It's hard to see anything revolutionary about Facebook's Libra
Facebook has its own cryptocurrency now. But why, exactly? What's it for?
Officially unveiled on Tuesday, the new digital currency, called Libra, will go live in 2020. Facebook already has 27 partners in the venture, including corporate heavy hitters like Visa, Mastercard, PayPal, eBay, Uber, and Lyft, plus some venture capital firms and nonprofits. They hope to have 100 partners or more by the launch.
The idea is to create an open-source digital currency, using the same blockchain technology that bitcoin was based on. Any customer could have a digital "wallet" of Libra, and could conduct transactions in Libra with any participating business and across any participating network. Libra will initially be available to the billions of Facebook Messenger and WhatsApp users, but presumably the goal is to eventually take it much bigger.
Facebook's own vision for Libra's purpose is pretty soaring: "1.7 billion adults globally remain outside of the financial system with no access to a traditional bank, even though one billion have a mobile phone and nearly half a billion have internet access," Facebook's white paper explaining Libra points out. "Moving money around globally should be as easy and cost-effective as... sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn."
But is Libra's actual design conducive to that goal?
Let's rewind the tape a bit. The successful national currencies the world has right now are run by their respective national governments — by the central banks those governments create, and the private banks that operate as public charters under those currency regimes. Conversely, the blockchain technology Libra's using, and that underlies bitcoin and such, allows the creation and maintenance of a totally decentralized database that tracks a currency's history — who has made what transactions with whom, and thus how much of the currency everyone has — without any overarching governing authority.
More than that, blockchain technology also enabled the creation of new currency supplies without any centralized authority. Any participant in the network could complete a particular task, the software protocols would confirm they'd completed it, and then they'd be rewarded for that task with new currency created ex nihilo by the network. In bitcoin as it actually ran, the only task this applied to was "mining" — maintaining the aforementioned database of all the historical transactions in the bitcoin network. But in theory, at least, those protocols could've created new currency to reward any widely varied number of tasks: Maintaining a ride-sharing service or an online grocery store and delivery service or a social network for musicians, and on and on.
That was by far the most revolutionary potential buried in the bitcoin and cryptocurrency craze. What's striking about Facebook's new Libra proposal is how unceremoniously it does away with that vision.
Libra will be run by a central association — literally, the Libra Association — that will make all the technical and software and managerial decisions. The Association would be made up of representatives from all those initial founding partners, presumably to further expand as others join in. There goes the decentralized aspect right there.
But more to the point, the currency will only be created when someone buys Libra using some already existing national currency. The initial supply of Libra will go to the founding partners, who have all agreed to kick in at least $10 million a piece. Conversely, Libra supplies will be destroyed only when someone takes their Libra back to the Association to exchange the digital currency for some traditional national currency. In the interim, the national currency used to buy the newly created Libra currency will be placed in the Libra Reserve — an investment fund of safe assets, like bonds for major western governments and the like. Returns from the Libra Reserve would be used to fund Libra's administrative operations. But more importantly, they'd also provide dividends to reward all the participating partners; that would be the profit incentive to entice investors to participate.
Under the U.S. gold standard, the Federal Reserve agreed to exchange any U.S. dollar for an equivalent amount of gold. In a similar way, the Libra would be backed by a basket of traditional national currencies like the dollar and the euro.
Libra's creators argue this will keep the currency stable, and avoid the bubbles that have bedeviled other cryptocurrencies like bitcoin. But it also means the supply of Libra will grow only according to the interests of people who already have money to kick into the system; which probably mainly means wealthy investors and corporations. Facebook officials told The New York Times that the Libra network could eventually offer services "such as lending and investing," though it's hard to know how that would work, since bank lending under traditional national currencies is itself an act of ex nihilo money creation.
Put it all together, and it's not obvious how Libra, in practice, would be functionally any different from mobile pay apps already out there. You have to get your hands on some traditional national currency before you can participate in either network. Thus the barriers to entry for people of lesser means are much the same in either case. A mobile pay app that has an easier time crossing national borders could certainly have some new uses at the margins, but beyond that it's hard to see what new possibilities Libra itself brings to the table.
For all of Facebook's soaring rhetoric about changing the world, Libra looks at best like a gimmick. At worst, it's one more effort to keep people forever enclosed in Facebook's walled garden of growing global dominion.