Facebook is the trigger for a currency revolution that’s long overdue — like it, or not
Money makes the world go around, but not the way it used to. Slow, costly, cumbersome and based on outdated technology and economic thinking, today’s global currency system is a drag on the worldwide economy. An innovative plan to reshape the world of currencies and payments should be welcomed with open arms.
But nobody on the U.S. House Financial Services Committee in October really wanted to hear Facebook Inc. chief executive Mark Zuckerberg’s testimony about his plan to shake up the global money system with a new, private currency. Instead, he had to deal with the usual grandstanding politicians whose main objective, from their power soapboxes in the committee room, was to make the head of the US$70-billion tech giant grovel. But his opening statement is worth another look.
As we sit here, there are more than a billion people around the world who don’t have a bank account but could through mobile phones if the right system existed
Facebook CEO Mark Zuckerberg
“As we sit here, there are more than a billion people around the world who don’t have a bank account but could through mobile phones if the right system existed,” Zuckerberg said about Facebook’s proposal to lead a band of tech companies — including Uber Technologies Inc., Spotify Technology SA and Vodaphone Group PLC — in creating a new currency, a “stablecoin” called Libra.
In the hours that followed, Zuckerberg’s outline of the Libra plan was drowned out by pontificating U.S. politicians who monopolized media coverage that continued to caricature Facebook as an untrustworthy lawbreaker and suppressor of basic rights. Facebook, House committee chairwoman Maxine Waters said, should be broken up rather than allowed to expand into something so vital as money.
But Zuckerberg’s words contain some of the core rationales for a currency proposal that has rattled the foundations of the government-controlled global monetary system, from central bankers to finance ministers, and corporate bank executives to leading academics.
“Being shut out of the financial system has real consequences for people’s lives,” he said of the billion-plus people without bank accounts, “and it’s often the most disadvantaged people who pay the highest price.
The idea behind Libra is that sending money should be as easy and secure as sending a text message
“People pay far too high a cost — and have to wait far too long — to send money home to their families abroad. The current system is failing them. The financial industry is stagnant and there is no digital financial architecture to support the innovation that we need. I believe this problem can be solved, and Libra can help.
“The idea behind Libra is that sending money should be as easy and secure as sending a text message. Libra will be a global payments system, fully backed by a reserve of cash and other highly liquid assets.”
Like it or not, Facebook is the new leading trigger for a currency revolution that’s already underway in China and India and now suddenly seems long overdue in the Western world. Libra may not make the world go around — yet — but it has certainly sent the established global money governance regimes into a panicky spin.
Within days of Facebook’s Libra announcement in June, the dominant regulatory powers brokers — the Group of Seven, International Monetary Fund (IMF), Bank for International Settlements (BIS), individual central bankers, European Union officials and finance ministers — began scrambling to cover their backsides. Reports flew, skeptical op-eds appeared, speeches delivered, panel discussions assembled, academics delivered condemnations, and lawmakers issued warnings.
There is general acceptance that the existing public system of currencies, banks, agencies and financial regulators delivers a costly, inefficient service in need of radical reform
In the end, two main broad themes emerged. The first is an acknowledgement of Zuckerberg’s opening claim that the system for moving money around is “stagnant.” There is general acceptance, even among Libra detractors, that the existing public system of currencies, banks, agencies and financial regulators delivers a costly, inefficient service in need of radical reform.
As Bank of England Chair Mark Carney put it in a post-Libra speech in August, the “deficiencies” of the international monetary and financial system have become “increasingly potent.” It suffers from “malign neglect” to the point where “even a passing acquaintance with monetary history suggests that this centre won’t hold.”
The second theme, however, looks suspiciously like a classic knee-jerk establishment determination to maintain a grip on a global currency system based on antiquated technology. The list of vested interests objecting to Libra is a global directory of the financial power structure, where it seems the first instinct is to shut down private digital competition.
To be fair, not all government agencies hold hardline anti-Libra positions.
