Libraʼs critics are missing the forest for the trees
Originally @ Techcruch
It would be an understatement to say it’s been a rocky couple months for Libra, the Facebook-proposed stablecoin.
Since its announcement in June, multiple high-profile members of the cryptocurrency’s consortium have jumped ship (many due to direct pressure from legislators). A congressional hearing on Libra turned into an evisceration of Facebook’s data and privacy practices. Federal Reserve Governor Lael Brainard assailed the project’s lack of controls. And the Chinese government announced its own competitive digital currency.
But critics of the idea, though they are well-intentioned, are missing the forest for the trees. In spite of Libra’s well-cataloged risks and unanswered questions, there is a massive opportunity in plain sight for the global financial system. It would be a tragedy to let that opportunity be destroyed on the basis of Facebook’s reputation or Libra’s haphazard go-to-market.
Governments should heed the lesson of the US/USSR space race of the 1970s and use the idea behind Libra, if not the project itself, in ‘coopetition’ to build a better, more inclusive global financial architecture.
A few key points to begin: First, Facebook is probably not the right actor to spearhead this initiative. Mark Zuckerberg promises that Facebook will only be one board member in a governing consortium and that the project will comply with US regulatory demands and privacy standards. But just as the company reneged on its promise not to integrate the encrypted WhatsApp into Facebook’s platform, it’s easy to picture Facebook pushing through standards to benefit itself at consumer expense. While Facebook would be a great platform to distribute Libra, its track record should make constituents uneasy about giving it any control.
Second, global payment systems are outdated and slow, and many businesses have been set up to extract rents from that fact. This burden disproportionately falls on the shoulders of poor consumers. People living paycheck-to-paycheck are forced into high-rate loans to smooth their cash flow due to slow ACH speeds. Immigrants sending money home pay high rates - up to 17%! - to move money across borders, and these costs eat into a sizable share of some countries’ GDPs. FX fees would vanish entirely in a ubiquitous currency regime.
Third, Zuckerberg’s ‘US vs. China’ positioning is a strategic whiff that undermines the entire idea of a universal currency. Libra’s lofty goal is to build a global medium of exchange to lower the costs and frictions of the outdated payments system. Letting this concept devolve into competing digital currencies, each with its own rules meant to maximize the influence of its governing body, would subject consumers to much of the same costs of the siloed payments ecosystems they deal with today.
And fourth, as Head of Calibra David Marcus explained in his congressional testimony and recent comments, Libra is not really meant to be a currency at all - it is meant to be a set of payments rails to facilitate commerce, both cross-border and within the US. It “has no intention of competing with any sovereign currencies or entering the monetary policy arena.”
With that said, Libra is the natural next step in a paradigm shift that started 30+ years ago with the rise of the internet and the fall of the Berlin Wall. Almost every economy has been radically reshaped by globalization. The free flow of information and goods across borders shifted manufacturing and services centers from the US to China and India, lifting millions of people out of poverty.
And yet, even as digital and physical goods flow freely across borders, payments systems have not caught up. We need a stable, universal money protocol, and it needs to exist outside of the Babel-ized walled gardens we deal with now.
As Mark Zuckerberg testified, a global stablecoin could, “let users send [money] to almost anyone with a smartphone, similar to how they might send a text message, and at low-to-no cost.”
This first use case is exciting enough, but imagine what you could build on this protocol?
Anyone could access a low-cost personal loan, underwritten seamlessly using their digital ID.
Tax returns could be compiled automatically, with zero offshoring or tax-dodging.
Businesses could instantly access the proceeds of purchase orders to finance inventory.
Investors - including mom-and-pop investors - could get access to international investment opportunities.
Digital anti-fraud, know-your-customer, and anti-money laundering tools - all highly necessary speedbumps to make payments safe - could be built into the protocol by default, massively shrinking the opaque all-cash black market and increasing the transparency of money. (Building on how Bitcoin, the poster child for anonymous digital currency, was recently used to bust an international criminal ring.)
High-risk sales such as firearms could be linked to their owners, whose information is encoded in a digital purchase receipt tied to the currency.
The possibilities of a global digital currency are truly limitless, and ordinary people stand to be the biggest beneficiaries. If banks and regulators welcome this opportunity and can modernize themselves to work with digital currencies, they too can benefit. Governor Brainard expressed the reasonable fear that a digital currency could pull money out of the banking system - but if banks set themselves up as intermediaries in a digital currency ecosystem, they could manage and lend digital currencies instead.
Fortunately, some financial regulators are waking up to this opportunity. Benoît Cœuré of the European Central Bank’s executive board recently agreed that Libra was a wakeup call to central banks that they need to work on improving the speed and costs of payments systems. As Alphaville writes, “Money makes the world go round, but the way in which it goes right now is not nearly fast or cheap enough. Fixing that is Libra’s siren call.”
It’s true that digital currency stability is still a problem to be solved. JP Koning puts forth an interesting proposal for Libra to use the IMF’s already-introduced SDR currency as its unit of reference, instead of deciding on its own (opaque) basket of underlying currencies.
And much education about digital currencies still needs to be done. Congress recently introduced the Stablecoins Are Securities Act, which would treat any managed stablecoin -- a definition that is still up for debate -- as a security, just like Apple or Amazon stock, with the same type of taxes and restrictions on use.
The space race was a remarkable human endeavor because it saw two bitter geopolitical rivals turn fiercely competing programs into a cooperative mission for the benefit of mankind. The Outer Space Treaty and the Apollo–Soyuz Test Project paint one way forward for digital currencies: if governments, banks, and multinational corporations can come together to pursue the dream of a global currency, they too have a chance to radically change the world for the better.