This month, Facebook announced it was making an investment in crypto. More specifically, the company and its partners issued a long-anticipated white paper unveiling a new digital currency, a management mechanism for it, and a platform for its development. It is called Libra, a kind of half pun: The name refers to an ancient unit of measure, as well as sounding like the French and Spanish word for “free.”
Facebook’s new money would be free to use and free to roam, changing hands and crossing borders costlessly or nearly costlessly. That means it could help provide cheap, basic banking services and money transfers to everyone, something that could drive down poverty rates around the world. “Libra’s mission is to enable a simple global currency and financial infrastructure that empowers billions of people,” reads the official elevator pitch. “We believe that global, open, instant, and low-cost movement of money will create immense economic opportunity and more commerce across the world.”
Global, open, instant, and low cost: It sounds undeniably great. The status quo, while global, is hardly open, instant, or low cost. Still, Libra faces major challenges in becoming a preeminent financial tool of the global poor. Silicon Valley wants to use elegant technologies to disrupt the real world, but the real world is often where elegant technology goes to get disrupted.
The central way that Libra wants to help the bottom billion is by providing cheap or free money transfers, something the world’s aid groups, treasuries, central banks, and development economists all believe is an urgent goal. Remittances—when one person sends money to a person in another country, stereotypically meaning an immigrant sending money home—are an unheralded but powerful economic force. They total half a trillion dollars a year, with two-thirds of that money heading to the developing world. Already remittances are three times as large as official development aid.
But they are expensive and sometimes difficult to send, limiting their scope. Money going from, say, Toronto to a small town outside Conakry, Guinea, needs to pass through an invisible network of financial institutions, all regulated by any number of national and international bodies. That costs money. According to the World Bank, remittance processors charge a 7 percent margin, on average. Cutting remittance prices by five percentage points would save nearly $20 billion year, meaning $20 billion more for recipients.
Cryptocurrencies, like the one Facebook and its partners are building, could send this number to zero. There would be no series of global banking institutions thirsting for a cut. There would be no need for the sender or recipient to go to a brick-and-mortar bank or Western Union. There would be no need for either side of the transaction to have a bank account, or formal identification either. “No one can be denied access for any reason, whether that is lack of identifying documentation, insufficient of funds or credit, or even outright discrimination,” Jerry Brito, the executive director of Coin Center, a cryptocurrency research and advocacy group, told me. “All one needs to receive and send money is an internet-connected device.”
Why haven’t currencies such as bitcoin already become the preferred way to send money home then? In part because the user experience is often complicated, and in part because of price volatility. What immigrant is going to risk sending $1,000 to her family if it would end up turning into $800 by the time it got there? Libra could solve both those problems, given that its value would be tied to that of a basket of assets (it is a so-called stablecoin) and given that the user experience would be designed by Silicon Valley’s finest engineers.
But this elegant solution still might not be a workable solution for the world’s poor. For one, recipients would need to figure out how to turn their Facebucks into cash denominated in their local currency—meaning a middleman looking to take a cut would enter the picture. The recipient would not necessarily need to convert her money into quetzales or francs or rupees if local merchants accepted Libra, and creating an “ecosystem” is its self-stated goal. But cash remains the dominant technology used for payments in many developing countries.
That’s not the only potential drawback. Libra wants to be the currency of the internet, free and global and liquid. But being the free and global and liquid currency of the internet means being a facilitator of tax evasion and illicit payments. It means being a shadow bank, an unregulated one with no protections for consumers, businesses, or financial institutions. It means potentially facilitating currency crises and capital flight. If Libra were to become dominant, countries would lose a little grip—or perhaps a lot of grip—on their national accounts, monetary policy, and tax authority. “It would be revolutionary if it works, but getting it to work will require the buy-in of national authorities, and I’m racking my brain to think through scenarios where national authorities would want to promote a competitor to their own national currencies,” said Michael Pisa of the Center for Global Development.
Finally, there is the problem posed by Libra’s relationship with Facebook, which has come under fierce scrutiny for allowing users to organize racial violence, promote hate speech, and meddle in elections, as well as for trampling its users’ privacy. “It is hard to view Facebook as a benign force, given all that has emerged over the past few years about their operations in the developing world,” said Jeremy Konyndyk, also of the Center for Global Development. “Facebook has shown a consistent pattern of ignoring massive negative externalities of their platform, particularly if fixing those externalities conflicts with their revenue model. We can’t fully envision what those negative externalities might be under this new system—but tying people’s finances to a company with a history of privacy violations, information manipulation, and cross-cultural stumbles presents major concerns.” Already Congress and a number of regulatory bodies have called for scrutiny of the Libra project, with an eye to hemming in the power of the tech giant.
Still, Libra’s goal remains a vitally important one: Free, fast, reliable, and safe money transfers would mean billions of dollars of support for families at the bottom of the global income distribution. Facebook’s biggest contribution might be in generating more innovation in remittances, and drawing attention to the issue. That would be a worthy thing, even if its elegant solution is not the right one.