By Mikael Fevang.
Anyone interested in crypto will most likely have heard of the news that a consortium of multinational tech behemoths, fronted by Facebook, is releasing their own “cryptocurrency” – the Libra. Amusingly dubbed “Zuck Buck” by FT’s Alphaville writers, the Libra aims for the moon by explicitly aspiring towards becoming a global currency similar to our payslip-denominating and rent-paying familiars. And, for once, that goal seems reasonably achievable. The names involved in Libra’s development, under a Swiss verlein umbrella, are nothing but impressive – ranging from global payment duopolists Visa and Mastercard to Vodafone and eBay. Contrary to many previous crypto projects, the credibility of these claimed partnerships is likely to be rock-solid given the reputations at stake. As such, any potential doubts as to the project’s earnestness can be jettisoned with vigour.
The same cannot be said for its honesty. For something advertised as a cryptocurrency, the Libra lacks several idiosyncratic features one would expect from one – namely decentralisation, immutability and transparency. The only present idiosyncrasy is the zealous and rambling White Paper, which seems to have been written by marketeers rather than technological literates. Packed with buzzwords and contradictions, the authors claim that Libra is based on a “blockchain” that contains neither blocks nor chains of them. But that is not the end of the absurdities.
For starters, the Libra will operate on a strictly permissioned network, allowing only vetted and accepted partners to operate nodes. For anyone who read my earlier work about DLT technology, you would know that this infringes on one of the main premises of cryptocurrencies – decentralization. Libra recognises this blemish by stating that it eventually wants a permissionless network, but that is a promise made conditional on “addressing [certain] technological and usability challenges”, as “[they] do not believe that there is a proven solution that can deliver the scale, stability, and security needed to support […] a permissionless network”. In other words, Libra does not even attempt to resolve the well-established problem of efficiency inherent to “true” distributed ledgers. Rather, they merely kick the can down the road.
Adding insult to injury, the Libra will also be governed by a central committee consisting solely of the node-operating partners. Tasked with ensuring price stability, the committee will have the power to burn existing and mint new Libra as well as adjusting a basket of bond-focused cash reserves intended to underpin its value. While prudent and reasonable on its surface, it would be foolhardy to believe that such a potent authority tasked with both running the network and governing the currency would be fully transparent in its dealings. After all, this is a purely commercial venture.
As you can see, the Libra lacks several of the strongest (perhaps only) innovations of cryptocurrencies. It is far more reminiscent of a pegged fiat currency governed by a central bank than what its dubious marketing labels would suggest.
The difference is, of course, that the Libra is not issued by a central bank on behalf of a nation state. It is issued by a consortium of corporations that transcend national borders and engage in regulatory arbitrage en masse. Espousing ideas of liberating the world from ominous banking structures and outdated payment systems, they are seeking to capitalise on both the populist outrage against the regulatory state and on banking the world’s unbanked. They even named it accordingly, referring to the balance scales commonly signifying freedom and justice.
But is that really the goal of Libra? Doubtful. Judging by Facebook’s previous behaviour and business practices, it is far more likely that it is an attempt at displacement rather than liberation. Banking is a lucrative business, especially when one can operate in a regulatory void like the one currently applicable to anything that labels itself “crypto”. Fearful of stifling “innovation”, the crypto label seems to have almost magical properties for keeping regulators passive.
Presuming that the Libra is widely adopted and that the regulatory inertia remains, the consortium will achieve at least two things:
- Liberation from burdensome regulatory oversight. By creating a new, global scheme for both paying and being paid, the consortium can disengage itself from the financial authority of individual nation states. Concurrently, it will also establish itself as a de facto monetary authority with a potentially enormous sphere of influence. This latter point is further enhanced when read in conjunction with the fact that the Libra is to be supported by a reserve of sovereign bonds, which, if the Libra is widely adopted, will make the consortium a major player in the international bond markets. Accordingly, the more Libra grows, the more influence the consortium will gain over state finances. It is neoliberalism and regulatory capture gone full circle.
- Increased control over users. Direct access to financial data and spending patterns opens up new possibilities for modelling and influencing users’ behaviour – including penalising unwanted behaviour by restricting access to personal finances.
Thrilling stuff. We can only hope and pray that it either flops or that major regulators step up and create common standards ex ante that effectively bars abuse and regulatory arbitrage.