Why Facebook’s Libra Has all the Makings of a Private Central Bank
A columnist for The Wall Street Journal (WSJ) recently spoke about the upcoming Facebook cryptocurrency, Libra. According to the article, the columnist opines that the proposed stablecoin isn’t as promising as projected and added that Libra gives Facebook the “license to print money.”
Libra Will Become a Private Central Bank
Recently, U.S. Congresswoman, Maxine Walters, called for Facebook to halt further plans until regulators have carried out thorough investigations. Europe is also seeking tighter regulations following the release of the Libra whitepaper.
James Mackintosh, a Senior Markets Columnist at The Wall Street Journal, also voiced his opinions concerning the Facebook stablecoin. According to Mackintosh, the fact that Libra is pegged to several reserves to provide stability doesn’t mean those holders are wholly protected.
Buttressing this point, the columnist said:
“Like a money-market fund Libra has no capital and no deposit insurance, so any drop in the value of the reserves should mean the value of Libra falls. Losses from fraud, mismanagement or default within the reserve fall on Libra holders, unlike with a normal bank account or bank note.”
The Libra project appears to be a private central bank – one that could see its backers earning interests on the deposits held by potentially billions of users around the world.
Think of the U.S. Federal Reserve but on a more global scale. This is all the truer if one follows the assumption that the project could see massive penetration within traditionally underbanked communities given Facebook’s social media pedigree alone.
Although Libra has the potential to reach a global audience, the columnist states that this wouldn’t guarantee the stablecoin’s success. The reason for this is the cost of conversion on cryptocurrency exchanges like Coinbase. In the end, banking systems and international transfer platform would likely be cheaper than Libra.
Libra and the Cost of Trust: A Lesson in Semantics
Ethereum co-founder and founder of ConsenSys, Joseph Lubin, didn’t appear very positive about Libra, calling it a “centralized wolf in a decentralized sheep clothing.” According to Lubin, there is a possibility of digital identity merging with Libra’s financial data, thereby eliminating protection and privacy.
Lubin further stated that the word “Facebook” is conspicuously absent in the Libra whitepaper, and that could be because the company has lost the trust of its users. The Libra project doesn’t eliminate subjective trust and instead solicits a pivot from “trusted central banks” to private companies. Therefore, it is the same “cost of trust” component just that the subjective trust is now domiciled elsewhere.
Lubin added that although Facebook could encourage massive global adoption due to its reach, the company would have to go beyond “subjective trust” to fulfill its promises.
Interestingly, Facebook’s co-founder, Chris Hughes, called for regulators worldwide to step in and slow down Libra’s progress. Hughes further stated the so-called “decentralization” purported by Libra backers is nothing but a shift of power into the wrong hands.
If Libra succumbs to historical precedents and this outcome appears most likely, then all of those deposits could be used to take on an obscene amount of risk. There would be nothing stopping the Libra central bank from running fractional reserves and adopting dovish fiscal policies, including quantitative easing (a euphemism for infinite money printing).
Further expressing concerns, Hughes said:
“Facebook and its partners would hold undue sway over the development of crucial global technology such as identify verification, as well as effectively writing the rules on matters such as privacy and response to theft.”
Proponents of Libra might counter with the “voting mechanism refrain.” However, if one has learned anything from altcoin projects with so-called democratic voting structures is that it is easy to create supermajorities within the network.
If these powerful voting blocs want Libra to act like the central banks we’ve all come to loathe, there isn’t much stopping them.