Bank of Canada officials seem ready to entertain the idea of private money, even though they have dismissed existing cryptocurrencies such as bitcoin as “deeply flawed.” They will “never be effective as a means of payment, store of value or unit of account,” Timothy Lane, deputy governor the Bank of Canada, said during a digital currency discussion last month.
But Libra and stablecoins, he added, are another story. Due to their unique structure, backed by a reserve of major currencies, “You could have money being created by quite a few different players.”
One of the first official reactions to Libra came from G7 finance ministers and central bank governors. In July — four weeks after Facebook’s announcement — the ministers ordered a report on stablecoins, the jargony generic word for the Libra currency model.
The report, “Investigating the Impact of Global Stablecoins,” landed in October and highlighted the costly gaps in the global system and the burden borne by consumers. “Cross-border payments … remain slow, expensive and opaque.” Among the costs are banking fees, foreign exchange costs, telecommunications costs, interchange fees and a host of imbedded legal costs.
The World Bank reports that the average cost of sending $200 to the Philippines from Canada via Western Union, banks or other agencies is $11.72; for a $500 remittance, the average is $16.06.
On a global basis, such remittances reached US$689 billion last year, an increase of 10 per cent as the movement of people around the world also continues to increase. At an average of rate of seven per cent, the total cost of sending this money is close to US$50 billion a year.
Facebook’s main policy claim has been that a Libra private money network can eliminate much of that cost by allowing anyone with a $40 mobile device — including 1.7 billion people who do not have bank accounts — to send and receive Libras at a sharply reduced cost that approaches zero.
The official reaction to the Libra proposal suggests Facebook and its associates at other tech firms have the capacity to shake up the world of money well beyond making zero-cost money transfers available to the financially disenfranchised.
A joint report last year from the Bank of Canada, Bank of England and the Singapore monetary authority estimated that cross-border payments totalled US$22 trillion in 2016 and were set to rise to US$30 trillion by 2022.
Libra and other digital currencies would not gobble up all these transfers. Still, the G7 report in October warned that the impact of “retail stablecoins” such as Libra could sweep the banking industry. A Libra “could enable a wide range of payments and serve as a gateway to other financial services. In doing so, they could replicate the role of transaction accounts, which are a stepping-stone to broader financial inclusion. Stablecoin initiatives also have the potential to increase competition by challenging the market dominance of incumbent financial institutions.”
Another paper, by two IMF monetary officials, delivers a more dramatic outline of the competition-enhancing benefits — and the risks — of Libra-like money. In “The Rise of Digital Money,” Tobias Adrian and Tommaso Mancini-Griffolia anticipate a major global competitive shakeup in central and commercial banking. The two most common forms of money today — cash and bank deposits — would battle Libra and other versions of e-money.
There are powerful reasons for anticipating a Libra-driven revolution, the authors say. Such money, issued by central banks or privately, offers myriad benefits, including user-centric convenience, ubiquity, near-zero costs for immediate transactions and trust. “In some countries (China, India, Kenya) users trust telecom companies more than banks.”
And then there are the network effects, which occur when a new technology in one area generates changes in other areas. If Libra delivers on its promise, it could spread to a wider range of activities beyond simple money transfers. The power of network effects “should not be underestimated,” the paper said. Network effects are described as “the wind that could spread the blaze” of digital money.
Move over big banks and central authorities, for the first time in a century, private money is coming to deliver a little overdue competition.
The elephant in the room is central banks starting to get scared that they lose control of the monetary system
Queens’s Prof. Thorsten Koeppl
Or maybe it won’t. The main G7 report — prepared by IMF, BIS and G7 officials — is mostly a catalogue of theoretical justifications for creating bureaucratic obstacles, regulations and controls that could kill the private money concept.
Libra and stablecoins “pose legal, regulatory and oversight challenges and risks,” said the report, which went on to highlight a laundry list of concerns that needed attention: legal certainty, sound governance, money laundering and terrorist financing, safety and integrity of the payments system, systemic risks, cybersecurity, market integrity, data privacy, consumer protection, tax compliance, monetary policy, financial stability and fair competition.
