Sign of the times: the convenience store in my block of mid-town Toronto has installed, in addition to the usual fare of milk, cigarettes and magazines, an ATM dispensing bitcoins. Customers insert their debit cards and buy bitcoin, which they can then use to … to …
To do what, exactly, that they could not do with regular money? Bitcoin, the original cryptocurrency — there are now dozens of competitors — has always struck me as a solution in search of a problem. Its chief selling point, the anonymity made possible by its system of ultra-encrypted peer-to-peer transactions, unmediated by the banking system and beyond reach of the regulators, would seem of most appeal to two groups: crooks and cranks.
Oh, and a third: speculators. The price of cryptocurrencies has tended to fluctuate wildly — having fallen to a third of its peak against the U.S. dollar last year, Bitcoin has tripled in value so far in 2019. Cryptocurrencies are unlikely to achieve widespread use as mediums of exchange so long as they fail to fulfil one of money’s other primary functions, as stores of value.
The Wild West reputation the privately issued currencies have acquired — one of the most popular, Dogecoin, was invented by a 26-year-old Australian in 2013 as a joke — will be one of the early hurdles confronting Facebook’s recent entry into the field. The company hopes its 2.4 billion users will soon be buying goods and services from each other with Libra, as the proposed digital currency is called, wherever on earth either party may happen to be.
And yet Libra differs from Bitcoin and its ilk in several important ways. One, while it makes use of the same blockchain encryption technology as Bitcoin to ensure the security of payments, it is not based on the same anarchic premise.
In contrast to Bitcoin’s unsupervised, massively distributed, “permissionless” network, Libra will operate, at least initially, via Facebook’s Messenger and WhatsApp platforms, which are very much subject to its control. The company, and the others it has recruited as partners — names like Visa, Mastercard, and PayPal — are likewise highly visible targets of regulatory oversight, and indeed have signalled they intend to work with national banking regulators.
Second, Libra is backed by something real, or real enough, giving it much greater stability than other digital currencies. Unlike Bitcoin’s bizarre, energy-gobbling system of bitcoin “miners” — computers working overtime solving meaningless mathematical equations — Libra will be backed by a basket of existing national currencies.
And third, well, this is Facebook: with its massive user base and global reach, Facebook is in a unique position to make the experiment succeed. One definition of money is “whatever people will accept as money”; people use a currency because other people use it. Which is a pretty good description of Facebook’s business model.
What’s the point? One is to cut out the middleman, or at least replace him. Users of traditional money incur a host of charges — bank fees, transaction fees, to say nothing of the costs of converting one currency into another. Libra’s combination of technology and scale might be expected to reduce these. Banks will be forced to respond.
The other is the separation of money and state. Governments with deficits to finance have often, and ruinously, resorted to the printing press to pay off — and eventually, via inflation, defraud — their creditors. There is little prospect of the Libra being debauched in this way.
Rather than being confined to the territory of a particular nation-state, similarly, the Libra would be free to emerge as a world currency — only not as a statutory monopoly, as in the disastrous euro experiment, but operating alongside and in competition with other currencies, its use depending on its usefulness. (That was the model once mooted for the euro, or the ecu as it was then called, at least in the United Kingdom: the so-called “hard ECU” plan.)
There are echoes in this of the gold standard of pre-First World War days, or perhaps the U.S. dollar-backed currencies in use in some states. Like them, the Libra will be fully convertible, meaning it can be redeemed for the currencies on which it is based at any time, on demand. These are fiat currencies, themselves, to be sure, but with a record of stability individually, and the more so collectively. The irony is that Libra will be piggy-backing on the credibility of its competitors.
It may find that competition is a two-way street. Central banks are looking at getting into the digital currency business themselves. How would that differ from the money they issue now? Again, by cutting out the middleman. Central banks operate now through the private banking system: only the banks are allowed to make deposits with the Federal Reserve or Bank of Canada, and to lend against those reserves. The idea is to open it to any private citizen to lend directly to the central bank, and to use the bank’s IOUs as money in dealings with others. We are back to the early days of the Bank of England.
Of course, there are a host of policy questions raised by this that have only just begun to be examined. Do we really want to give Facebook, of all people, this kind of power, especially given the potential privacy issues involved? Can a private company be entrusted to operate as a central bank, not just within one country but across international borders, with all of the regulatory difficulties that implies? What are the implications for the stability of the financial system? For inflation?
I suppose the biggest question facing (the?) Libra is, will it have any use in the world outside of Facebook’s platform? Wouldn’t you still have to convert it back into dollars, pounds and whatnot? Maybe, maybe not. It seems far-fetched now, but the day may come when my local convenience store accepts payment in Libras.
Copyright Postmedia Network Inc., 2019