A Meditation On The Geopolitical Impacts Of Libra
By Graeme Mills on ALTCOIN MAGAZINE
The world is debating how Facebook’s new cryptocurrency “Libra” (or as the Robinhood Snacks podcast calls it, “ZuckBucks”) will change the payments industry and shape the future of currency. While Libra may become incredibly successful as the first cryptocurrency to be widely used on a B-to-C or even C-to-C commercial scale, its geopolitical repercussions may tell a different story. Ideologically, Libra, a centralized corporate-born blockchain technology, is a bastardization of Satoshi Nakamoto’s vision for the use of cryptocurrency and blockchain technology (Hackernoon). But apart from the ideological criticism of Libra, there are some serious global political risks of issuing such a currency.
Mark Zuckerberg’s selling point for this crypto-brainchild is that it would bring stability to countries and regions that suffer from a deflated, inflated, or volatile currency. It’s a borderless currency designed for stability. A global “stablecoin”. Such a currency would allow locals to make transactions online using their Facebook accounts instead of using the local currency. In addition, it would make sending money across a border cheap, easy, and feasible for the everyday person. There is a high likelihood that users who face a volatile political and economic condition would flock to this option, bypassing their country’s chaos with ease.
The use case is clear. It is safe to say that Facebook’s network effects would make this coin an instant success in terms of adoption. But it’s important to understand how Libra would be valued. It wouldn’t be like other cryptocurrencies where its value is speculated upon based on a specific use case defined by its software, nor simply because it's disconnected from geopolitical risks as “digital gold”. Instead, Libra’s value will track a basket of global currencies, providing as much stability and diversification across nations as possible. Using a financial-speak analogy, Libra would be similar to an Exchange Traded Note (ETN) of international currencies where their “notes” or “shares” would be used as currency itself. In addition to this, it would gather a “collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”
So, what specific currencies and assets will Libra track? This is where potential geopolitical problems lie. According to the Libra whitepaper (there is a great summary and analysis of it here), there are no specific currencies or assets suggested in the backing of Libra. What is starkly clear, though, is that the Libra Association, an organization “independent” from Facebook but created by Facebook, will choose and manage these “safe assets”. In the adoption phase of this currency, developing and struggling national central banks and treasuries may get completely thrown away by their citizens in favor of Libra. When Libra gives citizens an option to bypass their dysfunctional government, the Global Bank of Facebook may have the power to put an end to these governments completely. Even if Libra coin helps these nations stabilize better than their government, is it really okay for the Libra organization to have that kind of power?
Yes, I am making an argument in defense of the governments that have done nothing to include, if not actively exclude, their own residents as citizens in their economies and democracies (or lack thereof). However, it is unknown whether the implosion of a government in favor of a disrupting financial solution will be helpful or harmful to its people in the long run. In addition, it is unknown whether the Libra Association would have the initiative or capability to get ahead of an issue like this. And if they would, how would they do it and who would be involved? Facebook’s partners are on record saying that they are now nervous about launching this currency and are uncomfortable learning on their feet when it comes to a technology that could have global impacts—impacts they would be responsible for. The fact that the Libra Association could destroy or save an economy is the most terrifying concept of this phenomenon.
Libra coin may not just affect developing or unstable governments, though. It is possible for it to have adverse effects on developed nations as well. An article I published on the state of the US’s Social Security fund crisis provides a background for understanding the vulnerability of our nation's financial well-being to a potentially destabilizing force such as Libra. But before getting into the adverse effects it may have on social security, let's talk about what it means for the US dollar.
What if Libra was a huge success in the US? Businesses and individuals would use this currency to make small, everyday transactions instead of the US dollar. Instead of a transaction being made in 100% US dollars, it will be made in, say, 60% US dollars and banknotes (40% of which is backed by other currencies and “safe assets” from other countries’ assets) essentially diluting the use of the US dollar. Additionally, the US dollar, as it is now, is the “stablecoin” of the world. The US dollar’s strong value comes from the fact that it is a safe haven currency underpinning a strong economy. Competition for the world’s stable currency, a competition that Libra could plausibly win because of the international network effects and the ability for use everywhere on the globe, would cause people to turn away from the US dollar as a global stable currency.
And we all know the math: a weaker demand for a currency will likely cause inflation of that currency. In addition, interest rates have been at historic lows (as of 2019) which means that the Fed would have to raise interest rates a considerable amount to offset weaker demand for the US dollar. A rate hike like this would put real constraints on lending activities, constraining economic growth. Now, this may be a much-needed hike when our social security fund is in desperate need of higher interest rates, not to mention that our economy (as of 2019) is booming and could likely handle higher interest rates. But would this force banks and state treasuries to utilize Libra as legal tender? How would that affect local economies? Again, perilous effects are not guaranteed to happen. But it depends on how Libra manages the fallout effects of its implementation. Even Jerome Powell, the chairman of the Fed, said that he has “serious concerns” about Libra.
In less speculative terms, a banker either invests in US dollar securities or they don’t, so when the balance is tipped enough due to a more stable alternative, a huge capital flight from the US dollar will ensue. The reason that Bitcoin didn’t already make this happen is that very few people use it daily or in a quotidian way. But Libra would be a different story. They have a built-in network of global users that can use it in an instant, shifting and transforming the landscape instantly, causing a shock wave of uncertainty, further sending the currency markets into chaos.
If the Libra Association decides to allocate the underlying assets by market-weight, the hugely negative effects might be eased, but would not be completely eliminated. Libra coin would allow users from other countries to use partial US dollars to pay for their everyday things, increasing the user base of the US dollar. If Libra becomes an international hit more than a domestic one, this could be hugely beneficial for the US dollar.
But again, how much power are we comfortable giving the Facebook-associated Libra organization? Are we comfortable giving a centralized organization not only our user and financial data? Are we comfortable with an unprecedented type of monopolistic power we can’t predict?
I guess we will find out.
