Politics and Geopolitics in Libra: an analysis (part 1)
Libra, the “Facebook cryptocurrency”, is in many ways an unprecedented project: we’ve never been so close to the creation of a unified global payment instrument. The initiative, launched by Mark Zuckerberg, is in fact the first attempt not to create a worldwide “cryptocurrency”, but rather a global currency that styles itself a “crypto”. Its importance stems also from being the first real attempt, by large corporations, to enter the field of monetary policy. I will therefore try to analyze the meaning of this final statement and the potential political and economic repercussions of the advent of Libra.
Introduction
1.1 What is Libra?
Facebook and cryptocurrencies have two very different stories, but with some points in common: no one would have bet on their survival after the launch, very few have grasped their long-term potential, and above all many have called themselves “experts”, of Social Media on the one hand and blockchain/crypto on the other, when the general public began to realize the extent of the change. And today these two stories, with their commonalities and differences, have unexpectedly met.
In fact, the “Libra project” was recently presented to the press: a new digital currency with some peculiarities that make it an interesting case study under multiple profiles. The declared purpose of the main promoter, Facebook founder Mark Zuckerberg, is bringing to the “unbanked” (the millions of people who do not have access to banking and financial services) an easy-to-use payment tool, at a very low cost which allows its users to send money to anyone who has a smartphone and an Internet connection.
1.2 “And I should care why?”
The innovative part of the project does not lie in the technology used: we’ve already seen many cryptocurrencies that offer, depending on their developers’ ideas and goals, transparency, security in transactions, anonymity or speed in transactions, but there is not yet a cryptocurrency with all these features ; even Libra will be no exception, not being able to offer all these advantages, but only a few, sacrificing — for example — anonymity to the demands of governments, which already demonstrate all their impatience with respect to Zuckerberg’s initiative. The Congress of the United States has in fact placed the alt on the development of Libra, waiting to understand more about it in order to eventually regulate the phenomenon.
In a letter sent on the 2nd of July, the Committee of Financial Services of the lower house of Congress, the House of Representatives, asked Mark Zuckerberg to suspend the development of the Libra project, laying “[…] a moratorium on any movement forward on Libra- its proposed cryptocurrency “ as it could pave the way to a completely new financial system, in competition with the US dollar (“ […] these products may lend themselves to an entirely new global financial system […] intended to rival US monetary policy and the dollar “). The project is instead potentially revolutionary due to the sheer power and user base possessed by Facebook and its allies: the ones already announced boast, together, billions of users. They are willing to network and create synergies in order to ensure Libra’s usability from Day 1 (especially through Mastercard and Visa), granting a vast number of users to Calibra, the company created by Zuckerberg himself to manage the virtual wallets, on which the units of Libra will be stored for daily use.
1.3 Blockchain = Decentralization?
The initiative is symbolic, both as a point of arrival of a long journey that began with the creation of Bitcoin, and as the first step towards a new era of which we can only imagine the advantages and risks. If, in fact, with the creation of Satoshi Nakamoto a real alternative to the banking system was born, which has opened a hole in the traditional centralization of the financial system and has contributed, if not launched in the first place, a process of disintermediation of the sector, here Libra stands at the opposite extreme of the spectrum, bringing back not only the issue of money controlled by a small group -in the whitepaper, we are told of as many as a hundred companies involved in its management-, but placing an additional layer, under the form of “authorized resellers”, of authorized dealers, who will be the only ones to place the future units of Libra on the market and distribute them to users. Those who try to push equality, however, between Blockchain and decentralization, will therefore be definitively disavowed by the advent of Libra.
1.2. Libra’s “Founding Members”
Before getting into the political analysis, we need to define some key aspects of Libra. First and foremost, the sponsors behind it: a group of various corporations, lead by Facebook, with many world-renowned brands like Visa, Mastercard, PayPal, Uber, Lyft, Booking.com and many others; this alliance has merged its efforts in a non-profit consortium located in Switzerland, the “Libra Association”. Its goal is to handle the currency’s networks, its emission, guaranteeing its stability and, some say in order to justify its “non-profit status”, sustaining financial education and access to banking services to the “unbanked” we already mentioned.
