After months of speculation, Facebook has finally lifted the lid on its plans for a global cryptocurrency.
Facebook hopes Libra will be available to selected users as early as next year for use in transactions across the platform. As with conventional currencies, the company hopes you’ll want to use Libra to pay for online transactions, transferring money and, somewhere down the line, additional banking services such as making loans and ‘smart contracts’, with apps able to process transactions automatically. Where it hopes Libra will beat conventional currencies is in cutting the costs of moving electronic money around, especially across national borders. A flurry of companies have signed up to support the scheme, each paying $10m to be involved in the early stages, from existing payment service providers Visa and Mastercard to ride-hailing app Uber. To stabilise Libra’s value, the cryptocurrency will be linked to a basket of conventional currencies like the dollar and the pound.
The plan is bold. Facebook has tried for a number of years to introduce payment services to its platform, and two years ago the company won a European banking services licence from the Irish authorities. But promising to create something that looks close to an entirely new digital currency for its 2.4bn users is orders of magnitude bigger than anything previously attempted. If successful, it is not unthinkable that in a few years Libra could become a rival to – and even supplant – existing state-based national currencies in the majority of transactions.
The advantages for Facebook are clear: not only can it take a cut from each transaction made, as existing payments services do, but it will generate reams of new, valuable data about its users’ shopping habits, tying users even more tightly into using the Facebook website – a win-win-win, from the company’s point of view.
As discussed on Novara Media previously, this isn’t a move made from a position of short-term strength, but one of long-term weakness.
Facebook’s business model critically depends on scale – getting as many eyeballs as possible, for as long as possible, on its platform and monetising their interactions. The more people use Facebook, the more valuable it becomes, but with over 2bn users, and expansion into Chinese and Russian language blocs limited by existing competition and regulation, it’s reaching a natural limit. Worse yet, it’s failing to pull in a new generation of users, with younger people dropping off the platform over the last few years. These barriers to growth, plus the security controversies that have plagued the company over the last few years, last year helped Facebook deliver the biggest one-day share price crash in US history.
So the company has to do something else – and like the other Big Tech firms, it views money services as the next big step. From Apple launching its own credit card to Amazon providing loans and Google securing its banking services licence, the Big Tech companies, facing rising costs and competitive pressures in their existing markets, see the provision of banking and payment services as the next big win.
The model for payment services is China’s Alipay, which is leading the charge towards a cashless society with 900m users globally. But Facebook’s goal further down the line is based on another Chinese site, WeChat, which integrates messaging, payment services and retail for another 1bn users. By turning a site into something like a user’s entire internet experience, it is possible to monetise every second they spend online. If Facebook can’t grow its user base any further, it has to work its existing base all the harder, creating a self-contained internet that – it is hoped – its users would never leave. Libra is a stepping stone towards that vision.
It should be clear, too, how Facebook intends to make its cryptocurrency work.
Currencies depend on trust. If no-one believes the pound I hold is worth anything, it becomes worthless. You have to trust the currency for it to function. But if there’s one thing Big Tech has managed to lose in the last couple of years, it’s trust – with Facebook perhaps worst-hit. Relative to other guzzlers of our data, such as conventional banks, social media is seriously mistrusted by the public. Meanwhile, money services (understandably) remain tightly regulated across the globe, particularly in the most lucrative developed-world markets.
To crack through this double barrier of low trust and high regulations, Facebook will plan to move into those areas with weak banking and payment systems and lower regulatory barriers. India, Facebook’s largest national market, is a prime candidate from this point of view, particularly if Libra can become the preferred means to make cross-border remittance payments. Once a sufficient user base can be developed there, it’ll have enough weight to surpass the barriers to entry in the tougher but valuable developed-world markets.
It’s not at all clear the regulators here and elsewhere are on top of Facebook’s move – or those by any of the other tech companies. Mark Carney’s first move after the Libra announcement was to offer Big Tech the use of banking facilities at the Bank of England itself – a huge privilege usually reserved for tightly-regulated commercial banks in return for meeting the strict conditions needed for a banking licence. By granting tech companies access, the Bank of England would be removing one obvious advantage the commercial banks might hold over them.
It’s reasonably clear why Carney made the offer: he’s hoping to outbid other central banks and put the Bank of England in a position to call at least some regulatory shots. But it’s an uncertain move that risks undermining existing banks, setting in train a race to the bottom amongst central banks and national regulators, and granting strange new privileges to companies generally operating beyond the reach of national financial regulators.
Worse, the justification for opening up Bank of England access in this way sticks well within the failed neoliberal boundaries of regulation, in which more competition is always assumed to produce better results for consumers and society in general – rather than, as we have seen in the past, promoting another race to the bottom as financial institutions are incentivised to bend and twist their way around regulations and take on excessive risks.
One looming danger here, only a decade after the last global financial crisis, is the new and poorly-understood forms of ‘systemic risk’ being created by the mash-up of Big Tech and Big Bank. In its most recent financial stability report, the Bank of International Settlements warned of some of these issues, claiming that tech companies could “loom large very quickly as systemically relevant financial institutions”.
When the global financial system crashed over 2007 and 2008, at the centre was the creation of poorly-understood new financial instruments, the now-notorious ‘collateralised debt obligations’, based on the complex but (as it turned out) fundamentally inaccurate ways to assess and process risk. One distinct possibility this time around is the expansion into credit-scoring and other risk-assessment methods by tech companies based on their users’ data, creating even more poorly-understood and fundamentally unknowable ways to handle risk. Fuse that with loan creation and you have the recipe for a spectacular blowout.
All of this poses deep challenges for the left. It forces us to operate a long way from our comfort zone of public ownership and national regulation. The creation of cryptocurrencies by the platforms, should they become viable, represents a direct threat to the role of central banks within monetary systems globally. And that, in turn, means the emergence of monetary systems that slip beyond easy regulatory control, undermining national economic sovereignty and democracy.
We will need new ways to think through the issues involved. One proposal gaining traction is to build on the existing base of trust in our national currency systems, utilising the huge advantage they enjoy here over cryptocurrencies. As Positive Money’s David Clarke has argued, by allowing ordinary citizens access to a public digital currency, directly backed by the central bank, intermediaries like the tech companies (and indeed conventional banks) can be carved out and a space created for a form of money that serves the public.
As cash fades from use, central banks are starting to look seriously at these ‘central bank digital currencies’, with the Bank of England posing a series of questions for its research. In Sweden, where 80% of transactions now take place without cash, an e-krona pilot is being launched this year, with the possibility of a countrywide launch as early as 2021. Under the current proposals, Swedish citizens would be given the option to hold a secure e-krona account, containing central bank digital money, which they could then use in ordinary transactions. Sweden’s Riksbank is the oldest central bank in the world, followed closely by the Bank of England. There are centuries of their societies’ trust embodied in these institutions. It may now be time to put that trust to work.