And it’s more powerful than you may have imagined.
Photo by Joshua Sortino on Unsplash
I get asked a lot about the upcoming introduction of the Libra, the Facebook-led consortium, which will manage the new crypto of the same name- the Libra. This event is big. The Libra is a bold, fascinating product which is going to bring areas of money, government sovereignty, international finance, regulatory oversight, privacy, payment and money laundering to the forefront. How the Libra will affect the credit and financial markets, socioeconomics, international trade and business cycles may be a disruptive world changing event.
The Skynet reference in the title implies that I am would be siding with the impending doom and apocalyptic naysayers with respect to the Libra. However let’s see how I think the Libra’s introduction as a supercrypto can play out. No worries yet to the AI and machine-learning doomers — you guys still have a forum.
Why is the introduction of the Libra Significant?
First let’s quickly summarize the main, although not complete, characteristics of the Libra and its related concerns. The Libra is actually managed by a consortium of international companies which includes the likes of Visa, eBay, PayPal, MasterCard, Uber, Spotify, Vodafone just to name a few. The Libra will be a stable crypto, backed by a basket of major currencies and securities, an important function of money especially wherever there is the even the threat of volatility. Still with about 2.4B FB users, sending money from one FB user to another will be cheap, fast, and easy. This is no small feat when you consider how costly and slow it currently is for cross-border transfers. Merchants can also take advantage of easy payment remittance from FB users. Post a FB fan page, display an ad, user clicks on a button, Voilà, payment transaction completed and with less merchant fee than current Visa/MC/Amex. And with Libra crypto’s accruing in your FB account, why not plow it back into FB digital marketing ads to generate even more sales?!
One big hole is that Facebook is not permitted in China, a potential 1B+ users, and rumors are leaking that China is looking to introduce its own sovereign digital currency. An important point is that by having access to the transfer, spending, and account holdings, this information can be very powerful. The concern, and rightly so, after the Cambridge Analytica scandal, is that Facebook and the Libra association can use this data, the least of which is a marketing gold mine, for even more nefarious reasons. That is the control of both data and money!
Yes the issue is a real one and while I am not trying to ignore the it by burying my head into the sand, I believe that it will be up to regulatory safeguards, coupled with the fact the Libra association consists of more than just Facebook alone. I both hope and believe that this potential abuse of power will never be realized, as tempting as it may be. Call me naive. Ok not everyone at once. This is one facet of the potential Skynet that is the Libra, but not the only nascent one.
Unlike Bitcoin, Libra will exist on a permissioned blockchain. So much for decentralization but this is just a pragmatic decision for insuring efficient transactions at the node level. The association has also claimed that once all the kinks are worked out and that the network is stable, it will migrate to a permissionless blockchain. In theory this should have little to no effect to the end users, e.g., senders, receivers, and merchants. This in itself shouldn’t be a big deal.
Facebook will yield considerable power as the central hub from the convenience of facilitating easy payments amongst its users, merchants, Libra members, and Facebook itself. Anti-trust talks have already started in the EU and it is even quite conceivable that the DOJ and FTC could start getting involved. One can see how Facebook and company can easily snowball their power if regulatory oversight does not take appropriate caution and controls.
Certainly a stable currency like the Libra will be very attractive to individuals from highly inflationary countries, which are mostly the developing countries. Then again how will, or under what rules will the Libra Association maintain its formula of basket currencies? If Libra gets enough of solid footing, will these re-balancing rules turn Libra into a new de facto Bretton Woods dictating the forex exchange rates merely by the copious amounts of its basket formula and holdings?
Many central banks have already stated “concerns”, to put it mildly, against the Libra for a variety of reasons. Without direct control of the money supply, how will a sovereignty moderate or stimulate their economies, interest rates, or lending? Tools such as quantitative easing by central banks may be severely hampered and their monetary influence and power would be diminished conversely by the rise of the Libra instead. Since the Libra association can become a de facto super bank, the central banks regulatory power over a diminished and weaken traditional banks will further erode its influence. Banks are a conservative lot by nature, and central banks even more so as their mandates are not aligned with financial goals per se. This is where I see the major battles and the area of greatest interest.
