There’s something fishy about Libra – the new ‘global’ crypto-currency that Facebook and partners announced plans to issue this week. And unless and until more is known and then regulatorily approved, the project as currently advertised will remain underwater. It will be far more ‘Pisces’ than ‘Libra’ where catchy Zodiac names are concerned.
Now in case you don’t know what I’m referencing, millions this week are abuzz over Facebook and certain consortium partners’ announcement that they plan to issue a new crypto-currency on an associated payments platform – the aforementioned Libra and a digital wallet platform called ‘Calibra,’ respectively. Facebook and its partners aver they expect Libra to become a dominant, even the dominant, new payment medium worldwide. And with somewhere between two and three billion Facebook users across the globe, how could they be wrong in this prognostication?
Yet the fact is that what Facebook and its partners project is all but certain not to happen in Libra’s announced current form – at least for now, and probably forever. And the reasons, ironically, are precisely in owing to those proposed features of Libra of which Facebook and its partners are most proud. For these features ensure Libra, if it’s to be more than a mere scaled-up PayPal, Venmo, or foreign exchange (‘forex’) platform, would require both domestic and global regulatory approval and oversight – approval and oversight that won’t soon, and probably won’t ever, be forthcoming.
To cash out (pun intended) what I mean, let us first briefly consider Libra’s most salient proposed features. Facebook and its partners plan to make Libra usable via Facebook’s own user interface. Anyone with Facebook and Facebook Messenger will be able to send Libra-denominated payments to, and receive such payments from, other such users. Like any money, then, Libra would function both as a payment medium and as a unit of account – one would pay or receive payments denominated and measured ‘in Libra.’
Now because payment media must retain stable values relative to what they exchange for if they’re to function as moneys over time – the vaunted ‘store of value’ function that moneys are said to discharge with their ‘medium of exchange’ and ‘unit of account’ functions – Facebook and its partners must employ some price-stability maintenance mechanism if Libra is really to work as a currency. The mechanism that they propose is a reserve fund of perceivedly safe, liquid assets that will ‘back’ Libra – assets that will be added to the fund as Libra are issued, and that will sell out of the fund as Libra are extinguished (or ‘burned,’ as those I call Cryptopians put it).
In going the ‘backing’ route, more on which below, Facebook and its partners would be endowing Libra with the attributes of two other money forms that many will already know about – (1) the money market mutual funds (‘money market funds’) that proliferated during the 1970s and ‘80s and remained popular till the biggest ones crashed in 2008, and (2) the so-called ‘stablecoins’ that have emerged in the crypto space over the last several years. This is, probably, the best route for Facebook and its partners to take if their ‘money’ is to behave as … well, money.
But the problem this raises for Libra is that these very features, along with the scale on which Libra would operate and the privacy concerns it would raise, render the would-be currency either superfluous like most other stablecoins are, or legally impossible to issue and administer without domestic and transnational regulatory licensure and oversight. And such licensure won’t be forthcoming in the near future, and probably won’t be forthcoming at all, if Libra really does take the form Facebook and its partners now plan for it.
Let us turn next, then, to the regulatory concerns that these features raise, and to the regulatory responses that Libra will accordingly draw.
The first things to note about Libra from a regulatory point of view are its scale and scope in the user-base and jurisdictional dimensions. Facebook and its partners boast that with somewhere between two and three billion users across the globe, Facebook is well positioned to offer a payment medium that can immediately be used by nearly a third of the earth’s population – and can be used not only via desktop and laptop computers, but also via smart-phones and other electronic devices.
This is of course very good news from both a scalability and a financial inclusion point of view, and Facebook and its partners are understandably eager to tout it. But it also means Libra would immediately be what financial regulators call ‘systemically important’ in potential, as well as transnational in scope. And this in turn means that our regulators will be very concerned, both in their domestic and in their transnationally collaborative capacities, about any vulnerabilities that inhere in Libra’s design. For the stakes raised by such vulnerabilities will be massive.
Are there such vulnerabilities? Indeed there are – thanks, ironically, to precisely what Facebook and its partners plan to do to maintain Libra’s value.
As noted above, Facebook’s plan is to ‘back’ Libra 100% with pooled assets that remain safe and liquid through time. Among candidate assets, accordingly, are (1) sovereign currencies issued by jurisdictions with effective central banks or monetary authorities that successfully maintain price stability at home; (2) other sovereign debt instruments such as U.S. Treasury securities and Eurobonds that never default; (3) deposit accounts issued by well-regulated and deposit-insured commercial banks, and (4) other, less fully specified instruments in which there either already are deep, liquid markets, or for which Facebook and partners can provide such markets by taking on the venerable financial ‘market-making’ role.
