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THIRD WORLD ECONOMICS

Facebook and friends threaten to “Libralize” the world

Facebook’s proposed digital currency, Libra, can shake up global finance – and not necessarily for the better.

by Anis Chowdhury and Jomo Kwame Sundaram

On 17 June, a Facebook white paper proposed a new global digital currency it plans to launch in the first half of 2020. Libra will be managed by a “not for profit” Swiss-based Facebook-led consortium of “for profit corporations”, with Uber, eBay, Lyft, Mastercard and PayPal among its founding members.

The initiative has received mixed reactions. While a few have cautiously welcomed it, most commentators want it stopped or tightly regulated, with one calling it a “totally insane idea”.

Even US President Donald Trump has declared he is “not a fan” of cryptocurrencies, which facilitate illegal activity, adding, “If Facebook and other companies want to become a bank, they must seek a new banking charter and become subject to all banking regulations, just like other banks, both national and international.”

Trump’s comments came a day after US Federal Reserve Chairman Jerome Powell told lawmakers that Libra could not move forward unless it addressed concerns over privacy, money laundering, consumer protection and financial stability.

Meanwhile, the G20 finance ministers agreed that regulation of cryptocurrencies requires globally coordinated efforts involving national, regional and international authorities, spanning different regulatory and geographical borders.

Unlike other cryptocurrencies with no intrinsic value, Libra will be backed by “a basket of bank deposits and short-term government securities”. Hence, when anyone buys Libras, the Facebook-led consortium will acquire matching securities in different currencies, reversing this process when Libras are redeemed.

Although securities’ prices and exchange rates will become more volatile, it is claimed that Libra will be more stable!

The plan is to become “more decentralized” over time, more resistant to regulation, and, hence, an unregulated “shadow” payment system.

Facebook claims that Libra will be more efficient than all existing payments platforms, which are both fragmented and costly, with highly regulated financial institutions at their core, facing expensive prudential compliance requirements against money laundering and for consumer and privacy protection. By avoiding them, Libra could reduce costs, particularly for cross-border transactions. As Facebook asserts, its user-friendly Libra system can process 1,000 transactions every second, with almost no transaction costs. In early 2019, Facebook had 2.38 billion monthly active users. Libra will allow Facebook users to make financial transactions anywhere almost instantaneously. As Libra becomes popular, the consortium may offer more services, particularly credit.

Thus, Libra can shake up world finance, not just banking systems, but also by circumventing and disrupting central banks and governments.

Compounding risks

Critics have raised privacy, money laundering, consumer protection and financial stability concerns, pointing to Facebook’s track record of disregarding privacy, exploiting user data and failing to control its platform. Facebook has already been investigated for massive privacy violations, anti-competitive practices, eroding the free press and fomenting ethnic cleansing, while the “new money” may enable more illicit activities.

According to the Bank for International Settlements, cryptocurrencies issued by big tech companies such as Facebook could quickly dominate global finance, threatening competition and stability.

Matt Stoller, of the Open Markets Institute, has described Libra as being “like a private global International Monetary Fund run by techbros, except it needs reserves so it’ll need a giant bailout during a crisis”, highlighting four core problems with Libra.

First, ensuring a reliable payments system while preventing illicit financial activities, e.g., money laundering, terrorist financing, tax avoidance and counterfeiting.

Second, preventing conflicts of interest, e.g., involving access to information, business relations or technology.

Third, greater global systemic risk if Libra succeeds. Governments will need to prepare for public bailouts of a private “too big to fail” system due to the systemic threat posed, requiring more liquidity than any single central bank or government can provide.

Fourth, governments’ ability to pursue sovereign policymaking will be curbed as Libra and related decision-making will be in private corporate hands, not democratically accountable governments’.

Facebook CEO Mark Zuckerberg once bragged, “In a lot of ways, Facebook is more like a government than a traditional company ... We’re really setting policies.”

If Libra becomes popular and the consortium offers other financial services, private “for profit” companies would have their own central bank and “fiat currency”, undermining central bank and government control over monetary policy. This will effectively privatize monetary policy, with scant regard for the public interest.

Facebook claims the Swiss-based consortium governing Libra will be a “not for profit” foundation. But as Libra becomes popular, people will exchange their national currencies for Libra to transact with. When they hold Libra, the association will earn from investing users’ money, and may even issue extra Libra to earn seigniorage, as central banks do with national currencies.

They can also profit handsomely from regulatory arbitrage, e.g., between regulation and no regulation, or even just less regulation.

Even if Libra remains just a payments system, fully backed by fiat currencies in reserve, consortium decisions to buy certain currencies and assets will move bond markets and exchange rates.

Partners’ profits from using the financial data of Libra users can grow rapidly if loosely checked and regulated.

First target: developing countries

Facebook’s explicit target is 1.7 billion developing-country citizens without banking services, promising to speed up transactions and cut costs for them.

Thus, developing countries’ poorer capacities and capabilities make them especially vulnerable to the Libra threat. While they already lose trillions of dollars via illicit fund transfers, Libra will likely accelerate such losses.

Macroeconomic policies in major advanced economies make developing countries’ financial sectors vulnerable to shocks and volatility. Their already limited capacity for making independent macroeconomic policies will thus be further constrained.

As with the dollarization temptation, those in countries with weak currencies will be tempted to “Libralize”, reducing use of national currencies for accounting and invoicing, further complicating monetary policy and stability.

Such an unregulated, privately owned and directed global payments system issuing its own currency, further diminishing policy space for development, is alarming, especially for developing countries.

But merely suspending the initiative, until all its full ramifications are understood and appropriate regulatory measures are in place, will not address the problems of existing systems that encourage such moves, e.g., governments and central banks have lagged behind technological developments and have been slow in enabling low-cost real-time transactions.

Therefore, policymakers must urgently consider alternatives, e.g., creating publicly owned digital currencies to supplement traditional monetary instruments.

They also need new laws and global treaties to check those issuing global digital currencies and mitigate negative fallouts. (IPS)                              

Anis Chowdhury, Adjunct Professor at Western Sydney University and the University of New South Wales (Australia), held senior United Nations positions in New York and Bangkok. Jomo Kwame Sundaram, a former economics professor, was Assistant Director-General for Economic and Social Development at the UN Food and Agriculture Organization (FAO), and received the Wassily Leontief Prize for Advancing the Frontiers of Economic Thought in 2007.

Third World Economics, Issue No. 686, 1-15 April 2019, p4-5


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