The Libra coin announced by Facebook is not a run-of-the-mill cryptocurrency. Its value will be supported by a basket of assets that will make it virtually stable. The project and its potential future raise questions about the risks of banking disintermediation.
The announcement of the creation of a cryptocurrency managed by a conglomerate of large companies led by Facebook – i.e. Libra – has relaunched the debate over these digitally native currencies that trouble many public and private actors. Economists, regulators, public officials and finance actors have raised questions about the risks and potentialities of Libra which, upon close examination, is not a run-of-the-mill cryptocurrency.
“Cryptos”, the “currencies” that are a product of a Libertarian utopia
Are these 2,000-some “cryptocurrencies” actually real currencies? They are essentially a product of a utopian world in which money would no longer be national but universal, valid in all countries and for everyone, and able to be transferred completely securely and without cost. These currencies would pass through intermediaries, and their value could not be manipulated by governments or central banks. They would be subject to private, decentralised management. They would guarantee the anonymity of transactions, and their guardian would not be a central bank but a supposedly infallible algorithm. In short, a form of anarcho-capitalism…
To accurately define cryptocurrencies and evaluate their potential instability, we must take a look back at the history of money issuance. The first banking currencies were issued in quantities that were increasingly high multiples of bank assets in precious metals, gold and silver. They circulated and were regulated freely by supply and demand. It gradually became clear that this system was unstable and was creating financial and banking crises. This led to the creation of central banks, to homogenise the monetary field and ensure the role of lender of last resort in the event of systemic crises.
Currency was subsequently issued not as a proportion of assets in gold or silver but from scratch, consistent with the development of the economy. Banks created money from credit. This system was supervised by an external institutional authority: the central bank, which, by pursuing a monetary policy, created the possibility of stability and demonstrated the usefulness of institutions and rules.
A hyper-speculative asset
Cryptocurrencies have no counterparty, be it gold or silver or the needs of the economy, since they are issued by private individuals according to arbitrarily set rules. These “currencies” are therefore not currencies at all, and are highly unstable. It is, in fact, conceptually impossible for anyone and everyone to create their own currency, since to be considered as such, currencies must be globally recognised as a payment method that releases the debtor from debt in order to pay the creditor or supplier. If everyone can issue their own currency, none of these “currencies” can win the necessary confidence from everyone to be accepted by all economic agents as a discharge payment method. The value of these “currencies” varies in a totally speculative and even erratic manner, without the basis of trust tied to the institutional role of issuers. Cryptocurrencies are in essence hyperspeculative assets, as created by the financial world from time to time when it completely loses sight of the real economy.
That said, while these pseudo-currencies do not contribute to the common good (in the words of Jean Tirole), the encryption technology on which they are based, i.e. the blockchain, opens a field of interesting technological possibilities.
A UFO on planet Crypto: Libra
Libra is different from other cryptocurrencies for two major reasons. First, the potential number of users. With 2.4 billion accounts, Facebook has the capacity to convert a considerable number of loyal users. This cryptocurrency could therefore eventually be used on a massive scale.
Moreover, and contrary to other cryptocurrencies, the value of the Libra will be backed by a basket of sovereign currencies and assets – on the basis of the 1-for-1 principle – which will make it virtually stable. Each Libra created will have its counterparty. Facebook will therefore not issue currency, in the strict sense of the term. Everything will unfold as if via a “currency board”, or a payment method internal to a system, such as casino chips or balls in the ancient system of Club Med villages.
What would be the consequences for banks, regulators, States and citizens if Libra came to be used on a massive scale?
Payment and money transfers
If major players in the payment and money transfer industry, whether established or up-and-coming, have decided to join Calibra (the foundation that will manage Libra), it is because in the short or medium term, this currency represents a disintermediation risk for them in this market. Indeed, the size and number of customers of the actors forming Calibra makes an “uberisation” scenario plausible.
Credit activity and monetary issuance… eventually?
Calibra will not issue currency in the strict sense of the term, due to its perfect attachment to a basket of assets. As long as 1-for-1 remains the rule, the impossibility of creating Libras from scratch, which is what banks do with their national currency, will prevent Calibra and its satellites from playing the role of a traditional banking institution. But it would be, for example, entirely possible for a non-banking financial institution to lend Libras to individuals or companies. The surface covered by the Calibra actors and the 2.4 billion potential lenders and borrowers allow us to imagine the possible scale of such a “shadow banking” phenomenon.
