There are over 2,000 cryptocurrencies, tokens, and blockchain instruments commonly traded on more than 250 platforms around the world. Some of these currencies are created by pseudonymous individuals such as Bitcoin’s Satoshi Nakamoto, while others are conceived by child prodigies, startups, large tech companies, or even governments. Almost none of them receive attention. Until last week, no sitting U.S. president had ever used the word “Bitcoin.”
Yet when Facebook, after much speculation and waiting, announced its own cryptocurrency, called Libra, governments were quick to respond. In India, politicians made clear that “this is not something we have been comfortable with,” while U.S. Senator Sherrod Brown, among many other colleagues from both ends of the political spectrum, was quick to point out “we cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.”
Kremlin economist Vladislav Ginko added that “Facebook’s Libra will have no alternative but to face being blocked on Russian territory,” while German MEP Markus Ferber warned of Facebook becoming a “shadow bank.” Within one month of its inception, U.S. President Donald Trump had weighed in critically on Twitter as Democratic members of the House of Representatives proposed the Keep Big Tech Out of Finance Act.
In the cryptocurrency community itself, the project did not make as many waves. But the more governments raised their concerns, the more enthusiasts of open, permissionless alternatives to Libra started raising their eyebrows. Why did Facebook manage to provoke such strong and concise criticism, when Bitcoin had not? Would Libra really manage to face a blanket ban in the U.S. and Europe while Bitcoin would remain legal? Would Libra succeed at widespread adoption where Bitcoin had failed?
Libra as a threat
Facebook isn’t the first large organization to have launched its own coin either. JP Morgan Chase announced its own cryptocurrency in February of this year, while payment startup Circle, backed by Goldman Sachs, launched a token in September 2018. Facebook competitor Telegram has reportedly raised 1.7 billion USD to build its own token TON.
It seems that unlike Bitcoin or any of its private competitors, Facebook has quickly hit a nerve in the politically well-connected circles of finance. Similarly to Bitcoin, it challenges not only the banking system but the U.S. dollar hegemony by building a system decoupled from the Federal Reserve and commercial banks. While Facebook has announced its currency will, similar to the IMF’s Special Drawing Rights (SDR), initially be backed by a basket of national currencies, it is not pegged to any government issued money and may freely float against them, possibly backed additionally by gold or real estate in the future.
Handing the power of a financial system to a tech conglomerate that might leave a country at any moment for a Caribbean tax haven surely does not excite policymakers anywhere. Moreover, if Facebook controls its own payment gateways, governments lose the ability to sanction the company or compel it to comply with its local laws, be it privacy protection in Canada, assistance to law enforcement in Russia, or hate speech in Germany.
Why Libra just might succeed
There is a sense that Facebook will be able to convince a significant number of people to use Libra, unlike other cryptocurrencies that exist today. Facebook’s broad user base is one indication. Whatsapp, the company’s most widely used product, has over 1.5 billion users. Equipping these 1.5 billion users’ phones with a convenient digital wallet might be the key to a “fourth industrial revolution.”
But it might also turn out to be a technocratic dystopian nightmare. While Facebook might not be out to directly oppress us, detailed knowledge of our purchasing habits in addition to our social circles and personal interests will allow a single company to collect an unprecedented amount of data from each and every transaction.
Money has intense network effects. We accept as payment whatever our peers will accept as payments, most importantly for rent, transportation, and food. The “Zuckbucks” might be harder for us to escape than the social network. If Libra is able to retain its purchasing power better than fiat currencies, it might prove irresistible to billions of people in emerging markets. Facebook, unlike the economists at central banks, might find no use in driving away users with inflation.
The path to adoption however will be very hard even for Facebook. No single bank is signed up as a partner of Libra, and both Mastercard and Visa have withdrawn from the project, dashing the promise (for now) of people being able to hop on board by credit card. And for many, the fact that Libra is not pegged one-to-one to a familiar currency poses risk—but there are those based in countries without a stable currency who would be drawn to this aspect.
Can it be as bold as Bitcoin?
The ability to conveniently exchange cash for Libra will likely define or break its success.
Let’s say a user in the U.S. buys Libra with a credit card and transfers the Libra to a family member abroad. How can Libra be cashed out quickly and cheaply? Any local partner will have to abide by the same local laws that prohibit other payment and remittance platforms, such as the troubled Whatsapp Payments. To convince local gray market money changers to treat Libra like electronic cash carries its own risks and requires Libra to have cash-like properties, like being a bearer instrument with irreversible, pseudonymous transactions.
Those using and advocating for the use of cryptocurrencies like Bitcoin are familiar with these problems and limitations. Bitcoin has been able to evade a lot of political debate because there is nothing to be done about it. Each exchanger is responsible for their own customers and transactions, but nobody can be held accountable for the system as a whole.
Facebook is just one of many members of the Swiss-based Libra Foundation, but the company has already failed to convince the public that this is a project outside of their control. Facebook will be politically and economically targeted for each one of Libra’s legal transgressions, and without Bitcoin’s bold willingness to ignore law and finance, Libra is just another Fintech app.