Barry Eichengreen is a professor of economics and political science at the University of California at Berkeley.
Living on the fringes of Silicon Valley and writing about the gold standard, I have the dubious privilege to be invited to lunch, from time to time, by ambitious young entrepreneurs with plans for a “stablecoin,” meaning a cryptocurrency pegged one-to-one to the dollar. I wasn’t so invited by the backers of Libra, Facebook’s newly announced stablecoin. But I still suffered a familiar case of indigestion.
Mercifully, Facebook avoided the idea that a stablecoin will free us from the tyranny of the Federal Reserve. Typically, stablecoin purveyors invoke a mythical past in which the monetary unit of account was free of government manipulation and backed by tangible assets, such as gold in the 19th century.
But as any historian will tell you, the 19th-century gold standard never operated this way. Governments were always involved. The gold backing of national monies was at most partial. Still, these simple facts don’t prevent the libertarian advocates of stablecoins from abusing the analogy.
Libra, unlike other stablecoins, is intended to complement national currencies rather than replace them. This doesn’t mean, however, that Facebook understands monetary economics any better than my 24-year-old luncheon companions.
Start with its composition. Since Libra is supposed to circulate globally, it will be linked to a basket of currencies. One can imagine a basket with a weight of one-fourth on the dollar, reflecting the share of the United States in the world economy, a weight of one-fifth on the euro and so on for the currencies of other economies. Libra will be pegged to the value of the basket, although it will fluctuate against each individual component. In practice, it might fluctuate sharply against those components given how widely exchange rates move. It, therefore, won’t provide Americans with the stable purchasing power of a dollar bank account.
Libra is supposed to be fully backed. In other words, Facebook will create a dollar’s worth of Libra only when a customer gives it a dollar. It will then put that dollar in the bank or use it to buy another safe asset, say a U.S. Treasury bond. If investors decide, for whatever reason, to dump their Libras, Facebook will be able to redeem them for a hundred cents on the dollar using the proceeds from sales of those same Treasury bonds.
Hence, for Libra to gain a foothold, someone will have to trade an actual dollar bill, which is straightforward to use, for a crypto-unit that is awkward to buy and sell. Facebook tells us that Libra will run on blockchain technology, which eats energy like there’s no tomorrow and can process only a limited number of transactions. If so, using Libra will be prohibitively expensive. Or maybe Facebook’s references to blockchain are mere advertising fluff, where in reality, Libra will run on whatever centralized accounting system Facebook chooses to deploy.
Either way, someone will have to trade a dollar backed by the full faith and credit of the U.S. government for a monetary unit backed by the full faith and credit of Mark Zuckerberg and the 28 corporations on Libra’s governing board. To be sure, the Fed can raise and lower interest rates and thereby affect the value of the dollar. But what prevents Facebook and its 28 corporate partners — the likes of Uber — from changing the composition of the Libra basket and altering its value as they see fit? What prevents them from changing the rules of the game midstream? Fed Chair Jerome H. Powell can only imagine such power.
Facebook wants Libra’s users to be people in developing countries without ready access to banks. But a growing number of such countries already have cellphone-based digital payment systems, such as M-Pesa in Kenya, against which Libra will compete — and presumably destroy.
Beyond this, who might be tempted to exchange a dollar in the bank for an equivalent amount of Libra? Most obviously, individuals and organizations engaged in money laundering, tax evasion and terrorist financing who value the anonymity of crypto-based transactions.
To address these problems, Facebook will have to track the identity of all those holding Libra. To identify bad actors, it will have to scrutinize their transactions. Leave aside its dubious promise to shield this information from its own social media and advertising arms. Do we really believe, given Russian manipulation of such platforms, that Facebook and its partners are capable of recognizing money laundering when they see it and searching it out when they don’t?
Are we then supposed to rely on Facebook to report the transactions it deems questionable to the Internal Revenue Service and Justice Department? Are we to assume that it will offer similar cooperation to 200 governments worldwide?
Credit card companies have been dealing with these dilemmas for years. Visa and Mastercard address them by partnering with banks, which issue their cards with a bank imprint. Those banks are regulated by national governments. They are subject to rules about what transactions to authorize, what information they report to the authorities, in what countries they can operate and how and where they hold their reserves.
In contrast, Facebook is not a bank. It is not regulated like one. Not yet, anyway.