Thus, the Libra system is a somewhat more civilized and open oligarchy than bitcoin’s, but it’s an oligarchy just the same. How the Libra Association will use its power is anyone’s guess. The narrow money-transfer function that Facebook lays out in the white paper is just one possibility—the narrowest and least threatening one. Facebook might sincerely believe that the association will manage the Libra as a kind of glorified Western Union. But Facebook has broken its promises before. And even if the social-networking giant envisions the Libra Association as a benevolent, judicious overseer that does only what’s necessary to preserve the stability of this new financial medium, the structure of the association allows a far more aggressive type of business.
The Libra Association will, after all, be overwhelmingly controlled by for-profit companies, not by charities. These companies want to make money. The structure of the organization gives them a direct financial interest in the management of Libra because their investment in the reserve entitles them to dividends, which in turn depend on the assets that the reserve holds. If those assets appreciate, the members make profits.
Again, the assets in the Libra Reserve will consist of national currencies and government bonds—at least at the outset. Every time you or I buy a Libra for, say, $1, a portion of that dollar will pay for a government bond whose interest goes to the Libra Association members, not to us. This will prove lucrative for association members if millions of people end up using Libra.
Then again, government bonds pay low interest, and national currencies pay none at all. If the Libra Association members want to increase their returns on their investment, all they need to do is change the composition of assets in the Libra Reserve—a policy shift that they could make by a two-thirds vote. They could then, for example, exchange some of the currency and low-risk debt for somewhat higher-risk debt—by making loans, or by buying loans from banks and other loan originators. And with sufficient diversification, a more aggressive portfolio can be accumulated with relative safety. This is how banks work, and banks, of course, make a lot of money, especially when they are big.
And Libra will be big. Facebook has 2.4 billion users, and if, as Facebook promises, they can costlessly, seamlessly jump from their Facebook accounts to their Calibra wallets to spend money, many of them will do so. Visa has issued more than 2 billion credit cards and is used by more than 40 million merchants. Vodafone has 444 million customers. Uber has 91 million riders. With such a huge user base—many of whom are already the helpless playthings of Facebook’s algorithms—the Libra reserve will grow rapidly.
As Libra becomes a juggernaut, expect other huge companies to sign up for membership and then integrate Libra into their operations, delivering millions or billions more users. Currency, like communication, exhibits strong network effects—meaning that it becomes more valuable as more people use it. So the strategy Facebook used so effectively to build its social network—lure in customers with zero-pricing and then make money off them without their realizing it—will work just as well for Libra. Here, though, customers will enrich Facebook and its partners through interest payments on the reserve rather than exploitation of their data—though that might happen, too.