Source: Bloomberg, Jun 2019
Libra is precisely the opposite. Facebook invited a “dream team” of experts to design money and hired professionals to implement it. That’s the kind of top-down, backroom process populists hate, especially when overseen by a distrusted entity. Libra is not something evolved by users to meet self-perceived needs but an idea in which experts have balanced the interests of governments, non-governmental organizations, investors, large businesses and ordinary users.
The first four groups will all have strong voices in the development of Libra; users have to trust the experts to understand and defend their interests. While individuals can refuse to use Libra, history suggests that if the other four groups are happy with the coin, user resistance will be met not with improvements to meet objections, but with suppression of alternatives and penalties like legal-tender rules to force adoption.
Of course, at this point Libra has not forged any powerful alliance. It has 28 backers, most of which have committed little more than their logos, and only a few of which are powerful. Both populist and progressive politicians have been negative and neither major technology companies nor banks have joined.
On the other hand, ever since the Nixon Shock of 1971 ended the Bretton Woods era, people who believe a global elite of experts should design society have been working toward something like Libra—a rationally designed global currency administered by a group of disinterested technocrats insulated from democratic forces. This was the impetus behind the euro, also the gradual transition of financial regulation from national regulators with indirect accountability to voters, to multinational unelected groups like Bank for International Settlements, International Organization of Securities Commissions and Financial Action Task Force.
Although Libra has copied some features from cryptocurrencies, its rationale is precisely the opposite. Its competition is national currencies, not crypto. This is explicit. When the whitepaper describes providing currency to the 1.9 billion people now relying exclusively on cash, it means replacing the national currencies of countries like Nigeria, Mexico, Indonesia and Pakistan for the large majority of citizens.
While the initial design calls for 100% reserves in developed country currencies and government debt, that’s illusory, since its controllers can change the investments at any time. Any country that allows inflation or issues dubious debt can find its currency and debt dropped from reserves. Moreover, a successful Libra would likely switch to a fractional reserve system, with only enough national currency reserves for liquidity purposes, and currency backed either by loans and other risky assets, or nothing at all.
Libra is a complement to cryptocurrencies. Its blockchain design and Move programming language allows seamless interaction with crypto. Attempts to link the traditional financial system to crypto have been marked by extreme volatility, fraud, legal uncertainty and technical problems. One plausible scenario is that Libra succeeds in becoming the legal-tender medium of exchange for much of the traditional commerce in the world and that cryptocurrencies thrive for non-traditional exchanges.
On the other hand, if Libra fails, it will not be the last attempt to impose a rational global currency on a skeptical world. It may happen by gradual ceding of central bank and securities regulation to multinational entities, or by a new currency, or by negotiation among developed economy governments. Or it may be blocked by populist sentiment, or superseded by a pure crypto solution. The future of money is in play and Silicon Valley technocrats have just made a compelling move.