Now you might already be noticing here, in connection with the first three asset classes that I’ve just enumerated, an interesting pattern: if Facebook is backing its putative currency primarily with what already are sovereign moneys and near-moneys, what work is Libra actually doing? How is it anything more than a conveniently available digital payment and currency conversion mechanism that can be used in remote areas and facilitate cross-border transactions? And if it is no more than that, why can the world’s central banks and monetary authorities not simply construct and make available a much simpler version of this mechanism themselves?
I’ll return to the latter prospect, of which I’ve been writing a fair amount lately, in a moment. But for now, let’s turn our gaze to the other, less well-specified asset classes that Facebook and its partners plan to include in their Libra-value maintenance pool – those I have numbered ‘(4) just above. For it’s these that would make Libra ‘different’ or ‘interesting.’
Facebook and its partners have announced that they plan both (1) to manage Libra’s reserve portfolio so as to maintain its value over time, and (2) to issue and extinguish Libra in precise proportion to new additions to and deductions from the portfolio, respectively. That is the right way to go about things if Libra is to operate as a stablecoin. But the real devil for Libra, if it is to be more than a glorified payment or forex platform as other stablecoins amount to, lies in the detail of whatever non-sovereign assets it plans to hold in the pool.
Facebook and its partners aver they will hold investment grade short-term commercial paper and related instruments insofar as they go beyond sovereign issuances. As noted above, however, this will impart to Libra the characteristics not merely of a stablecoin, but also of a money market fund. And money market funds, thanks both to their natures as bank deposit substitutes and to their consequent popularity among unsophisticated ‘investor/depositors,’ must be and are carefully regulated.
The urgency of the regulatory task where money market funds are concerned is well-highlighted by the debacle the industry experienced during the 2008 crash. As financial markets trembled and plummeted over that fateful autumn, funds’ investment portfolios lost value so quickly as to render their managers no longer capable of meeting their contractual ‘one share, one dollar’ commitments. Thanks to the widespread use of money market funds as payments vehicles – in effect, again, as substitutes for bank demand deposits – this ‘breaking of the buck’ placed the entire U.S. financial and payments systems on a cliff’s edge.
The magnitude of the danger necessitated the FDIC’s stepping in to insure money market fund accounts just as they’d long done for the bank deposit accounts since the ‘runs’ on inadequately regulated banks during the post ’29 Crash 1930s. And this the FDIC had to do notwithstanding the fact that those funds hadn’t been regulated like banks for their ‘safety and soundness’ ex ante to minimize likely failure and attendant recourse to public bailout. (Regulatory arbitrage of this sort was precisely the point of most money market funds, and was touted as such by the industry.)
The problem this poses for Libra is that governments and regulators worldwide haven’t forgotten what happened to money market funds only a bit more than a decade ago. They will in consequence require pre-clearance and exacting oversight of any new financial institution operating as money market funds do – viz., by offering moneys or near-moneys ‘backed’ by investment portfolios of inherently speculative, even if ordinarily safe and liquid, financial assets.
This prediction is already being borne out, within days of Facebook and its partners’ unveiling of Libra: Both Congresswoman Maxine Waters, Chair of the U.S. House Financial Services Committee, and the French finance ministry have announced plans to apply the brakes to Libra’s rollout until further inquiry can be conducted.
Will regulatory approval be forthcoming? I think it virtually certain that it won’t if Libra retains its current announced form – at least without attached ‘strings’ that neither Facebook nor its consortium partners are likely to accept. For, particularly insofar as Facebook and its partners hold non-sovereign instruments in Libra’s reserve portfolio, not only will Libra likely have to register as and submit to exacting regulation both as a de facto money market fund and as a systemically important financial institution (‘SIFI’) by the Securities and Exchange Commission (‘SEC’) and the Financial Stability Oversight Council (‘FSOC’), respectively, but it also will have to jump through all counterpart hoops raised by counterpart regulators in all other jurisdictions where Libra would be available.
But wait, there is more… The inherently cross-border character of Libra – one of its advertised virtues – will require coordination by all of the world’s principal financial regulators. Something akin to the Basel process, pursuant to which the world’s central banks, finance ministries, and other financial regulators develop uniform capital-regulatory standards, will have to be gone through. And that process, even when it successfully culminates in agreement on readily administered global standards, takes time – probably more time than Facebook and its partners will be willing to wait.
