As if controlling a social media monopoly were not enough, Facebook has decided to get into the digital currency business. It announced plans to introduce its new cryptocurrency, called “Libra,” by next year. In telegraphing its plans, Facebook has expressed the hope that it would create “the foundation for a new financial system not controlled by today’s power brokers on Wall Street or central banks,” write Mike Isaac and Nathaniel Popper of the New York Times. A lofty goal to be sure, although when unpacking the details of Facebook’s digital currency aspirations, they seem ill-conceived and, much like Icarus flying too close to the sun, will almost certainly hasten the company’s downfall, or finally motivate a swath of government agencies to properly regulate it, which of course may amount to the same thing.
Already, the Bank for International Settlements (BIS), the Financial Stability Board (an international body that monitors and makes recommendations about the global financial system), the U.S. Federal Reserve and the UK’s Financial Conduct Authority are all signaling displeasure with Facebook’s proposed digital currency launch. Unlike other regulatory agencies, it’s hardly likely they’ll be pussyfooting around the issue as the DOJ’s antitrust has done. If left unsatisfied, they will shut it down, but, more importantly, this might break the dam in terms of D.C.’s diffidence in regulating Facebook’s other activities.
Perhaps the flaccid non-interventionist response of the federal government since the dawn of the internet has led Facebook’s CEO, Mark Zuckerberg, to assume that anything is fair game for the company. But central banks endure through the process of putting the squeeze on the rest of society. It’s one thing to create a newfangled web-based social community and avoid the regulatory strictures of, say, the Federal Communications Commission (FCC). Trying to muscle in on something as basic as money itself, without triggering a regulatory response (especially given the controversy Facebook has started to generate in its existing business activities), is naive in the extreme.
In addition to the mounting regulatory scrutiny Libra is bound to invite, the company’s decision to launch a new global financial system predicated on cryptocurrencies is almost certain to revive a longstanding economic debate on the nature of money itself. Ironically, the swarming crypto industry cheering on Facebook may end up seeing themselves regulated or crushed by the same rules framework that is ultimately enacted for Facebook.
Is money something historically that is a purely private sector creation, designed to facilitate frictionless trade, ultimately displacing barter in the process? Or is it a creature of the state, which alone determines what it will use or accept as money in its own transactions, and which therefore mandates what is acceptable as the principal unit of account by virtue of the government’s monopolization of money creation?
One way to conceive of money is as an IOU that is deemed acceptable via two consenting private sector parties. The difficulty, as the economist Hyman Minsky has emphasized, is in getting it accepted. The “state theory of money” suggests that this is done via taxation, whereby the state designates the unit of account in which all citizens must pay their respective tax liabilities, thereby creating both demand and value for what is essentially a “fiat” instrument. Those of a libertarian, private markets orientation, on the other hand, conceive of money as a store of intrinsic value that has historically arisen independent of state sanction, which in the past derived its value through some sort of tangible backing of real assets, normally gold bullion.
Facebook’s gambit appears to be a weird amalgam of the two competing theories. The company is making a calculation that a large multinational corporation with captive users throughout the globe gives Facebook the critical mass and captive audience designed to create a viable “digital IOU” whose usage it can impose/enforce among its captive user base. It still plans to use the blockchain technology, now prevalent among other cryptocurrencies such as Bitcoin. (One of the purported virtues of this technology is that it tends to restrict the cryptocurrency’s supply and, in so doing, establishes a scarcity value comparable to what existed under a gold standard system.)
What distinguishes Facebook’s proposal from other cryptocurrencies, however, is that the company is going to back Libra explicitly via government-issued currencies — dollars, euros — as well as “bank deposits and short-term government securities in currencies from stable and reputable central banks.” Of course, this begs the question as to the whole point of the exercise. At least with Bitcoin, one could make the libertarian case that it genuinely bypasses the pre-existing bank-dominated monetary system, as well as providing viable security safeguards through the blockchain technology, which therefore makes it unlikely to be prone to the privacy abuses that are now so prevalent at Facebook.
In the case of Facebook, the proposed linkages to existing state-backed instruments make it virtually impossible to conceive of a means whereby Libra can do the same. How does Facebook potentially bypass central banks, bank regulators and existing currency systems when it is backed by these very same government-issued currencies? Even more anomalous, the company is provisionally partnering with entities firmly locked into the existing payments system, such as Visa or MasterCard. It has even suggested that banks are welcome to join the “Libra Association” if they wish to do so. What’s the point, and what advantages would these companies secure?
