Even in money, competition is good.
It’s easy to project the flaws of Facebook onto Libra, the social media giant’s cryptocurrency project, slated to debut in 2020. What would become of financial privacy in the hands of a company that has done so poorly as a personal data steward?
It’s a valid concern, and there are others. But none are so strong that we should reject the opportunities for choice and empowerment that come with new forms of money and financial services. Criticism should test and shape the offering, but Libra should not be slowed or stopped.
Most Americans have probably never thought of money as a consumer product that could be subject to competition. But it can be, and it will. What do people look for in money? Well, it has to have reliable value. It has to be widely accepted. It has to be easy and fairly inexpensive to transfer. Easy to secure. It’s nice if it can be transferred privately. It’s also nice if it’s hard to steal or seize.
Anything can be money. For much of humanity’s early history, basic commodities such as salt, cattle, cowrie shells and precious metals served as essential lubricants of trade. Today’s bills improved on four-legged beasts and ingots of metal.
Originally redeemable for ‘real’ valuables, paper notes came to be treated as valuable in and of themselves. Growth in the extent of commerce, though, meant that counterfeiters were hard to discover and punish. Governments stepped in because they could assure notes across wide areas.
Times and technologies change. Most money movements have gone digital. And with the advent of blockchain technology, the anti-counterfeiting function is an automated part of the software that maintains and transfers cryptocurrencies directly online. Money does not have to be government-provided.
So how does Libra stack up as a consumer product?
It will be backed by a basket of major government currencies, so its value and inflation-resistance should be on par with those currencies. That actually means continual losses of a few percent per year. It’s a standard practice of governments to debase their currencies’ value. But using Libra will be great for people in countries with mismanaged currencies from A to Z: Argentina to Zimbabwe.
With its tremendous user base, Facebook can help make Libra widely accepted. Unlikely to catch up with the dollar, it could easily eclipse projects such as Bitcoin, which has eschewed day-to-day use in favour of perfecting its decentralisation and security against censorship.
Where Libra may really shine is in easy, inexpensive transfer. Facebook and its partners in the Libra Foundation understand ‘user experience’. They can build digital wallets and exchange platforms that are easy to use, another area where Bitcoin is lacking. Libra users may avoid ATM fees, bank service charges, and the fees merchants pass on to consumers for credit and debit card payments. Then there are the savings to people in parts of the world without our sophisticated financial services industry. Remittance services charge double-digit percentages. In many parts of the global south, banks are hard to access, and their fees are high and unreliable. The result? A financial services system that excludes 1.7 billion people.
For financial outcasts, it’s harder to save, to start or expand a small enterprise, to educate children, to provide for family healthcare and much more. The status quo in global financial services is a scandal.
Part of the scandal is the surveillance system operated by the financial sector on behalf of governments worldwide. Mandated customer background checks, suspicious activity reporting, and high-value transaction reporting impose costs disproportionate to their benefits, invade the privacy of the innocent, and undercut the incentive to serve people in risky communities or countries.
On this score, Libra will be a wash only with existing money systems, though. Facebook – no friend of privacy, according to many – has pledged that it and its Libra Foundation partners will obey the financial surveillance mandates that exist worldwide. That is not good for privacy or international development.
But Libra represents an important step: competition among moneys.
In the cryptocurrency world, there has been minor debate about whether Libra even counts as a true blockchain project or a true ‘cryptocurrency’. It deviates from the pure versions of both. But Libra’s founding document says that it will begin to transition to an open, permissionless system – a real cryptocurrency – within five years.
That second act may require Libra to open a new front of competition – with itself. Competition is good. Let’s see what happens.
– by Jim Harper
Shut down Facebook’s currency plan before it begins
Credit Facebook with this: The company sure is audacious.
In June, Facebook announced plans to start a new global currency. Think about that. If it sounds troubling to you, trust your instincts.
Maintaining a monopoly over establishing the currency and making new coins is a defining feature of national sovereignty. Facebook wants to abrogate that right to itself – and do so on a worldwide scale.
What could go wrong?
A lot. In fact, the risks are so great that regulators around the world should shut down this new initiative before it gets off the ground.
Let’s start with the easy-to-understand issues. Facebook has an atrocious record of protecting consumer privacy. The Cambridge Analytica scandal made clear how little Facebook has done to protect privacy, but that is just one in a long list of examples.
Why then would we trust Facebook with holding data on billions or even trillions of transactions around the world? Facebook says it’s creating a new subsidiary that will hold this data and not share it with other parts of Facebook. Why should we trust this? Facebook is right now tearing down walls between Facebook, Instagram and WhatsApp that it had previously said it would protect.
Whether or not Facebook maintains this wall of separation, the new currency will enable it to glean even more information about its users, enabling it to engage in even more troubling advertising targeting and manipulation of consumers.
There are broader consumer protection issues that arise, as well. With an international platform using an international currency, it will be exceedingly difficult for regulators to crack down on bad actors who do business in the new Facebook currency. What happens when a lender in, say, Ukraine – perhaps failing to disclose where it is from – illegally tricks people into borrowing from them and then imposes improper fees, charges and super high interest rates? How is a US regulator going to do anything about that? Even more, what chance does a regulator in, say, Kenya have of preventing such abuses?
There are serious questions that do not involve traditional scams, too. For example, will Facebook and its corporate partners be able to gain information enabling them to price discriminate against users? How might that exacerbate racial inequalities?
The proposal also seems almost certain to exacerbate Facebook’s excessive market power and undermine competition. The risks are too great that Facebook will pull consumers into a closed Facebook ecosystem that will disadvantage competitors and consumers. It’s easy enough to imagine, for example, Facebook and its partners disfavouring competitors, including by excluding them, offering discounts to Libra partners, or punishing those using alternative private currencies. If Facebook’s plans get to scale, then exclusion of competitors would be utterly devastating.
Even more profound than the consumer protection and antitrust issues are matters of national sovereignty. For smaller countries, the Facebook currency could displace the national currency, undermining the ability of national governments to maintain control of their monetary policy. If countries’ currencies come under attack, the Facebook currency could exacerbate the problem. Even bigger countries will face seemingly insurmountable problems: the Facebook currency seems designed to enable money laundering and to facilitate tax evasion and tax fraud. It also seems to provide a mechanism to facilitate evasion of economic sanctions.
In announcing the currency proposal, Facebook has made a number of claims and promises that would address some of the possible problems with its plans (though not most of them). But Facebook’s promises are not worth much at all. Even if Mark Zuckerberg and Facebook executives truly intend to honour the commitments they are making right now, there is nothing preventing them from changing their minds in the future.
And that is a problem that speaks to fundamental problem with this whole scheme. Facebook is a corporation with no public accountability and, like other corporations, a singular focus on generating profits. It has no business taking over governmental functions like issuing currency, precisely because it is not accountable and because its mission is to make profits, not advance the public interest.
Facebook’s plans may well fail on their own. But they may not. The corporation’s global reach makes it possible that its new currency could gain widespread usage. Once that happens, it will be exceedingly difficult to prevent the very identifiable dangers inherent in the concept. Regulators should shut down this idea right now.
– by Robert Weissman
About the writers: Jim Harper is a visiting fellow at the American Enterprise Institute. Robert Weissman is the president of Public Citizen, a non-profit consumer advocacy organisation that champions the public interest in the halls of power. Both wrote these pieces for InsideSources.com.