When two weeks ago, Facebook announced its intention to create a digital currency, to be called the Libra, it is fair to say that the world’s central banks and financial regulators were momentarily caught unawares. Facebook and their partners in the venture appear genuinely to have kept their planning confidential, which given the size of the consortium they have put together and the length of time they have been planning the move, is no mean achievement.
This does not mean that central bankers were blind to the possibilities of large scale digital money. They have been well aware that the technology behind digital or crypto-currencies is here to stay, and that sooner or later someone would solve the problems of scale and price volatility that have bedevilled such “currencies” as Bitcoin and stopped them from become mainstream.
Several central banks have even toyed with the idea of introducing their own digital currencies (see our article “The future of digital currencies”, 16.09.17), though to date none has done so – as one central banker told us “It would bring us into direct contact with the public, and I am not sure we are ready for the three Cs that this would inevitably entail – Customers, Complaints and Call centres”.
So they were quick to make cautiously welcoming but appropriately non-committal comments. Central bankers cannot afford to be seen to be too hostile to innovation per se, and they are also well aware of the advantages that secure payment systems can bring. Indeed Mark Carney, in his last Mansion House speech before his term as governor of the Bank of England ends, went further and opened up the possibility of the Bank working with non-bank financial operators, including examining how to allow digital companies to access its payment system and even keep funds at the Bank overnight.
So much for the public response to Facebook’s announcement. In private, few central bankers are as equanimous as their public statements suggest, on at least three grounds.
Firstly, they are nervous of any new currency of global reach, let alone one not under official sector control. Although there are many different forms of e-money already in existence, and although in much of the developing world consumers barely use cash or formal bank accounts and are already very familiar with paying for things using for example their mobile phones, without exception all of the existing alternative money transmission mechanisms rely on existing currencies and payment systems, and all are therefore caught under existing regulatory frameworks. Libra threatens to be a cross-over or hybrid between mainstream money and crypto-currency and will therefore escape current regulatory frameworks.
Secondly (and in a way a compliment to the way Facebook have done their research and constructed their proposals), they strongly suspect that if it gains any traction at all, Libra may prove extremely successful and become a significant player in quite a short time. One feature of innovative and disruptive technologies, whether social media or other new industries like Amazon, Uber or Airbnb, is that their business model seems to be to make themselves so attractive to consumers and so easy to use that they rapidly become indispensable, to the point that when the authorities try to rein them in, the public backlash from their users can be quite vociferous.
The power of Airbnb or Uber, for example, to mobilise people who like what they offer and are either ignorant of or (worse) indifferent to the damage they do to cities and existing businesses, let alone their cavalier attitude to laws and their legal responsibilities, is not encouraging. Governments fear similarly that if Libra catches on, they will not be able to rein it in simply because it will be too convenient, useful, and easy for consumers, who will want it regardless of the hidden costs and risks. So they fear that the time they will have to try to control and regulate Libra may therefore be quite short.
And lastly – and although they would never say as much publicly – they think Facebook is already too powerful and beyond any state power to regulate, control or tax, and they view Zuckerberg himself with distaste. His arrogant refusal to meet parliaments, answer legitimate questions (even under legal summons) or change his business practices when criticised does not bode well, and it is hard to see how he would qualify as a “fit and proper person” to be in charge of a significant part of the world’s payment systems.
So most central bankers, if they were totally honest, would probably admit that they would rather Libra did not exist, or if it did, that it had a different promoter.
Having said that, it is not easy to see what grounds they will have for formally objecting to the proposals for Libra that Facebook outlined in their recent announcement.
Facebook’s proposal is that Libra be run by an independent consortium based in Switzerland, with eventually 100 member firms drawn from across the financial and technology sectors (though interestingly no banks have been invited to be a founder member). Furthermore, in an obvious move to address the Facebook in Control criticism, the intention is that all members will in due course have an equal say in the operation of Libra.
The construction of Libra itself is also interesting, as its proposed structure seems to be a bit like an ETF (Exchange Traded Fund), with Libra created and cancelled by official intermediaries against “real” assets such as hard currency cash and bonds. This is designed to address any concerns that the Libra foundation will act as a bank (ie, creating money and/or taking deposits from the public).
Lastly, the clear unspoken reason for creating Libra is to counter China’s Alipay. Zuckerberg argues that “if we don’t do this the Chinese system will become entrenched, firstly in the third world and then increasingly in our world too”. So far the West has avoided a straight fight with Alipay, whose usage outside China remains very small, but many in central banking are fearful that (a) it will come and (b) they will lose.
Against this, Zuckerberg seems to be using the concept of Libra to offer a defence against a Chinese takeover – “yes it is a private sector currency, and yes you may not welcome it with open arms, but it is our private sector currency not China’s”. This is an argument that is likely to play particularly well in the current White House, which makes it difficult for other western regulators to be too overtly hostile.
In our view Facebook have done their homework well. The structure is interesting and looks robust, and it establishes Libra as clearly not a bank, which will make satisfying regulators easier. With both Visa and Mastercard on board as founder members of the consortium, there is payment system expertise aplenty. And with Silicon Valley’s best minds and largest tech companies behind the technological infrastructure, the issues of capacity that bedevil crypto-currencies should prove surmountable. Finally, with the White House supportive – or at least not officially expressing concerns – other western countries will find it hard to stand in Libra’s way.
Indeed we think the bigger problem is that if it is successful, Libra might end up more like the Gold Standard, with world liquidity tied to a fixed finite source of backing (ie, Libra’s holdings of cash and government bonds). If the amount of Libra in circulation becomes of significant importance to the world economy then, in an echo of 19th century banking and liquidity crises, the inability to create new Libra at will might cause economic stress.
And here is the last of the authorities’ concerns. Faced with a possible economic contraction caused by inadequate circulation of Libra, governments will come under increasing pressure to permit the issuance of unbacked Libra. But this turns Libra into a fiat currency and risks the authorities finally losing control of the global economy and making the Libra Foundation more powerful than any single state.
At which point any company that disagrees with them could find itself blackmailed to maintain their membership of the Libra consortium or even barred from using Libra altogether (it is noticeable that Google, for example, has pointedly not been invited to be a founder member of the consortium). And even governments may find themselves under pressure to comply with Libra’s wishes, if the alternative is that they and their citizens are frozen out of the Libra payment system.
This may seem far-fetched and an exaggerated response to what is at the moment merely a proposal. But disruptive technologies appear to obey two cast-iron rules: a winner-take-all style, in which one company or platform rapidly establishes itself as not just the market leader but market-dominant, and a growth rate which moves them from “too small to be concerned about” to “too large to rein back” in a remarkably short time.
Faced with this, central banks may well feel that, brand new though the Libra proposal is, time is not entirely on their side to craft their response.