Facebook’s new Libra cryptocurrency is a smart move and a natural progression for the social media company toward providing financial inclusion, as well as potentially creating the largest global payment network in history. As of March 31, 2019, Facebook had 2.37 billion active monthly users, making it the largest social media network in the world connecting an unprecedented and significant proportion of the global population via technology. Despite critics and naysayers, their new currency could be a force for much good if successful, seems to have well-designed elements at the outset, and is not as risky as it is being made out to be. Here’s why.
The Inter-Connected Economy
Social media and currency have more in common than you think. Both rely on well-functioning networks in order to be successful. I use Facebook because it allows me to connect with my friends, family, and people in my professional network because they are already using the platform. Others use Facebook because it allows them to connect with their family and friends, and this is not dissimilar to the way money works. I use and hold on to dollars because I know others are willing to take it from me in exchange for goods. Others take dollars from me because they trust that they will be able to exchange it for goods from someone else. In fact, the value of the dollar today crucially relies on the confidence and expectation that it will be widely accepted as a medium of exchange tomorrow and the day after that and the day after that.
A reading of the whitepapers released by Facebook further reveals that the currency is not meant to be a stand-alone currency like the dollar or pound—or even Bitcoin for that matter. Rather, it resembles what economists call “inside money.” The only way to acquire Libra is to either buy it or invest in it through the initial offering, and the only way to create or mint Libra units is when they are purchased for fiat currency. The reserves of fiat currency will then be invested in low-risk low-yield assets, and customers will have the option to buy back their initial currency from authorized dealers at any time.Libra could lead the way to easier payments, remittances, and even credit options for millions in developing countries around the world.
This is similar to how our current banking system works. Most of us conduct a bulk of our transactions by swiping debit or credit cards or writing checks instead of exchanging actual paper dollars. The inside money or bank account balances are what is being transferred most of the time and doing the actual job of standing in for paper dollars. At the same time, we can withdraw cash from our account anytime we wish. Further, Libra will be managed through a non-profit association that utilizes open-source blockchain technology. Hence, unlike our current banking system, monetary profit is not the primary goal of creating Libra.
Whether people living in developed countries with well-functioning financial systems will have a need or demand for something like Libra to conduct day-to-day transactions is questionable. However, the biggest gains would come for those who do not have access to financial products or even electronic banking in many developing countries but do have smartphone and access to the internet. Like the mobile money revolution that allowed citizens of some African countries to make use of privately issued inside monies like M-Pesa, Libra could lead the way to easier payments, remittances, and even credit options for millions in developing countries around the world. This would open the road for large gains from trade and trigger economic growth.
Technology Is Rapidly Changing the Economy
While there are legitimate concerns about data privacy that need to be addressed, overall, we should cheer Libra as a step forward for “permissionless innovation” and more broadly for competition in currency that is all too rare in a world dominated by central banks. Similar to Facebook allowing non-profits and individuals to create crowdfunding campaigns for charity starting in 2015, and thus benefit from the platform’s worldwide network, issuing its own private currency is only a natural step forward and could benefit many who do not have access to electronic currency within that network. Technology is starting to push the boundaries of well-established conventions and institutions that we are accustomed to.It could also be the case that the introduction of Libra makes the Facebook network even larger as new users come on board specifically to benefit from it.
One thing is certain: We live in interesting times. Technology is starting to push the boundaries of well-established conventions and institutions that we are accustomed to. From the ability to become an e-resident of Estonia to raising a large sum of money remotely for a charity across the world or using private currency issued by Facebook, new technology is creating choices like never before, and we are only beginning to understand the implications for markets, civil society, and nation-states.