Facebook, one of the world’s most distrusted companies, wants us to trust its new Libra cryptocurrency, which, it hopes, will be used by billions of people around the world. We shouldn’t. Libra will almost exactly replicate all the problems generated by Facebook’s social network. Those problems can in turn be traced to the central paradox of Big Tech: The technological innovation that is supposed to liberate us from government ends up subjugating us to a handful of corporations.
The key insight underlying Libra is that the transfer of money from person to person is similar to the transfer of information. “Moving money around globally,” Facebook declares in the white paper laying out the company’s vision for its new cryptocurrency, “should be as easy and cost-effective as—and even more safe and secure than—sending a text message or sharing a photo.” Money is information: When I send money to you, I’m telling the financial system that wealth holdings assigned to me should now be recorded as assigned to you. Financial networks are information networks, just as social networks are. And yet while the internet has revolutionized social networks, financial networks have not caught up. They remain hard to use and expensive, especially for international transactions—whereas, once you own the hardware and obtain an internet connection, social communications are essentially free. In Facebook’s vision, the financial network will be modeled on the social network, and eventually the two networks will be merged into a single network, through which we will seamlessly convey to one another money as well as cat photos and political diatribes.
In the name of eliminating inefficiency and injustice in the financial system around the globe, Facebook’s new cryptocurrency threatens to replay what’s become a familiar story—of tech companies blithely reshaping the world around them, and significantly increasing their power over people’s lives, while being accountable to no one.
Libra will be a brand-new currency, in spirit the same thing as a dollar or euro. People will obtain Libras by handing over national currency to organizations such as Calibra, the subsidiary that Facebook is creating to handle Libra transactions. Calibra will in turn transfer this money to the Libra Reserve—a group of accounts held by financial custodians around the world. The money that goes into the reserve will be held there or used to buy other currency or low-risk government bonds. Meanwhile, people with Libras can transfer them over the internet, using them to buy things or make gifts. You can exchange your Libras back into a national currency if you need it, with the money coming out of the reserve.
While Facebook advertises Libra as a cryptocurrency, and Libra uses some of the same technology as bitcoin, Libra is actually quite different from bitcoin. There is no bitcoin reserve. If you want to exchange your bitcoin for dollars, you need to find someone willing to buy it. This is the source of bitcoin’s volatility: If people decide bitcoins are worth nothing, then no one will buy your bitcoin, and it is worth nothing. If people decide that Libras are worth nothing, they can trade them in for cash from the reserve. And because of this, people won’t decide Libras are worth nothing. The problem of volatility is solved.
But this solution comes at a price. And to understand how high this price is, we need some background. Bitcoin was promoted as a decentralized currency. No corporation, government, or other organization ran it. Its protocol guaranteed that a certain number of bitcoins would be produced at a predetermined rate, and this was supposed to guarantee that bitcoins would have a value stable enough for day-to-day transacting. The model was gold—a precious metal whose value remains relatively stable because of the economics of mining. When the market price of gold rises, miners dig deeper, producing more gold, which causes the price to fall. When the price of gold falls, miners stop mining, producing less gold, which causes the price to rise. The bitcoin protocol created a digital version of this process, with the important difference that bitcoins can be sent over the web, unlike gold bars or nuggets. And this meant that, unlike gold, bitcoin was supposed to be a usable currency for people who distrusted government management of national currencies. People could transact and save without worrying that the government would overborrow and then use inflation to wipe away debt. For libertarians philosophically opposed to government management of currency, bitcoin offered a technological solution to the government’s historic monopoly.
But in its raw state, bitcoin was too hard to use—and this gave rise to intermediary firms that supplied “wallets,” platforms that were accessible to ordinary people. And the important process of confirming transactions (“mining” in bitcoin parlance) also turned out to be too complicated for ordinary people—giving rise to sophisticated and wealthy entities that performed this process. Once these large players were in place, they became an oligarchy that dominated the bitcoin world. When the bitcoin protocol needed to be changed from time to time in order to address inevitable problems, the oligarchy made the decisions and profited from them.
