Facebook has formally announced its intention to start a new digital currency, called Libra, even though the actual launch is still (at least) one year away. Predictably, nervous politicians across the globe have raised a “chorus of caution,” voicing concerns over privacy and security issues.
Never mind that Facebook is a private entity that does not force a single person to join its network and would not force a single person to use Libra. And ignore the fact that criminals use thousands of the same goods and services used by millions of law-abiding citizens.
Rep. Maxine Waters (D-Calif.), chairwoman of the House Financial Services Committee, wasted no time in calling for hearings—and for Facebook to cool its jets.
CoinDesk.com reports her as saying: “It’s very important for [Facebook] to stop right now what they’re doing so that we can get a handle on this…. We’ve got to protect our consumers. We just can’t allow them to go to Switzerland with all of its associates and begin to compete with the dollar.”
Waters’ statement echoes that of her colleague, Rep. Brad Sherman (D-Calif.), who last year called for a ban on using cryptocurrencies because they threaten“to undermine the U.S. dollar” and because they are “only useful for criminal activities like money-laundering, drug-dealing, and tax evasion.”
But the “criminal activities” argument is a poor rationale for banning the use of Libra or any other cryptocurrency. Criminals also use the internet, airplanes, smart phones, and computers. Should we ban the internet as an optimal solution to identity theft?
What’s particularly interesting is that Waters and Sherman are so afraid of competition for the dollar, even though they believe that cryptocurrencies have extremely limited use and that Facebook shows utter disregard for the people using its network.
If no law abiding citizens care about using these digital currencies, and if Facebook really is just out to steal data and harm people, what are Waters and Sherman so afraid of? There’s no need to ban such an awful product, and there is simply no way that a completely useless/nefarious currency could ever threaten the almighty dollar.
Could it be that politicians do not want U.S. citizens to have an alternative to the dollar? Is it possible that allowing privately produced digital currencies to flourish threatens the federal government’s ability to simply print money and pay for any and every spending program Congress can think of?
Perhaps Waters and Sherman adhere to Modern Monetary Theory, and they’re afraid that if too many people use cryptocurrencies the feds won’t be able to “pay” for the Green New Deal?
In one sense, this skittish attitude seems misplaced because cryptocurrencies have such a long way to go before they threaten any major national currencies. On the other hand, there is no denying the power a national fiat currency provides government officials. It is hardly surprising that they would try to shield this power from competition.
Libra is just the latest stark reminder that providing money does not have to be a centralized function of government. That’s why those running centralized governments are so fearful.
But if policymakers really want to help people, they won’t shy away from competition. Instead, they’ll recognize that allowing monetary competition – even just the credible threat of such competition – will help expose weaknesses and inefficiencies in existing monetary systems. They’ll foster ways to improve money with the same competitive market forces that improve other goods and services.
Libra, like other new digital currencies, is nothing more than a private innovation in the way people pay for things. It should not be shunned, banned, or regulated into irrelevance. It should be allowed to compete with other methods on a level playing field.
Libra is particularly intriguing – and to some people, scary – because Facebook already has a giant network of people using their service. But even though this network gives Libra an instant advantage over lesser known cryptocurrencies, Libra still faces just as many practical problems as any other new type of money relative to existing national currencies.
One of the biggest hurdles it must overcome is the lack of acceptance. And it is not immediately obvious why anyone would accept Libra for payment. The simple fact that Facebook has billions of users does not mean that any significant portion of those individuals will use Libra.
But this is Facebook’s (or, the association running Libra’s) problem. If they can’t demonstrate to people that using Libra is economically beneficial, then people won’t use it.
Though the details are still murky, Facebook appears to be betting that tying Libra to a basket of fiat national currencies will help convince people that it is worth using. Ultimately, though, Libra will most likely have to stand on its own. While that sort of reckoning seems light years away, the act of delinking from its basket of fiat currencies – provided Libra achieves widespread use – poses no particular problem.
In the 1930s, the U.S. dollar was still tied to gold, but people transacted mainly without moving gold around. It was easy for the government to delink the dollar from gold because people viewed the paper currency as their money. The same principle should apply to any cryptocurrency linked to any asset.
Once incredibly large numbers of people become comfortable using digital tokens to make purchases, digital tokens will be money. If Libra becomes such a digital token, Facebook will have created money. In theory, any large company with a massive customer base – Apple, Amazon, Google, etc. – is similarly set up to pull off the exact same move. But it won’t be easy.
Policymakers should view Libra from this perspective because the only way Libra will actually become money – or even just part of some new kind of payment system – is if it proves to be economically beneficial. And it’s the U.S. government’s job to protect people’s ability to figure such things out.
This piece originally appeared in Forbes https://www.forbes.com/sites/norbertmichel/2019/07/01/facebooks-libra-the-latest-reminder-that-money-does-not-have-to-be-centrally-provided-by-the-government/#2449d0403dc2