By Simon Stocker
Since Friedrich Hayek’s famous essay “The denationalization of money” libertarians dream of a world where private currencies compete against each other and no government or central bank can abuse its power. In 2020, Facebook launches with its Libra coin an attack on a classical state’s monopoly of power. But do we really need a private global currency?
Libra is going to be a hybrid of normal currency and cryptocurrency. Crypto because it is based on blockchain. Normal because in comparison to other cryptocurrencies the intermediary does not disappear. The Geneva-based Libra Association is going to take the role which usually banks play. Another difference to Bitcoin and Ethereum is going to be Libra’s peg to a basket of several currencies. Such a so-called ‘stable coin’ is in theory not subject to the kind of fluctuations we see among pure cryptocurrencies. Libra should also be integrated into Facebook and WhatsApp and therefore easily accessible. Of course, Facebook has just good intentions with its Libra coin: The goal is to have fast and cheap cross-border payments, an inclusive banking system and all that thanks to Libra.
Admittedly, Facebook’s official motives are noble. It is true that cross-border payments nowadays can be incredibly expensive and slow. The claim that the banking system in its actual form is unfair is justified and legitimate. But why a new currency? Why not a new payment system which uses the dollar? In fact, it is about setting new standards in digital payment and identity. Probably Facebook bears the Chinese WeChat in mind where online payment, e-commerce and messaging are already unified.
Either way, in developed countries consumers have absolutely no incentive to use Libra. With services like Twint we already have the possibility to pay fast and almost without transaction costs. Quite the contrary, users who buy Libra coins will be exposed to risk since the Libra Association does not guarantee you that the coins can be exchanged back. In addition, the value of Libra is going to depend heavily on the currencies to which it is pegged. So, a stable coin might not be as stable as its name indicates.
However, following the official intentions, developing countries could profit massively from the Libra project since they are often subject to much higher transaction costs. Unfortunately, this idea is not so new and in many developing countries similar payment systems like M-Pesa already exist. The actual problem here is that cell phones and internet access are relatively expensive.
Moreover, it is not clear at all how Libra should be regulated. Various economists consider Libra as a danger for financial stability. Since the Libra Association is based in Switzerland, it is probably the Swiss Financial Market Supervisory Authority that would be responsible. Whether they are up to the task remains unclear. It is also unclear what the Libra Association wants to do against the circumvention of sanctions or tax fraud.
Friedrich Hayek was very critical of state intervention and regulation. Regarding the political pressure under which Libra is at the moment, probably, regulation will not even be necessary. In the end, currency issues are always a question of trust and Facebook does not seem to be the right company to launch such a project. At least there is something positive about the Libra story: The debate about a cheaper payment transaction came back to the top of the agenda and central banks have started to think about digitalization.
Title Image by The Guardian