We’ve seen this story before. The early internet itself, along with some relatively simple applications such as email and chat rooms, created a decentralized system of communication over which no central authority—no government, no corporation—exercised much power. But ordinary people did not like the chaos of the early internet. They wanted a more structured environment, and this gave rise to the big social networks, above all Facebook. Once that structure was in place, the system was no longer decentralized. Facebook kept claiming that it was, but made policy choices—about how information was displayed, about the use of data—that harmed a great many people. We now see that Facebook regulates speech and privacy for millions of people, domains normally left to government. What started out as a libertarian utopia is now a highly regulated environment, albeit one regulated by a corporation rather than by our government.
Facebook obviously knows this history. It knows that a fully decentralized Libra would not be usable. But it also knows that the natural solution—a centralized currency controlled by Facebook—would not be trusted. The white paper solves this problem by seizing both horns of the dilemma, claiming that Libra is both decentralized and centralized. Libra is supposedly decentralized because it is based on blockchain, the technology used by bitcoin, which ensures that records are kept by multiple users rather than by one, and in this way enhances security and transparency. Facebook itself will not operate Libra. But Libra is also centralized via the creation of a governance body. That body is the Libra Association, to be located in Switzerland. This body is supposed to prevent the emergence of a bitcoinlike oligarchy to rule over Libra.
But it’s hardly clear that, in practice, the Libra Association will act any differently from the oligarchy that dominates the bitcoin world. The white paper provides a few details about how the Libra Association will work. It currently has 28 members, with that number expected to rise to 100. (To get the system started, the members put money in the Libra Reserve, which will enable the creation and circulation of an initial pot of Libras.) Major policy decisions will be made by a two-thirds vote. A small number of nonprofits are given slots, but the majority of members are large profit-making corporations, including PayPal, Facebook/Calibra, Uber, Visa, Mastercard, the telecommunications firm Vodafone, and various venture-capital powerhouses. Ordinary people who buy and use Libras have no votes.
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.
If the Libra Association takes this path, and the Libra Reserve gets big enough, its policies will have macroeconomic impacts throughout the world. The reserve will, at a minimum, hold government debt, and buying the debt of one government rather than another has macroeconomic consequences. If the Libra Reserve lends or buys risky assets, it will affect the global money supply, just like a central bank. Facebook’s white paper promises that the Libra Reserve will not exercise monetary policy: “Since Libra will be global, the association decided not to develop its own monetary policy but to inherit the policies of the central banks represented in the basket.” But deciding not to develop its own monetary policy today doesn’t prevent the Libra Association from deciding to develop its own monetary policy in the future. It’s clear enough that Facebook knows that Libra will have the capacity to conduct monetary policy; otherwise, there would be no reason to promise that it won’t.
But how the Libra Association will use its power is anyone’s guess. The white paper is long on happy talk and short on details. The point is that, along a plausible future path, it will gain immense power, and it’s not beholden to the public, unlike the central banks that manage national currencies. For all the glitzy futurism of cryptocurrencies, Libra is a step backwards in social and political terms, the way bitcoin tried to throw us back into the age of the gold standard. Until central banks were created in the 19th and early-20th centuries, dead-tree versions of the Libra Association were plentiful. They included family dynasties such as the Medicis and the Rothschilds, and massive private banks. Driven by profit and able to operate across national borders, they accumulated massive political power without feeling loyalty to any particular nation—until governments finally reined them in.
Of course, Libra could fail, or become nothing more than a niche product like Venmo. And it could certainly do some good by reducing the cost of transferring money. But government regulators need to approach Libra with a great deal of skepticism, given Facebook’s track record of moving fast and breaking things.
The company has already shown that a successful tech platform can scale up quickly to a once-unimaginable size. An international banklike organization with potentially trillions of dollars in assets and, through its members, ties to billions of users around the world will have a massive influence over people’s economic affairs and far too much political power to be effectively regulated by governments—just like Facebook’s social network.