WHY THIS MATTERS IN BRIEF
Who is more powerful today – Trump, Xi, or Zuckerberg? Think about it … Technology and an increasingly connected society are now making individuals more powerful than the state.
Tim cook recently went on record to say today governments can no longer go it alone, and in doing so he put what many people have been thinking for a long time into the spotlight – that today private organisations are increasingly as powerful, if not more powerful, than many nation state governments.
Today, the UN recognises 180 currencies worldwide as legal tender, all of them issued by nation states – and it doesn’t recognise cryptocurrencies like bitcoin in this way, even if communities of enthusiasts have been treating them as a means of exchange for well over a decade now.
All that said though one of the latest wannabe additions to this group, that I discussed when it first came out last year, Facebook’s Libra, threatened to do something that none of these other cryptocurrencies have come ever come anywhere close to achieving – threatening sovereign countries monopoly over the control and issuance of money, and turning the entire global financial system on its head almost overnight.
Today, Facebook, the company behind Libra, boasts over half the world population as active monthly users: 2.2 billion on Facebook, 0.8 billion on Instagram and 0.7 billion on WhatsApp. Combined with the fact that 1.7 billion adults worldwide have no bank accounts, a project like this, on a technology platform that could be increasingly viewed as it’s own “Virtual Nation” state, is the perfect petri dish in which to create what could easily be regarded as the world’s first truly global currency.
In its original documentation the independent Libra Council that Facebook first proposed to oversee the new currency based from Geneva would have become nothing short of a quasi central bank. Consisting of 27 giant corporates plus Facebook, it was going to vet aspiring applicants who wished to join their ranks for a fee of $10m (£7.9m); as well as manage the reserve of state currencies and short-term government bonds that would have backed the Libra.
This model is very different to the likes of bitcoin, whose exchange rate is driven purely by the supply and demand. In contrast, the Libra Council would have been competing in global currency wars against other nation states.
Imagine ten years from now if, say, 40 percent of all US dollars were held on deposit by Facebook, or the council, to back the issued Libra coins, which would have by then undoubtedly become widely used across the world. We can only hypothesise that US dollars might constitute a 30 percent weight of Libra’s so called “Asset-backing basket,” which would be made up of a variety of other currencies and other widely traded financial assets, in order to help keep Libra’s exchange rate steady – just in the way sovereign countries keep their own currencies stable.
In the likely event that the US experienced a moderate, or even severe economic crisis, Facebook, or the council, would then have needed to rebalance the basket of assets to defend the value of Libra.
So, let’s say they decided to revise down the US dollar weighting in their reserve to 25 percent of the basket. This would involve selling huge sums of US dollars and replacing them with, say, Euros, which would then have significantly driven down the value of the dollar. And now, hopefully, you can start to see the potential power hold that Facebook and Libra could have on the world’s financial markets.
Obviously, this would be a very negative market signal, encouraging other holders of dollars to dump them as well, thereby exacerbating the fall. And even before this happened, Facebook could potentially use the mere threat as leverage in negotiating with nation states on matters of regulation, taxation and so on. Based on Facebook’s current revenues, the company would already be 90th largest “country” in the world by, so, as you can see, its power to face off in negotiations with states and trading blocs is formidable even without Libra – and that’s before we discuss how it could leverage it’s network of over 2 billion so called “citizens.”
Which then begs the question: How do nation states control a global company with unprecedented access to their citizens’ data, its own currency, and perhaps the ability to affect their domestic politics and the strength of their currency on the global markets? It sounds tricky to put it mildly…
And by the way, it’s not only Facebook that is entering this space. JP Morgan also recently launched its own cryptocurrency for institutional customers, while 13 other global investment banks are planning to follow suit with currencies later this year. Samsung is also rumoured to be looking at launching a currency for ordinary customers, while it would not be surprising if other online giants like Amazon and Google were tempted, too. So, if country’s governments and central banks felt threatened by Facebook and Libra then just imagine how they’ll feel when there’s an avalanche of them landing at their dorsteps.
Mark Carney, governor of the Bank of England and chairman of the Financial Stability Board, told the G20 in 2018 that cryptocurrencies didn’t pose a systemic risk to the global financial system. His assessment might have been based on their current footprint rather than their future potential – which we all know doesn’t play by any historic rule book.
In fact, the blockchain technology that underpins new currencies like libra has astonishing potential. The ability to significantly move exchange rates is only part of it – if people buy and sell with these currencies, save with them, trade with them, demand for state currencies and bonds could plunge.
This would undermine the ability of central banks and governments to buy and sell these assets to set national interest rates. It would emasculate this vital means of managing our economies, leaving only fiscal levers like taxing and spending at the disposal of states. What then?
Of course, such a seismic shift in our control of the use of money would first require these new currencies to be widely adopted. Yet the genie has been out of the bottle since the arrival of cryptocurrencies – it will be very difficult to stop it now.
If this space comes to be dominated by big listed companies like Facebook and JP Morgan, it is at least arguably preferable to alternatives like bitcoin which are almost unfettered in having no geographic or tax domicile and being pseudo-anonymous in nature. A currency like Libra also has the potential to reduce consumer transaction speeds, improve transparency and allow users to store their wealth digitally using a “trusted” consortium of founding institutions.
And when it comes to future geopolitical shocks like Brexit, consumers will be able to shield themselves more easily by reducing their exposure to, say, the British pound by holding their wealth in libra or whatever instead. Arguably we are talking about a superior type of money that is better aligned to a younger generation that is comfortable with such new forms of money.
Notwithstanding, we need to come to terms with the size of this potential change and its ramifications: Facebook’s impact on our societies has been profound over the previous two decades, and libra may well eclipse that accomplishment. Facebook’s founding mantra of “move fast and break things” seems entirely consistent with the strategy for this currency, and as the American futurist Stewart Brand famously said “Once a technology rolls over you, if you’re not part of the steamroller, you’re part of the road.”
Well, nation states appear not to have been invited to get on board this particular steamroller which leaves a lot of vulnerable road, and with it a lot of worried and increasingly vulnerable countries …