A New World Order
Photo by Ross Findon on Unsplash
So what is the worst case scenario? Possibly the weakening of sovereign states itself. Think of a real and effective United Nations but using the powerful cogs of money to enforce, or shall I say, act as the world police. Now I am not advocating anarchy or anything of that nature but if the governments are not serving the people, and its authority and legitimacy are founded by the people, then why not just proceed and see if some new framework can be formed which may be to the betterment of the people?
I am not sure that this in itself is a bad thing, but two things I know for sure are this: sovereign nations are not going to give up this power readily and they will fight to the bitter end to retain it. Secondly, the models of cryptos business and monetary cycles are not well understood nor tested. While Bitcoin has risen tremendously in value and trading volume, its adoption as a means of payment has not been realized. Libra payments will do better due to the number of Facebook users and businesses already in place, and when you factor in the other partners of the Libra Association, this could be a much bigger game changer.
This begs another question: what is the role of government in dictating monetary policies and economics? Is it appropriate for Trump to drag the country into a tariffs-driven trade war for his own agenda? Are we ready to seriously question these old and possibly outdated precepts of sovereign money and control? Do we dare to?
Conclusion
Digital currencies are in the first inning of a multi-game series, just barely out its infancy. The term money has multiple and separate functions: 1) medium of exchange, legal tender or otherwise, 2) storage of wealth, and 3) unit of account. Depending on which money term we are referring to, conventional fiat currency has had a long head start, having been around for over 2,000 years. It is indeed a tall order to transfer the trust from sovereign nations to another autonomous party, but is it anything less risky than boarding a flight and banking your life on the integrity of the flight crew, maintenance, and plane manufacturer?
The goals of an ideal digital currency are ambitious: efficient (low costs and timeliness), secure payments and transfers in order to provide financial and banking services to everyone in a fair manner. There is a still a significant portion of the world population who does not have access to these services — mostly the less entitled individuals who need it more than anyone else. They deserve a chance to participate in any economic run-ups and benefit from monetary efficiencies.
This Democratizing of money will therefore ensure equal opportunity to the ownership of property, and thus full participation in the democratic governance of society, as well as equal access to the banking system, which finances the creation of capital via the creation of money. If the divergence between capital and labor — between rich and poor — is explained by the monopoly access of capitalists to finance, then reducing this divergence is crucially dependent on the democratization of money. Though the role of money and finance in determining inequality between capital and labor transcends any particular understanding of the process by which the creation of money leads to inequity, specific proposals for the democratization of money will depend on the explanation of how money comes into existence and how it supports capital accumulation.
The introduction of the Libra is bringing many of these important issues to the forefront and is forcing both businesses, individuals, and governments to get involved in how digital currencies are going to evolve. Certainly there are many precarious issues regarding Libra, but instead of turning our backs and shying away from it, we should embrace the concerns and bring noteworthy resolutions to how Libra can bring meaningful impact to users and business alike. This is simply called progressive innovation. What we are still getting used to is the fast exponential pace of change.
Besides the needed regulatory concerns and oversight, there is still the development of the technologies, security and services that fundamentally need to be established as part of the building block of this world order. Exchanges, wallets, custodial services need to be based on really hardened security using both technology and regulation to insure the safety and viability of cryptos. But after more than two thousand years of the evolution of traditional fiat, it still has not been perfected. Has anyone ever been physically and directly killed by a crypto robbery? No. Chalk one up for progress right there!
One likelihood that is often talked about is that the Libra will never be released. I think that would be a shame. But Google, Amazon, Alibaba, TenCent, Apple, Starbucks, etc I am sure are watching this carefully and already planning. So even if the future is not Bitcoin in its current state, or Libra, rest assure the genie is out of the bottle. We are figuring it out as we speak and I think the Libra, regardless if it is ever deployed or not, has stimulated the thought process of innovation. I say at least give it a chance. Stay tuned.
Edward Wong is a Co-Founder at QuantDesk.AI, a crypto custody, wallet, investment funds, advisory, and exchange startup. He is also the Original Co-founder of the Shanghai Futures Exchange and was the former Treasury Architect at Federal Reserve. Besides being a Fedophile he is a World Champion Spicy Eater and a cat lady.