The Associations’ Partners, called “Founding Members”, have to meet very specific criteria: with regards to for-profit companies, their business value has to be at least 1bn$, they have to operate globally and be present on the global markets. For non-profit organizations, like NGOs, they are still expected to have global extention and have at least 50mln$ in their accounts.
1.4. Money creation
To design Libra’s monetary policy, its creators have chosen to implement the very well known model of “asset-backed currencies”, which were dominant in the 19th century and part of the 20th. They are currencies guaranteed by an underlying asset (usually gold or silver): this technique ensured, at least in theory, that a certain amount of money was always backed or, in other words, exchangeable for a certain amount of gold set by the central bank. In the case of Libra, on the other hand, the issuance will be guaranteed by ‘low-volatility assets’, identified in short-term government bonds of stable countries. The actors behind the issue will be only chosen between the members of the Libra association, which are going to be around one hundred in the future; the substantial price tag of the entrance ticket as the “node-issuer” of the network has already made the front pages of the newspapers : 10 million dollars.
2. Libra: pros and cons
2.1. Theoretical approach
After having discussed, albeit superficially, the main features of Libra, it’s possible to move on to the most interesting, innovative and, from a certain point of view, disturbing aspects of the project; but, first, we must make some premises concerning the approach adopted and the issues that will be addressed.
It is my belief that, in order to study and understand Libra, a two-way approach is required, using both political and economical reasoning/analysis. The former is necessary because Libra threatens one of the fundamental prerogatives of the modern State, which have never been questioned even by the most extreme Libertarians, a là Milton Friedman: the issuance of public money. Togheter with the monopoly of the exercise of violence, printing money is one of the defining tasks of national power and sovereignty. In the case of a widespread adoption of the new e-currency, national states would lose at least some of their power. This is why we need a political and economical analysis of Libra.
It could be objected that the State’s involvement in monetary policy issues has ended, or at least been significantly reduced, by the advent of the independent central bank model on the one hand, and by the emergence of supranational institutions like the ECB on the other. But you have to remembered that, first of all, central bankers are constantly under great political pressure (just look at the current interest rates policy by the US Federal Reserve, or the Quantitative Easing promoted by Mario Draghi); secondly, even the mere adoption of a currency, or its use by non-issuers (think of the widespread use of the US dollar and the French Franc in Africa) also has a number of political and economic effects, first of all constituing a strong incentive to buy securities denominated in the currency of the issuing country (USA or France, in the examples above), considered “too big to fail”.
This is accompanied by the expansion of the sphere of influence of countries with the strongest currencies, which evolves into political and economical dependence on the monetary policy choices of the stronger issuing countries; on this point, history serves us very well with numerous examples. But one of the most famous still remains the 1973 debt crisis of developing countries, triggered by the then Chairman of the FED Paul Volcker, who sharply increased double interest rates to 10%; his decision took many countries, whose loans (and payments on the debt) were denominated in US dollars, by surprise, causing a series of bankruptcies in Africa and South America.
Therefore the most influential countries can exert more political power on the international stage by promoting, through various means (like investments and loans), the use of their own currencies. But this advantage and prerogative can disappear if the monetary instrument is held by a private entity that, by definition, is not motivated by national security, geopolitical or social interests but only by the profit motive. This makes Libra’s existence and potential size a threat to national states, as it reduces their power. From what we said to this point, it seems that the arena Facebook is entering has, on the other side of the ring, the nation states. Correct, but not complete. As we will discuss seven days from now, in fact, the clash could become part of another one, already underway and much wider: the ongoing conflict between China and the United States.
On the next issue: China, the USA and Libra, and some reflections on privacy.
