Welcome to a special edition of the News Fix. Politicians and bankers are in the midst of a Category 5 freak-out over Libra, Facebook’s proposed cryptocurrency (or currency, depending on your point of view). The hysteria we’re hearing from supposed world and financial leaders would be hilarious if it weren’t so dangerous or shortsighted. So this week, we’re going to take a deep dive into Libra – what it is, how it works and why everyone is freaking out about it.
What is Libra?
Libra is a stablecoin that will be pegged to a basket of bank deposits and short-term government securities tied to currencies like the dollar, pound, euro, Swiss franc and yen.
This, right away, makes Libra different from bitcoin and other pure cryptocurrencies. The value of bitcoin, ethereum, litecoin and other pure cryptocurrencies is determined by the market. The value of stablecoins is determined by the value of their underlying assets.
An existing example of this is tether. In theory, for every tether in circulation, there’s an equivalent dollar being held in reserve.* That keeps the value of tether at around $1. This year, tether has traded between $0.99 and $1.03. Tether’s stable value makes it good for transactions. What tether can buy today will be roughly equal to what tether can buy tomorrow and six months from now. (*For reasons that are too complicated to get into here, tether’s reserve fund has only 74% of the dollars it’s supposed to be holding.)
By comparison, bitcoin is far more volatile. Bitcoin traded for less than $4,000 to start the year. And it’s trading for more than $9,500 now.
By pegging Libra to a stable and international mix of underlying assets, Facebook is making its new coin stable for payments and global in nature.
What will Libra be used for? And who will use it?
Let’s be clear. Libra is a massive payments play. In announcing Libra, Facebook outlined two clear goals:
- It wants Libra to be the internet’s native currency
- It wants to bring the 1.7 billion unbanked people across the world into the digital economy.
So let’s consider some use cases…
- Let’s say you don’t have a bank account or credit card. But you have to go online to buy a book your child needs. You can go to a trusted Libra seller or reseller and give them your cash (dollars). In return, you will get the equivalent amount of Libra deposited into your Libra wallet. You can then go online to buy the books using your Libra.
- You have relatives outside of the U.S. and want to transfer money to them. Because Libra’s worth will be exactly the same in the U.S., Asia, the Caribbean, Africa or wherever your family is, you can transfer Libra to them. You can transfer it without the slow, messy and expensive process that traditional banks would put you through. And your relatives will be able to use that money right away to buy things without even converting it into local currency.
- You live in a country like Argentina or Venezuela where the local currency is unstable. So merchants start pricing in Libra and consumers start purchasing in Libra to create a stable marketplace.
- You want to buy something online from another country. But the website doesn’t accept credit cards from other countries (this is actually pretty common). With Libra, it doesn’t matter. Libra crosses borders seamlessly. And you won’t lose any money to currency exchange fees.
This is exactly what digital currencies are designed to do. Who is freaking out about Libra?
The list is actually pretty extensive. Here’s a sampling of the reaction.
- “It is out of question [that Libra] become a sovereign currency. It can’t, and it must not happen.” – French Minister of the Economy and Finance Bruno Le Maire (Bloomberg)
- “I think there’s a lot of water to flow under the bridge before Facebook’s proposal becomes something that we’re using all the time. There are a lot of regulatory issues that need to be addressed, and they’ve got to make sure there’s a solid business case.” – Reserve Bank of Australia Gov. Philip Lowe (CNBC)
- “Multinational corporations such as Facebook must not be allowed to operate in a regulatory nirvana when introducing virtual currencies.” – Markus Ferber, a member of the European Parliament from Germany who also worried about Facebook becoming a “shadow bank” (CoinDesk)
- “Facebook is already too big and too powerful, and it has used that power to exploit users’ data without protecting their privacy. We cannot allow Facebook to run a risky new cryptocurrency out of a Swiss bank account without oversight.” – Sen. Sherrod Brown (Twitter)
- “Facebook has data on billions of people and has repeatedly shown a disregard for the protection and careful use of this data. With the announcement that it plans to create a cryptocurrency, Facebook is continuing its unchecked expansion and extending its reach into the lives of its users.” – Rep. Maxine Waters, chair of the House Committee on Financial Services who also wants Facebook to pause its work on Libra (Reuters)
What exactly is their problem with Libra?
That depends on who is doing the complaining. Early Investing Co-Founder Adam Sharp neatly summarized some of the opposition to Libra yesterday.
Banks should be worried. Who else should be worried about Libra? Any countries that don’t have their currencies included in Libra’s currency index. If citizens in these countries start to use Libra instead of the local currency, it could cause huge sovereignty problems. So I suspect many countries will ban Libra in the near future.
Bitcoin and other cryptocurrencies have paved the way for Libra. They’ve shown that it’s possible to build real currencies using software. And the world is going to change because of it.
Think about it. Now anyone can launch their own currency. Do you think Google, Amazon, Microsoft, Square, Alibaba and others will sit idly by as Facebook builds a potential financial dynasty? Unless world governments squash all of this digital currency ASAP, we’re likely going to see dozens of powerful new organizations sprout up and launch their own “Libra” projects.
These aspiring central banks can distribute their networks across hundreds of partners (like Facebook is doing), so the systems will be relatively decentralized.
For American politicians, the calculus is completely different. In the eyes of politicians, big tech companies are the villains of the new world economy. They can’t protect your privacy. They can’t protect your data. They can be used to manipulate people and elections. Big tech is out of control. And it needs to be reined in.
The Fix has no idea why an Australian banker is worried about whether Facebook’s business case is solid. Facebook thinks it is. That’s all that matters. Bankers and politicians need to leave the “business cases” to business.
Didn’t Facebook anticipate any of this?
Yes, it did. That’s why it’s been leaking news to the media for the past year. None of this is a surprise. We’ve known what Facebook has been working on for a long time. Facebook has likely been keeping regulators in the loop as well. It’s not stupid.
That’s what makes all of this outrage so tiresome. Politicians and regulators, if you were actually surprised by this, you should be ashamed of yourselves. It’s your job to keep up with this stuff. And this information has been well publicized.
And if this is all fake outrage, then stop it. If you have serious policy concerns, articulate them. Discuss them in a constructive manner. And move forward in a responsible way.
Fintech is supposed to be disruptive. It’s supposed to be innovative. It’s supposed to be creative. And it’s supposed to challenge the status quo, make things better and move things forward.
Facebook is doing its job. Now it’s time to put on your big boy pants, act like adults and make sure the private sector has the space to innovate and make things better in a responsible way. Even Facebook understands this…
The success of this venture depends on its trusted and safe integration with the existing financial system,” it wrote in documents describing Libra. “The world’s governments, specifically regulatory and law-enforcement authorities, are essential partners in this endeavor (The New York Times).
And that’s your News Fix.
Have a great weekend.
Senior Managing Editor, Early Investing
P.S. I’ll be writing about why we shouldn’t be worried about Facebook controlling Libra in Monday’s First Stage Investor article. Keep an eye out.