Some of these concerns are legitimate, but economic progress would grind to a halt if every new and potentially disruptive innovative concept had to run through such a regulatory wringer. Can the Libra promise of launching a new, more competitive, more efficient and less costly global currency and payments system survive a regulatory dissection of every aspect of its operations and activities?
On the other hand, the West’s regulatory agencies face an overarching dilemma in their review of the emerging global currency landscape. If not Facebook’s Libra or some other Big Tech stablecoin, what’s the alternative?
You go out to China, India — you go to Kenya — they are using financial services that are all attached to big, big digital commercial platforms
Queen’s Prof. Thorsten Koeppl
Zuckerberg was lightly mocked in media reports for claiming before the U.S. House committee in October that if the U.S. did not take the stablecoin lead soon, “China is moving quickly to launch similar ideas in the coming months.”
But the China argument has much merit. Thorsten Koeppl, a professor at Queen’s University in Kingston, Ont., argues that the West is three years behind the curve in adopting network technologies as part of the currency and payments systems.
“You go out to China, India — you go to Kenya — they are using financial services that are all attached to big, big digital commercial platforms,” he said in an interview.
In China, Alibaba Group Holding Ltd. hosts one billion users of Alipay, while its competitor, Tenpay, claims more than 500 million users. Combined, China’s third-party non-bank mobile payment systems reportedly handle 10 trillion transactions a year valued at US$21 trillion.
Similar systems operate in India and Kenya. The West is “way behind” the East, Koeppl said, and Facebook’s Libra announcement was a “pivotal moment” for the West’s financial institutions. “The elephant in the room,” he added, “is central banks starting to get scared that they lose control of the monetary system.”
The U.S. dollar’s dominant role in the world trading and currency system is particularly vulnerable. Will China’s Communist Party-controlled currency and payments allow the yuan or some virtual version to supplant the mighty U.S. dollar as the anchor global currency if a Western alternative to the existing financial system is not found? If not Libra, then what?
In a commentary in The Guardian on Nov. 11, Harvard economist Kenneth Rogoff said technology is “on the verge of disrupting America’s ability to leverage faith in its currency,” which in turn will disrupt the U.S.’s ability to pursue other objectives via sanctions and other economic means.
Libra may not be the answer to the rise of Chinese and other currencies, said Rogoff, “But if not, Western governments need to start thinking about their response now, before it is too late.”
There are vague proposals to introduce new government digital monopolies, known as Central Bank Digital Currencies (CBDCs). For example, the EU plans to clamp down on Libra and is looking at issuing its own digital currency. In his post-Libra speech in August, Bank of England Governor Mark Carney has proposed an international Synthetic Hegemonic Currency, perhaps created by international agreement. The objective would be to supplant the U.S. dollar and somehow act as a response to Libra and a barrier to the rise of China.
But unless these new ideas are attached to and even managed by Big Tech firms such as Facebook, official government moves into digital money are unlikely to get off the runway any time soon. The implication is that central bank digitals are years in the future, leaving Facebook’s 2020 plan for Libra as the Western world’s only prospect for a new low-cost currency.
Opposition to opening a major role for Big Tech in the currency business is strong, but Libra has already launched talk of a money revolution that suggests we perhaps need to update the old Money song performed by Liza Minnelli and Joel Grey in the 1972 film version of “Cabaret.”
Libra makes the world go around
The world go around
The world go around
Libra makes the world go around
It makes the world go ’round.
A euro, a yen, a buck, or a pound
A buck or a pound
A buck or a pound
Is all that makes Libra go around.
Judging by the reaction of the global currency authorities to Facebook’s plans, Libra has already rewritten the lyrics. Sooner rather than later, the world’s currency authorities in the West are going to have to break out of the 1970s and start singing the 2020 version of Money.