become subject to all Banking Regulations, just like other Banks, both National and International,” he added.
Considering how divisive American politics have been in recent years, this is one issue that both the Democrats and the Republicans seem to be able to agree on: they don’t like Libra, at least as it stands right now.
While all of this may make it seem like regulators are against the concept of cryptocurrencies, nothing could be further from the truth. They simply want to have cryptocurrencies under their control—not Facebook’s.
Libra Forces Central Banks To Accelerate Digital Developments
Central banks all over the world have been working to develop their own digital currencies for some time now. However, it looks like the announcement of Libra has forced central banks to kick their development programs into high gear.
“Speaking to the Financial Times on Sunday, [Agustin Carstens, chief of the Bank for International Settlements (BIS)] said that BIS – which acts like a central bank for central banks – is supporting global central banks’ efforts to research and develop digital currencies based on national fiat currencies.
“[I]t might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies.”
Carstens may be right about the timing regarding the global adoption of digital currencies. Just last week, the People’s Bank of China (PBoC) suggested that it was accelerating the development of its own digital currency.
“A digital currency issued by the central bank can improve the efficiency of monetary policy, and help to optimise the payment system,” [Wang Xin, director of the People’s Bank of China research bureau] said. “We had an early start … but lots of work is needed to consolidate our lead.”
“The PBOC will push for unified standards and regulatory rules, and work to improve international coordination and cooperation in digital finance, [Wang Xin] added.”
But Facebook and central banks like the PBoC may not be the only heavy hitters with digital currency dreams…
“Tyler and Cameron Winklevoss, co-founders of the New York-based crypto exchange Gemini, may soon join the Libra Association, the consortium governing Facebook’s proposed cryptocurrency . . . Tyler added that in their view, Libra is a harbinger of cryptos to come: ‘Our feeling is, this [Libra] is the first of many FANG [Facebook, Amazon, Netflix and Google] companies to have a token project. Our prediction is in the next 24 months almost every FANG company will have a coin or be working on some sort of project.”
Libra to Fight Uphill Battle Against Global Financial System
Adoption by the masses is the key to any new product or service’s success. Currencies, digital or not, are no different. If Facebook has its way, Libra could be one of the world’s most easily adoptable currencies. After all, approximately 2 billion people already use Facebook.
However, Libra faces stern opposition from many of the world’s foremost regulators and bureaucrats. It will need their blessing to move forward, given the fact that it could completely disrupt the global financial system. What changes are required to garner that blessing? Your guess is as good as ours, but in the end, if allowed, Libra will look nothing like a traditional cryptocurrency.
Libra, in a conceptual sense, is like the mythical Pandora’s Box; from central banks to big tech, everyone is dying to open it—but once they do, there’s no going back…
All the best with your investments,
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