Libra could be the start of an alternative financial system
beyond the reach of government -- and a boon to prosperity.
By Zachary Karabell
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 27, 2019).
The ambition is grand: "Reinvent money. Transform the global
economy. So people everywhere can live better lives." So said
Facebook last month in unveiling Libra, its new digital payment
service. The company heralded it as "a simple global currency and
financial infrastructure that empowers billions of people." If
fully launched, Libra would allow Facebook users to buy and sell
goods and services around the world and across borders using a
digital cryptocurrency governed by a collective in Switzerland. It
would be linked to but distinct from the dollar, the euro and other
currencies and maintained not by a government but by the behemoth
Silicon Valley tech company.
The reaction from governments around the world has been swift
and negative. "My determination to make sure that
Facebook's...Libra project does not become a sovereign currency
that could compete with the currency of states is...absolute,"
declared the French finance minister. "Because I will never accept
that corporations could become private states." In the U.S., both
the Senate and House held hearings and grilled Facebook executives.
For his part, President Trump tweeted his objections to
cryptocurrencies, "whose value is highly volatile and based on thin
air. Unregulated Crypto Assets can facilitate unlawful behavior,
including drug trade and other illegal activity."
It's worth emphasizing that these are reactions to an initiative
that has been announced but not implemented. The logic seems to be
that, because Libra is new, untested and potentially disruptive, it
should be banned or highly regulated lest it do harm. Distrust of
Facebook and the other tech titans is also a factor, of course.
Is the prospect of a wider role for Libra and other
cryptocurrencies really so dark? True, these new technologies, if
fully developed, could upend the monopoly of state-licensed banks,
state-issued currencies and the tax and regulatory framework that
undergirds them. They could place vast amounts of digital commerce
beyond the reach of governments, which in turn could erode the
ability of states to collect taxes and provide for the common
good.
But that's not the end of the story. Like earlier technologies
that seemed threatening at first, cryptocurrencies could be a great
boon. Their wider adoption could create a parallel financial
infrastructure that might unlock untapped global reserves, enabling
peer-to-peer transactions without the friction of banks, borders
and exchange rates. Today's layers of payment systems and banks all
add time and costs. With Libra (and other cryptocurrencies),
transactions become more seamless. Making myriad activities
cheaper, faster and easier could facilitate economic activity in
countries like India, where hundreds of millions of people remain
outside the banking system. What governments lose in tax revenue on
transactions that they can't track might be regained from greater
economic activity and prosperity.
Remember that bitcoin, the progenitor of Libra and other
cryptocurrencies, is only a decade old. Launched in 2009, bitcoin
is based on what was then a novel software protocol known as the
blockchain, which allows for each transaction to be authenticated
and protected.
Bitcoin is costly to mint and cumbersome to use, however, and so
far lacks a killer app to make possible its wide-scale adoption.
Hence the proliferation of myriad "alt-coins" such as Ethereum,
whose champions tout their advantages over bitcoin.
The result of this early competition was a speculative bubble
that crested at the end of 2017, with the price of an individual
bitcoin rising to almost $20,000, along with equally vertiginous
gains for other cryptocurrencies. Their total global market
capitalization grew to nearly $800 billion. Today, it hovers below
$300 billion.
Until now, the market for cryptocurrencies has been dominated by
a few large investors. Libra has the potential to be a step change.
Two of the limitations of crypto have been the difficulty of using
it and its unsettling volatility. By embedding Libra in a social
network platform with more than 2 billion users globally and
attaching the value of the coins to a basket of existing
currencies, Facebook could solve that challenge.
Today, if an American wants to hire a team of software engineers
in Bangalore, there are multiple ways to do it, using apps that
connect them and payment services to provide for funds. But behind
such transactions is an architecture of payments, exchange rates,
licensed and regulated banks, and government rules, all of which
add costs and friction.
Now imagine a world where that transaction exists entirely on a
social network platform. You could hire someone to do data entry in
India or Nigeria or Indonesia who doesn't have a bank account but
does have a social media account. You could be on your computer in
Austin, see an ad on Facebook for a perfume being sold in a Paris
boutique and buy it using your Libra account, with no link to any
bank account and no one collecting sales tax unless you declare
it.
That is far different from what exists today, even with payment
services such as PayPal. Those services are almost all linked to
banks, which in turn are regulated by governments. Libra can cut
out that middleman and also make a range of transactions that much
harder for governments to track and tax.
In the long run, Libra and the legacy cryptocurrencies could
potentially replace not just existing payment systems, not just
traditional banking, but the sovereign power of states over
currency. That is what politicians and regulators suspect and fear.
For its part, Facebook says that is has no intention to overturn
the current system, and its Libra consortium currently includes
major payments players such as Visa and PayPal. The company is
attempting to allay the concerns of both governments and
established banks.
But it's fair to wonder where it all might go. One of the
hallmarks of modern banks is the ability to issue credit; one of
the capstones of modern state power is the ability to issue
currency and to license and regulate banks. Libra at present isn't
a form of credit, and it is tied to a basket of currencies. You
might be able to use Libra to buy a Xiaomi electric scooter or
cellphone directly from a Chinese seller, but you won't be able to
pay your taxes with it.
Why then are governments in such a tizzy? Because they
understand that once in place, there may be no way to prevent a
sophisticated, widely adopted cryptocurrency system from evolving
into something much more far-reaching.
Would that be a bad thing?
States have been the foundation of economic prosperity for the
past century. The creation of regulations governing the
marketplace, the launch of a global monetary system after World War
II, the taming of banks and the establishment of relatively stable
currencies in affluent countries -- all were part of the mix.
No one would argue, however, that this system has solved all
problems or that most societies are at peak prosperity. Will states
and banks in their current form, or some new financial technology,
lead to the next great wave of economic improvement?
Libra may be a failure, or it may face so much opposition that
it never launches. The fierce response to it is certainly a
reflection of Facebook's wider problems and the troubling history
of cryptocurrencies. But it is also the reaction of a complacent
establishment to a radical and potentially revolutionary
technology. Perhaps it is time to shift our attention from the
admitted risks of cryptocurrencies to the astonishing opportunities
they could create.
--Mr. Karabell is the author, most recently, of "The Leading
Indicators: A Short History of the Numbers That Rule Our
World."
(END) Dow Jones Newswires
July 27, 2019 02:47 ET (06:47 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.
Meta Platforms (NASDAQ:META)
Historical Stock Chart
From Mar 2024 to Apr 2024
Meta Platforms (NASDAQ:META)
Historical Stock Chart
From Apr 2023 to Apr 2024