Moreover, the Swiss foundation managing this “currency board” could very well, once Libra is accepted by a larger public, loosen the 1-for-1 constraint it currently wants to impose. Following the historic example of banks vis-à-vis precious metals, the foundation could one day easily start to create its own currency, strictly speaking, by creating Libras in a multiple of the quantities of currency received and invested in counterparty. At that point, the monopoly of the right to issue currency will have slipped out of States’ hands.
A reorientation of savings to the detriment of the private sector
Whether by allowing users to protect themselves from a risk of inflation or exchange in a given country, or to use an advantageous currency when making purchases, etc., Libra clearly raises the question of banking disintermediation risk. The 1 for 1 rule implies that the money exits the banking circuit to purchase Libras, and that the sums exchanged are invested by Calibra, essentially in sovereign debt. There would then be a portion of savings that could no longer be mobilised [locally] by banks in favour of private agents of all sizes [at the national level], from individuals to SMEs and large companies, as these savings would be called in exchange to finance, through the intermediary of Calibra, “safe” States.
A risk for States’ sovereignty
Countries with a weak currency could see a funnelling of money to the Libra, which would be impossible to contain as it would be accessible everywhere and to everyone. This would precipitate the devaluation of the country’s currency and the funnelling of savings outside borders. And when a country loses control of its currency, it loses a part of its sovereignty.
Free financial services are a fantasy; banking is a profession
If Calibra limits itself to putting in place a universal unit of exchange that allows users to buy from a conglomerate of partners and to benefit from commercial advantages, we can imagine that this cryptocurrency fulfils a part of the promise made. It would remain free and the partners would take on the costs (human, technological, etc.) inherent to the management of Libra, considering them to be marketing costs. But if the Libra system begins to move towards selling financial services, there is no doubt that the prices of these services will be the same as those offered by professionals in the sector.
Moreover, both in terms of payment methods and the potential financial services to come, Libra will be the focus of all regulators’ attention. Facebook’s announcement of its aim to develop Libra next year set off a series of reactions and investigations by prudential and monetary authorities in all countries, as well as by US Congress and regulators, generally more inclined to favour the expansionism of the Big Four companies. And if Libra respected the regulations that would have to be imposed on it, the cost in results would preclude the service from being offered free of charge.
A customer experience compatible with the Big Four universe?
Add to this that the “customer experience” will be far from resembling that of the universe Big Four companies offer their customers: services that are apparently free of charge, easy to use and totally instantaneous. The customer will, in effect, have to provide their identity before opening a Libra account, or will have to prove the origin of the money they wish to convert to Libra, in order to address the concerns of fighting the circulation of drug money, crime, arms trafficking, terrorism, as well as fighting against tax fraud, as regulators require banks to do.
Nevertheless, the Libra system, even in accordance with the regulations of each country, would allow for such reprehensible uses (money laundering in all forms), as users could simply purchase Libras in countries with minimal or non-existent regulations and circulate them elsewhere.
Finally, in addition to the already vast amount of personal data collected by social networks in particular, providing payment, revenue and spending data to Libra would lead to a society where private lives become even more public. And this additional data would be used to continually boost the pressure of sales via increasingly intrusive targeted advertising.
Banks, however, ensure the confidentiality of this data.
Some might think that this is all about protecting the interests of “old world” operators. This could not be further from the truth. In fact, it is strictly a matter of protecting citizens and monetary and financial stability, which is to say, ultimately, their well-being. This means protecting them from the risks of loss of sovereignty for the most fragile States, the reorientation of savings outside the private economy, the opportunities offered to the crime industry by an unregulated currency, and hazardous investments, such as the over-use of their own data for commercial purposes, or even, eventually, political ones.
At the same time, all banking actors must thoroughly explain the social and economic role of the bank: to bring its capacities to bear on the financing needs of its customers, and to take these risks themselves, on their own income statement, in a professional and regulated manner; financial risks, whether credit, interest rate or liquidity risks, that the majority of savers and borrowers do not want to take for themselves. It is this global role that allows the economy to finance its growth as robustly as possible. We must reflect on this carefully before finding ourselves, as the case may be, in the midst of a non-regulated banking disintermediation.
CEO of BRED
Professor of Financial Economy at HEC