As if to clinch the point, note also that nothing I’ve said yet addresses the very poignant governance, security, and privacy concerns Libra will raise. To start with the latter, Facebook of course has been bathing – or boiling – in very hot water of late thanks to recent notoriously massive data breaches that have occurred on its platform. (Can you spell ‘Cambridge Analytica’?) These have been very concerning, to put the point mildly, to legislatures and regulators even without citizens’ bank accounts and financial data being the principal compromised data.
Adding money and payments to the mix only heightens the worry – as our already extensive regime of bank depositor privacy regulation, and as recent bipartisan Congressional hearings on fintech, abundantly attest. Before it could be approved, then, Libra would have to be shown to be compatible with that already-existent and highly protective banking privacy regime.
Facebook and its partners address these concerns by reference to the underlying technology that is to undergird their Calibra digital wallet platform – a cryptographic, distributed ledger technology. It is of course true that this technology offers certain salient safety features – features that account in large measure for their attractiveness as private payment modalities. Ironically, however, these features also impart to Calibra another attribute of concern to bank-regulatory and other law enforcement authorities – viz., the ease that they can impart to money laundering, terrorist financing, and other forms of illicit financial flow. Hence there will be yet another layer of very close regulatory scrutiny to which Facebook and its partners will have to submit before Libra can get off the ground.
Will Facebook and its partners find that submission worth the candle? I doubt it. I think what’s more likely is that they attempt to ease preclearance and other regulatory burdens by relying more upon sovereign issuances than privately issued paper to ‘back’ Libra, thereby converting Calibra into little more than a digital payments and ‘real’ transaction-tied forex platform, regulated as no more than such.
But here, alas, lies the ultimate irony – namely, that Facebook and its partners will render Libra regulatorily tolerable only by rendering it monetarily superfluous.
Let me close by unpacking that final point. As I have noted repeatedly elsewhere, the world’s central banks and monetary authorities, which administer their nations’ domestic payments systems and oversee the world’s cross-border payments system, are now looking to upgrade those systems. In so doing, they are unsurprisingly availing themselves of some of the many new financial and payments technologies now on offer, even going so far as to develop central bank digital fiat currencies administered on such platforms. It is all but inevitable, I believe, that our own central bank, the Federal Reserve System (‘Fed’), will follow this path.
Against this backdrop, Facebook, its partners, and others among those I call Cryptopians should ask themselves a question: what value can they add, in offering newfangled ‘moneys’ or near-moneys, particularly in light of the regulatory burdens that they will inevitably and indeed necessarily face in connection with any such offering that isn’t a mere glorified PayPal or Venmo?
The answer, I think, is none. There’ll be no need of a ‘Libra Reserve’ once we have a digitized Federal Reserve.
As central banks begin issuing digital fiat currencies, money as we already know it will simply go largely if not fully digital, and be universally usable via smart phones and other devices as it already is now in China. Cross-border payments, for their part, will involve currency conversions that central banks themselves already perform – and will be able to perform ever more seamlessly on a shared digital platform once they have upgraded their national payments systems. And if, in connection with these changes, central banks begin opening and administering what I call ‘Central Bank Citizen Accounts’ as I’ve elsewhere been arguing they should and they will, then there will simply be no special function for Libra or indeed any non-sovereign crypto-currency to perform. They’ll be like the private bank issued ‘wildcat’ currencies of times past.
What we should and in all likelihood will soon be doing, then, is fixing our eyes upon that goal and then setting about realizing it. Financial inclusion and payment system inclusion are ultimately sovereign responsibilities. All people everywhere have an inalieble right to participate in their economies and attendant banking, broader financial, and payments systems. The only way to ensure that these rights are vindicated happens also to be the only way to ensure that an economy and its money operate both stably and transaction-accommodatingly through time: that is through public monopoly issuance and maintenance both of sovereign money and of the financial ‘plumbing’ through which it flows.
Monetary and financial history themselves show the truth of what I’m here saying. Indeed they do so again and again, through every distinct era of payments technology from the age of clay tablets and tally sticks through those of metals and papers on down to keystrokes. Money’s past is fintech’s future. And the future at this point is sovereign digital currency and citizen central banking – in the U.S., a ‘People’s Fed.’ Everything else is distraction at best and subversion at worst.
So – dare I say it? – goodbye, Libra. And hello, FedCoin and BritCoin and YenCoin and …, maybe one day, a WorldCoin of the kind Keynes once proposed and the post-crisis Fed has been all but issuing as well.
