Facebook has been hard at work making Libra, a new cryptocurrency which it will use to let Facebook users easily transfer money to each other, which is supposed to be released in 2020. I believe that Facebook’s Libra will fail in every major economy and powerful state. Before I give my reasons why I would like to properly explain how the Libra is supposed to work. After that I will explain why any powerful state will try to stop the Libra from becoming widely used in their country, and why the Libra could become an important currency in developing countries.
Unlike most crypto currencies like say the Bitcoin the Libra will have a central bank, at least functionally in the form of the Libra Association. The Libra association will have the power to set both the amount of Libra in circulation and the exchange rate at which Libra is bought and sold. This Libra association is headquartered in Switzerland and is made up of 28 large companies including Ebay, Visa, Mastercard, Uber, Paypal, and of course Facebook. The Libra is supposed to be bought at an official Libra exchange, which will create new libra in exchange for real money and use that money to buy stable assets, mostly fixed income assets which will have to be quite liquid so that people can exchange their Libra back into regular money. Now, as always with Facebook there are huge potential privacy issues with the Libra but as this blog is about political economy that will not be discussed here.
Privacy issues are far from the only potential issues with a privately managed currency. As despotic and unaccountable governments have shown many times, control over a currency can be a powerful tool to supress a population, and as even accountable democracies have found, control over a currency can be a powerful tool to get economic advantages vis-à-vis international competition. In short, controlling a currency confers a lot of power, and most states would probably consider a private firm controlling a currency widely used in their territory an infringement on the state’s authority. Indeed, the US Congress have already asked Facebook to cease the development of Libra until Congress can understand what launching Libra would mean, and it has called Facebook to public hearings.
I’m not sure if the US government will allow Facebook to launch Libra at all, but if it does I’d wager that it will not be allowed to be released as originally intended in the US as that would be a threat to the dollar. Similarly, I believe that the EU will also investigate the impact Libra would have and that the EU will also try to hamper the Libra, especially in the Eurozone and I’d be very surprised if Libra was allowed in China at all. I’m not going to list more specific states here, I think you get the point. Powerful states will oppose the Libra as the control of the domestic currency is too important to be in the hands of a private entity. In developing countries though, I believe the Libra will be a major success, again if it is allowed to exist at all.
I don’t trust Facebook to act in the best interest of Libra users, and a private firm having its own currency sounds straight out of a cyberpunk novel but while I’m personally inclined to be pessimistic about the Libra, there are places which could really benefit from it. The people of Venezuela could benefit massively from a safer place to store their savings free from hyperinflation and beyond Maduro’s grasp. Given the resources Facebook has and the massive userbase it has I think the Libra stands a very good chance of becoming widely adopted and used in most places where it would be allowed to exist, which would be places where the state isn’t strong enough to stop it. Still, the Libra would most likely be bad from a privacy point of view as well as a corporate power point of view. The good news is that the Libra probably won’t be allowed to see the light of day.
If you enojyed this blog post you can read another one about how the Euro is similar to the gold standard here. Feel free to share this blog post with a friend or coworker who might find it interesting! You can follow me on Twitter and please come back next week for a new blog post about political economy or international relations.
Written by Karl Johansson, Founder of Ipoleco
Cover Photo by David McBee from Pexels
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