Facebook announced the launch of its new Libra “cryptocurrency” last week to much fanfare. Since then, bitcoin, the world’s most famous digital currency, buoyed by the first entrance of a major tech giant into the crypto market, has been trading at 400-day highs. But behind the Silicon Valley jargon of “blockchain”, “crypto”, “decentralised networks”, “distributed ledgers”, and, of course, “empowering billions”, Facebook’s Libra isn’t a traditional cryptocurrency in the normal sense of the word.
When the first bitcoin was mined in 2009, a reference to a front page news story of the day was embedded into its code: “The Times 03/Jan/2009 Chancellor on the brink of second bailout for banks”. This digital inscription from its anonymous creator nodded to the currency’s libertarian, anarchic ethos. Bitcoin was a radical break with fiat currency issued by discredited central banks: it bypassed failed institutions with fractional reserve systems, and directly challenged a traditional banking model left in disarray after the financial crisis.
The anonymity bitcoin afforded users meant it quickly became adopted for money laundering, tax evasion and illegal online purchase free from intrusion by government and law enforcement. With its extreme price volatility, bitcoin also became a vehicle for wild speculation. If you’d converted your life savings into bitcoin at the end of 2017, you’d have now lost more than half of them. If you’d taken out a mortgage in bitcoin in 2011, you would now be paying back 599,900 per cent. Such fluctuations have prevented bitcoin from becoming a useful store of value or medium of exchange. In other words, they prevent it from being a useful currency for anyone who isn’t involved either in currency market gambling or outright criminality.
But while digital assets like bitcoin have struggled to make inroads into widespread everyday use, Facebook, with over 2 billion monthly users, could potentially transform Libra into a global reserve currency. While most cryptocurrencies make a virtue of their independence from central banks and governments, the value of the Libra will be pegged to a basket of other currencies and low-risk assets, meaning its stability will depend on the stability of traditional currencies – avoiding the volatility associated with bitcoin.
Regulators and politicians have reacted with alarm at Facebook’s proposals. French Finance Minister Bruno Le Maire said Libra becoming a sovereign currency is “out of the question”. Mark Carney, the governor of the Bank of England, affirmed that Libra would be subject to “the highest standards of regulation”.
Mark Zuckerberg’s foray into international payments has also sent shares for Western Union tumbling. Libra will offer “the unbanked” across the world the chance to send remittances abroad for minimal cost and without need for a bank account. Indian regulators are unlikely to welcome Libra with open arms when it threatens an actually existing home-grown network of microlenders and payments companies.
Beyond Facebook’s noble-sounding aspirations of financial inclusion and helping “the unbanked” lies a desire to transform Libra into the default global currency for millions. But if domestic currencies in the developing world are traded in for large quantities for Libra, the resulting local currency depreciation will have the opposite effect, in fact worsening the load of its unbanked customers. Facebook plans to use customer deposits (when users convert their standard cash into Libra tokens) to invest in interest-yielding securities and earn returns on their reserves, meaning the money transmission license currently sought by the company will not be adequate.
Facebook’s role in the election of Trump and Brexit has also led to questions over their suitability as trustworthy stewards of people’s financial data. The tech giant promises a total separation between its social media arm and its newly created crypto subsidiary, Calibra, but ominously it has also promised to use financial data for cross-selling purposes only with users “permission” – i.e. they’ll make it as difficult as possible for you not to tick that consent box.
Cryptocurrencies have come a long way from being the preserve of basement-dwelling anarcho-capitalists and tech-savvy libertarians – 1 bitcoin is currently valued at $9,320 (down from a peak of $20,000). Now Facebook, the world’s biggest social network, wants a piece of cryptomania that could bring digital assets to the masses. But with wary regulators and a public reputation in tatters after the Cambridge Analytica scandal, its journey will be far from smooth.
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