Yesterday’s public announcement by Facebook of its upcoming blockchain platform and cryptocurrency and their documentation release have naturally attracted a lot of coverage. However, what received surprisingly little attention was the expressed intention to back the Libra stablecoin not just with a bunch of national currencies but also short-term government securities.
The initial thoughts I had about this were negative. I thought that Facebook was putting its cryptocurrency at unnecessary risk, given the increasingly unhealthy fiscal state of most modern governments. But I failed to appreciate the much larger importance of Facebook’s plans, whether Facebook’s decision makers grasp it or not. In a barely noticeable way, the social network giant has essentially announced that it would engage in creating genuine money. The reason for my claiming that is that its Libra stablecoin is supposed to be partly backed by short-term government securities.
Using government securities as backing means bona fide money creation
Consider the case where a stablecoin is created with full backing by a single or several national currencies. Although, nominally, a new currency is thereby created, an equivalent amount of purchasing power is withdrawn from circulation in terms of the base currencies. In this scenario, one can essentially say that the money supply remains the same.
The situation is decidedly different when an entity like Facebook purchases or incentivizes its stablecoin users to purchase government securities from someone other than a government and uses those securities as a backing for newly-minted stablecoins. In this way, if its stablecoin is widely accepted for payments, purchasing power is created where it did not exist before. One can argue that this would be unprecedented since the demise of fractionally-backed banknote issuance by private banks that had mostly occurred by WW1 but continued in Canada until the creation of its central bank in 1934.
Facebook’s move may accelerate crypto’s showdown with central banks
Given Facebook’s clout, its currency will undoubtedly make other crypto’s monetary impact pale in comparison. So far, even Bitcoin has been barely used for day-to-day payments, and central banks and their supporters could sleep well knowing that their potential competitors are so far too weak to matter. Of course, it can be argued that Tether has been creating money in a similar way to Facebook for some time, however, the size of Tether’s supply is still too small and its shady nature have so far prevented this from having an impact.
With Facebook’s explicit desire to serve the 1.7 billion of the world’s unbanked and the massive resources and reach at its disposal, its money creation will be impossible to ignore.
And the problem with Facebook for governments is that it is not a central bank whose monetary activities are subject to regulation by laws and can be predictably used to further the governments’ ends, even if indirectly.
There is also the widespread belief among all kinds of actors that centralized management of the economy’s money supply is indispensable for ensuring low volatility or at least the prevention of catastrophic downturns like the Great Depression. Central bankers can try to use this widespread consensus to convince governments to restrain Faceboook.
If a crackdown on Libra were to happen, other cryptocurrencies may suffer, too, since laws are usually not passed to target singular cases. In addition to this, scared central bankers may advocate for addressing the crypto’s perceived monetary threat as extensively as possible. However, are governments really bound to clash with Facebook?
Governments may differ in their approach to Facebook’s money creation
This is where Facebook’s decision to back its currency with short-term government security may prove to be a genius move. Some governments may find the temptation to use another large buyer for their debt very hard to resist, and may turn a blind eye to the protests by their central bankers.
While the claims of developed countries’ central banks’ total political independence from other branches of government (or large national governments in the case of the ECB) are certainly exaggerated, in the modern times, they have largely resisted being used for pure fiscal accommodation. In other words, even where central banks have engaged in buying government securities, they have done so for monetary policy reasons.
Some governments may, thus, hope that Facebook and the Libra Association members would be less stubborn than their central banks and could be manipulated for their purely fiscal ends.
A range of possible effects
Given that governments will not necessarily shut Libra down, if Facebook sticks to its plans to use government securities to partially back Libra, this opens a wide range of possibilities.
First, even if Facebook wins a potential clash with central banks, other cryptocurrencies that are not backed by government securities may end up to be less fortunate. Facebook and potential copycats may become for crypto what the system of National Banks in the 19th-century U. S. was for the banking system, a bunch of privileged private money issuers.
However, the return of private money issuance may also bring with it the much needed relaunch of the debate on the need of monetary competition. Its supporters, including this author, may rejoice at this prospect, as in the past, this debate was not lost on the merit of the arguments. Perhaps, this time, monetary competition advocates will be able to actually make that debate happen and win it.
Finally, there are of course a lot of other potential important impacts and scenarios that are interesting. For instance, in the Libra whitepaper, Facebook expressed commitment to ultimately making the underlying blockchain platform permissionless. Nothing was mentioned about the nature of the native token such a blockchain would have but it probably could be something not backed by anything and created one-for-one for each Libra stablecoin.
Also, if other blockchain platforms succeed in achieving mass adoption, their native currencies may come to have stable exchange rates with Libra. This can catapult them into widely-accepted means of exchange position. And I am sure I just started scratching the surface of what Facebook’s surprising plan may lead to, for better or worse.