Ultimately, this makes Libra look like just another link in a daisy chain of credit, the “moneyness” of its proposed cryptocurrency effectively established by its backing by other pre-existing monetary instruments. So why bother? Just because the label says Facebook (or Libra)? In case Mark Zuckerberg hasn’t noticed, Facebook isn’t quite the reputable brand it was a few years ago, and companies like PayPal already provide many of the types of services purportedly on offer from Libra (already operating under regulatory sanctions from the existing monetary authorities).
There’s also a certain kind of hubristic quality to Libra: Zuckerberg’s company is already under significant political and regulatory attack. Facebook’s CEO probably thinks (not unfairly) that Congress doesn’t have a good way of regulating his business via old 20th-century antitrust instruments (especially as most of Congress seemed utterly clueless when it came to understanding Facebook’s business model).
If Facebook introduces a cryptocurrency that in effect seeks to privatize or displace existing central bank functions, it is inevitable that the company will face a ton of regulatory oversight crashing down on it. As Chris Hughes of the Financial Times argues:
“Let us imagine that Libra works as planned. Hundreds of millions of people around the world will be able to send money across borders as easily as they send a text message. The Libra Association’s goals specifically say that ability will encourage ‘decentralised forms of governance’. In other words, Libra will disrupt and weaken nation states by enabling people to move out of unstable local currencies and into a currency denominated in dollars and euros and managed by corporations.”
Why on earth would any central bank allow this potential systemic risk to be introduced, to say nothing of the money-laundering opportunities facilitated by Libra? We already have a “too big to fail” issue with regard to large multinational banks, due to the crucial role they play in preserving the global payments system. Do we want to extend this guarantee to Facebook as well? Social media might be a newfangled type of business that doesn’t lend itself easily to the regulatory strictures of the Sherman Act, but money is precisely the kind of thing guaranteed to bring the Federal Reserve, the IRS, and several other regulatory bodies crashing down on Facebook, given this systemic risk.
There is already evidence that this is occurring: the BIS, the central bankers’ central bank that stands at the apex of global monetary officialdom, has already warned that Libra would attract regulatory scrutiny “to protect customers and prevent... [Facebook] from facilitating money laundering.” Equally significantly, Hyun Song Shin, economic adviser and head of research at BIS, suggested that the central banks themselves could easily appropriate many of the existing features of digital currencies as the world’s central banks update their own payment systems. Ironically, Facebook’s gambit could well catalyze these efforts.
Ultimately, I suspect, as Cornell Law Professor Robert Hockett has argued, that cryptocurrencies “will soon go the way of the ‘wildcat’ banknotes of the mid-19th century.” Why? Because the state has too much at risk here, and there is no incentive for it to lose its monopolist control over money. In fact, it was the failure of the state to assert is primacy over various private sector creations of money that engendered much of the systemic instability of the 19th century (in spite of the irrational and ahistorical nostalgia today for cryptocurrencies as a 21st-century private sector, “hard money” alternative to state-backed currencies). Much like the sun, the BIS is gently applying threats of “regulatory heat,” but today’s modern-day Icarus, Mark Zuckerberg, seems determined to fly ever closer, paying little heed to the risks.
The BIS, the Federal Reserve, the ECB, and other global monetary authorities and regulators will, as Hockett suggests, likely appropriate much of the technology now in place, and drive these private sector digital competitors out of existence. These institutions are nearing the end of a massive, multi-year regulatory enactment process designed to stabilize the industrialized world after the 2008 financial crisis. They are also busy updating their payments system in order to incorporate many of the technological features of cryptocurrencies. Facebook may be a tech giant, but as far as the global monetary authorities go, Libra would represent nothing more than another regulatory target, which would operate under their umbrella, and according to their rules, not the private whims of Mark Zuckerberg.
After the fiasco of the 2016 election, very few tears will be shed if Facebook too ends up as a casualty. Our global monetary authorities barely survived the regulatory wreckages exposed by the global financial crisis in 2008. Antitrust bodies have been similarly delinquent in their dealings with Big Tech. But failure to respond forcefully here to the latest regulatory challenge posed by Facebook risks turning out global economy into something that would reflect the worst pathologies of both Wall Street and Silicon Valley.