Yesterday, we took a look at Mark Zuckerberg’s ambition to become a central banker, launching a form of “world money” called Libra.
Libra will essentially be an exchange-traded fund (ETF). It’ll hold a diverse basket of currencies and short-term government debt, and those in control will issue tokens (effectively shares) “backed” by those assets to those who want to buy them.
But it’s an ETF with a twist: you’d be able to spend the “shares” on real goods and services, and it won’t be managed by a traditional financial institution – though you can bet it’ll be regulated like one. Also, any of the interest earned from the underlying assets will be funnelled through to holders of Libra “investment tokens”, which you can only get a hold of if you partner with the Libra project and invest at least $10 million.
It’ll be interesting to see which currencies and assets will “back” the Libra token. Should the token be a success, this would give Libra geopolitical influence. Facebook is currently blocked in China, though it does work as an online advertising agency there. With Libra, “the Zuck” could approach the Chinese Communist Party (CCP), and request that Facebook be opened to the Chinese public.
In return, Zuck could offer to include the yuan and short-term Chinese government bonds within Libra’s currency basket (known as the Libra Reserve) at, say, a 5% weighting. The flood of cash from the Libra Reserve would increase international demand for the yuan and further “internationalise” it – a key ambition of the CCP.
It’ll also be interesting if Libra releases any backtests to show how stable Libra’s basket of assets would have been, relative to fiat currencies over the last few years. If Libra, thanks to its international diversification, is indeed more stable than individual fiat currencies, will folks use it as an online current account instead?
In countries like India where the currency movements can be volatile and where cash has been banned, a truly stable Libra may gain significant traction – but I can imagine it occurring here, not least following sterling’s schizophrenic Brexit action.
Zuck’s cavalier approach to Facebook privacy will no doubt turn many away from using his currency – but he’d be a fool to be anywhere near so careless now.
The traditional financial system is hardly immune from spying. The Snowden leaks revealed that a group within the National Security Agency known as “Follow the Money” had been hoovering up “bulk global financial data” as part of its broad surveillance operations, with a database called “Tracfin” which held 180 million records just by 2011. Agents joked that “Money is the root of all evil”, as they used Visa, Mastercard and the SWIFT interbank messaging system as a CCTV network to pick up suspicious activity and monitor targets.
Let me ask you a hypothetical question. If you had to choose between…
1) A volatile fiat currency – your transactions in which are spied upon by the government
or
2) A more stable, digital currency run by “Facebank” fronted by the Zuck – your transactions in which could be sold to those selling products or who want to get elected
… which would you pick? And, would your answer be any different if it wasn’t the Zuck in charge of the digital token? I’d love to know your answer. Drop me a line at [email protected].
This is purely hypothetical of course. We’ve no idea yet just how stable the Libra could be, and regarding privacy the Libra team has declared transaction data will only be sold for ads if you opt into it.
From where we stand now, I reckon the millennial generation will take to Libra like a fish to water (for better or for worse), and that the older generations will remain sceptical. But this could be a serious stumbling block for the project, as it’s mostly older folks who use Facebook these days.
No entry?
The gatekeepers to the financial system weren’t pleased by the appearance of Zuck on their turf, and have lashed out in response, just as they did with bitcoin. The most vehement reactions thus far have come from the French finance minister. From Bloomberg:
French Finance Minister Bruno Le Maire said the digital currency known as Libra shouldn’t be seen as a replacement for traditional currencies.
“It is out of question’’ that Libra “become a sovereign currency,’’ Le Maire said in an interview on Europe 1 radio. “It can’t and it must not happen.”…
Maxine Waters of the Democrats in the US has declared that all Libra development be halted until congress is satisfied saying:
“Given the company’s troubled past, I am requesting 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,”
Mark Carney meanwhile, has declared that if Libra is successful, “it would instantly become systemic and will have to be subject to the highest standards of regulation”.
I doubt Zuckerberg is much of a fan of regulation – but “becoming systemic” sounds right up his street.
Until tomorrow,
Boaz Shoshan
Editor, Capital & Conflict
Category: Market updates