The stars were never going to align for Facebook’s Libra
Four months after Facebook announced a “new currency,” Libra, the project is foundering. It’s no surprise that Facebook couldn’t create a currency out of thin air — because Facebook can’t create a currency.
Facebook’s business model is to smash traditional gatekeepers under the guise of facilitating individual empowerment and then take on the gatekeeper role itself. Money may be the last gate standing — but it should remain impenetrable for good reason.
Facebook CEO Mark Zuckerberg used the “empowerment” language in announcing Libra in June. “Libra’s mission is to create a simple global financial infrastructure that empowers billions of people,” he wrote.
The idea is that you can put money — Libras — into a “digital wallet” and use the Libras to buy things online and, eventually, in person, from vendors who accept Libras. But Visa and MasterCard, announced as partners with great fanfare in June, quit the venture Friday, following PayPal, and Congress has called Zuckerberg to testify about the scheme.
By definition, a company can’t create a currency, just as a company can’t create a military. No matter how well-armed your company’s security force is, it’s still subject — legally, if not always practically speaking — to a nation’s laws.
Similarly, no matter how sleek your company’s investment offerings, they are not currency. Only governments create modern currency. Facebook’s currency is not a currency; it’s an investment product. As the Libra folk note, “it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.”
That is, you will convert your money — dollars, if you’re American — online into “libras,” and Libra will then convert much of that money back into dollars, euros, pounds (maybe), yen and other supposedly stable currencies.
Facebook is creating a traditional, if big, money-market account: a type of investment that is supposed to be low risk but generally pays slightly higher interest than a savings account, because it’s not quite no-risk. Except the Libra account, unlike most venues for savings, won’t pay interest.
So what’s the point? Residents of countries that use dollars and such can already do everything that Libra might do: buy and sell products online; transfer money cheaply; and, if they feel indisposed toward their home currency, invest their savings in another big currency.
The idea is to help people who don’t have these privileges. As Zuckerberg noted, “There are around a billion people who don’t have a bank account but do have a mobile phone.”
And there are billions of people who live in countries without stable currencies or the ability to make global investments: places subject to hyperinflation that ruins savings, such as Zimbabwe and Venezuela, and like China, which controls capital across borders, making it hard to stash money offshore to keep it safe from seizure.
This is nice: The fruit vendor in Zimbabwe would be “empowered” to keep his money safe from his corrupt government. Except, there’s nothing, technologically speaking, from stopping Citibank from inviting any working-class Venezuelan and Zimbabwean from opening up a Citi account on her mobile phone, and transferring her savings.
What stops Citi? Economics — it may not be profitable. Also, government rules. Those in places where a Libra customer lives (e.g., if China prohibits transferring money abroad, the prohibition will still apply to Citi, and Libra) and rules in the US and other developed countries to thwart money-laundering and terrorist-financing.
You can’t just deposit your Mexican pesos into a US bank account, no questions asked — because there’d be no way, absent a long process of verifying identity and source of income, of knowing where you got the money and what you plan to do with it once it reaches the Western financial system.
Actually, the United States often honors these rules in the breach: Saudi, Russian and other oligarchs have laundered money through Manhattan real estate, and drug and terrorist money finds a way, too.
But it’s not clear that we’ll improve the situation by handing responsibility to Facebook. Facebook hasn’t shown it can keep terrorist snuff videos and child-abuse images off its site, something the old news organizations it supplanted were capable of doing.
If money makes the world go around, do we want Facebook to be the one with its hand on the wheel?
Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.
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