Digital currency became an even hotter topic last month when the Libra Association, made of Facebook and 27 partner companies such as Uber, Paypal and Mastercard, announced the new block chain-based “Libra Coin”.
The new currency, Libra, will be able to be used for purchases as well as a quick low cost way to send money. This is in contrast to the current banking system where hefty fees are charged for international transactions and banks often profiting off foreign exchange spreads. Moreover, what makes Libra more attractive is that unlike many crypto currencies like Bitcoin, it is a stable coin as its value is pegged to a basket of low risk assets making it much less volatile.
Facebook will be developing the digital wallet called “Calibra” which will allow users to send Libra to essentially anyone with a smartphone around the world. Initially Calibra will be available in Facebook Messenger, WhatsApp and as a standalone app on iOS and Android.
With regulatory pressures mounting around data security and privacy and its main source of income coming from data driven advertising, it is interesting to see Facebook diversifying its offering and almost reinventing itself as a private, encrypted network.
And why not?
Facebook has an estimated 2.4 billion users monthly which is more than the entire population of China, America, Europe and Australia combined. Adding a payment and transaction system to its current social media platforms could create a user experience similar to Chinese app giant WeChat, in addition to solving the issue of slow and expensive international money transfers. Unlike WeChat however, Libra would be on a global scale.
While Libra has many potential benefits and a digital shake up of banking is long overdue, the coins’ implementation could have many implications to global monetary system. The Libra Association’s goals specifically say that allowing the free flow of money will encourage “decentralised forms of governance”. Libra may disrupt and weaken countries by enabling citizens to move out of unstable local currencies and into a currency denominated in dollars and euros.
With citizens using less and less of the local currency but rather a foreign currency, a country has less control over its monetary supply. In times of unsustainable economic growth, a country may not be able to slow the economy to more manageable levels of growth. Equally, in times of strong economic downturn a developing country may not be able to help encourage economic growth and renew the economy.
One could take the example of Greece as a cautionary tale. As a member of the Eurozone, Greece had no way to devalue its local currency after the financial crisis as it could not influence the value of the Euro leading to disastrous consequences. A decade later, Greece’s unemployment rate is the highest in the Eurozone. Libra may create a similar problem for other countries as Governments would have not control of influencing the value of the coin.
Venezuela also comes to mind on this topic . Despite the Venezuelan Government actually having control over their monetary policy, hyper inflation was further exacerbated by their citizens choosing to use US dollars instead of their own currency. With the government unable to control the use of US dollars in the country there was little room for monetary policy to be exerted and the economy to be improved. Libra coin may provide a quick an easy way for citizens of countries to get stable currency and in fact worsen certain countries’ economies as a result.
Going forward, policy makers will need to consider the implications Libra coin will have before introducing it into their economy.
On one hand, there are a whole host of issues with Libra coin which will need be considered. Whether it be the erosion of a countries monetary policy or that the Libra Association is made up of very large companies who may exert monetary policy on countries through Libra coin for economic gain, regulation around the coin will need to be very well considered to avoid disaster.
On the other hand, we are in a very new era in terms of the powers of a private entity. Today companies such as Google, Amazon, Ali Baba and Facebook are at a scale larger than some major countries. It is possible with effective regulation, greater economic prosperity could be achieved through the introduction of Libra coin. Citizens may benefit from freer-flowing currency at lower costs to transfer, not to mention the benefits block chain systems present.
In addition, the Libra Association also has a lot of work to do, not only convincing policy makers that Libra is a currency on a platform that should be accepted and can be regulated in an effective manner but also convincing businesses and consumers that they are protected and can actually use this currency.
It will be interesting to see the response of policy makers and consumers of Libra Coin and whether countries are prepared to hand over this level of power to private entities, especially giants like Facebook, Uber and eBay.
