Facebook’s crypto experiment will languish on Capitol Hill
It seems Congress and Facebook are on a new collision course, not over privacy but over a cryptocurrency called Libra. Facebook just announced a new financial system using this cryptocurrency and built on blockchain technology. At the same time, Congress is looking to introduce a bill to ban all forms of cryptocurrency.
According to the Libra White Paper, Libra is “a simple global currency and financial infrastructure that empowers billions of people.” To this point, it is leveraging its 2.4 billion Facebook participants to entice strategic investment partners while targeting a new market of 1.7 billion underserved individuals in unbanked areas of the world.
The Libra White Paper faults the current financial system as outdated: “… parts of the financial system look like telecommunication networks pre-internet.” The white paper stresses the use of unique properties of blockchain technology upon which Libra will operate, including:
- distributed governance, which ensures that no single entity controls the network;
- open access, which allows anybody with an internet connection to participate; and
- security through cryptography, which protects the integrity of funds.
It has signed up 28 initial participants, including some of the largest payments systems operators in the world, Master Card, Visa and PayPal; major Gig economy companies eBay, Uber, Stripe, Lyft and Spotify; as well as venture capital, communications and blockchain thought-leadership companies.
In reaction to this announcement, House Financial Services Committee Chairwoman Maxine Waters has released a statement that “Facebook agree to a moratorium on any movement forward on developing a cryptocurrency until Congress and regulators have the opportunity to examine these issues and take action.”
This follows House Financial Services Committee member, Rep. Brad Sherman (D-Calif.), as reported by Forbes last month, urging his colleagues to consider banning cryptocurrencies due to the threat they pose to U.S. international financial power through diminishing the U.S. dollar’s central role in world financial markets:
An awful lot of our international power comes from the fact that the U.S. dollar is the standard unit of international finance and transactions. It is the announced purpose of the supporters of cryptocurrency to take that power away from us, to put us in a position where the most significant sanctions we have against Iran, for example, would become irrelevant, Sherman said.
Facebook is setting out to establish first-mover advantage, creating instant global scale through its existing global client base. Conspicuous by its absence is membership by any traditional financial institution even though Facebook sees itself collaborating and innovating with the financial sector and its regulators.
Facebook believes it can “deliver a giant leap forward toward a lower-cost, more accessible, more connected global financial system.”
One of the intriguing questions posed by Libra and other cryptocurrencies like Bitcoin is whether a privately issued currency can serve as money in commercial transactions. This would be money which is not issued by the government or its central bank where the power of a sovereign government underpins its value.
Facebook won’t directly control the Libra currency, nor the network. The individual members of the consortium will. There are 28 members at present, known as the Libra Association. Members will serve as “nodes” on the system.
Each member has put up $10 million to fund the currency’s reserves. Some will be permissioned to verify transactions and maintain records of them.
Still, the lure of Facebook’s nearly 2.4 billion monthly active users was too strong for many companies to pass up joining the Libra Association. Card companies have long fretted that a technology giant could muscle into their business, creating a payment option that cuts out card networks.
Participating in Libra allows them to closely monitor Facebook’s payment ambitions while sharing in the upside should the project gain traction with consumers.
This same logic could propel banking institutions, even central banks, to join the network: to learn, monitor and potentially share in the upside of Libra’s success while keeping all its options open. JPMorgan Chase, for example has recently begun testing its own cryptocurrency, JPM Coin, with its closed network of institutional clients.
Many central banks have expressed interest in having their own digital currency. That means letting the general public, not only banks, have deposit accounts directly with the central bank.
It would clearly be possible for a central bank, like the Federal Reserve, to have millions of accounts directly with individuals and institutions in an all-electronic relationship. The Fed would become a direct competitor with all private banks and with the Libra Association.
It would certainly be a highly advantaged competitor subsidizing traditional banking business with the profits from its currency-issuing monopoly.
Facebook is moving cautiously, selecting only large, financially substantial members to support the currency. A basket of currencies, still to be determined, will make up the reserve.
Many cryptocurrencies, including Bitcoin, have no underlying assets to back them. As a result, speculation and investment have caused massive swings in value.
The Libra reserve fund is intended to support stability of the coin’s price and achieve value preservation. It is expected that each Libra coin can be sold near its reserve value giving the coin intrinsic value.
Given Facebook’s current privacy and profiling issues with Congress, it would seem highly unlikely their Libra project will move along quickly. Most likely, Congress will hold hearings, the banks and their trade associations will lobby Congress to slow down the effort, and regulators will continue to move cautiously.
An exciting experiment in the use of blockchain will languish somewhere in the space between legacy mindsets and technological entrepreneurship. Upsetting the balance of power the U.S. now enjoys in the dollar being the reserve currency of the world will not be easy.
Allan D. Grody is president of Financial InterGroup Advisors, a strategy, research and acquisition consultancy.
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