BY DR. JOSEPH HUBER*
“Ethical Markets shares the misgivings of so many experts, central bankers, politicians and citizens about trusting Facebook’s plan to issue its Libra currency. We have posted links to many experts’ critiques and to C-SPAN Hearings on this matter in the US Senate and Congress Committees at www.ethicalmarkets.com.
This article by our expert colleague Prof. Joseph Huber, author of Sovereign Money (2018) and many other treatises on the role of money-creation and its relation to governments’ other major responsibilities for administration, rule of law, jurisprudence, taxation, regulation and the use of force, is by far, the most penetrating analysis. Huber covers the likely scenarios and possible threats posed by Libra, on top of those from shadow banking, bank-created money and other new forms of privately-issued digital currencies. A must read! . Hazel Henderson, Editor“
THE LIBRA PROJECT
In June 2019 the Facebook-initiated Libra Association presented a White Paper on its project of a private global currency and payment system to be launched in 2020, called Libra. The paper presented here makes an assessment of the Libra concept.
The name Libra refers to an ancient Roman unit of mass. In Latin, libra means balance as well as pound. The Libra will be a permissioned blockchain digital currency, a so-called stablecoin, in this case pegged to a basket of globally relevant sovereign currencies. This basket is yet to be specified and no parallel is drawn to the basket underlying the IMF’s special drawing rights. Presumably, about two thirds of the basket will consist of US dollars, or US Treasury bonds, respectively.
Facebook will not go it alone, but wants to muster a consortium of 100 financial, technology, internet and sales companies, constituting the Libra Association based in Geneva. Applicants are expected to have a market capitalisation of at least one billion dollars or over 20 million customers. Becoming a member includes making an entrance payment of 10 million dollars. So far, 28 companies have become members, among them Visa, Mastercard, PayPal, Stripe, PayU, a number of venture capital firms, Coinbase, Vodafone, Spotify, eBay and Uber. Facebook itself will be represented by a newly established subsidiary named Calibra, having one vote as any other member.
Libra units will be issued by way of coin offering, that is, users buy Libra against payments made in sovereign currencies. The Libra Reserve promises reconversion of the Libras it has issued at any time. The paid-up money will be held partly as a liquid money reserve and partly in sovereign bonds and perhaps other securities. The money is managed by a special body, the Libra Reserve, sort of central Libra bank in spe.
From this angle, the Libra Reserve is like a 100% asset-backed narrow bank. Libra can also be likened to a mutual money market fund (MMF) whose shares are used as a deposit-like means of payment. The Libra is also similar to e-money which according to EU regulations is defined as a means of payment sold against a reserve of other monies and used in payments to third parties. E-money, however, is denominated in a national currency, while crypto tokens represent private commercial currency denominations of their own.
In comparison to a bank, MMFs and even less regulated e-money, crypto tokens, including the Libra, are not regulated at all. Not yet. By locating the Association in Switzerland, the Libra may circumvent other kinds of regulation, for example the US Bank Holding Company Acts of 1956 and 1970 prohibiting banks from being active in a non-financial commercial business.
The paid-up ‘reserves’ are likely to consist of bankmoney rather than fully valid legal tender in the form of central bank reserves. Either way, the Libra White Book suggests full asset-backing by such monies, or securities bought with them. The Association remains free, however, to switch to a fractional asset base, particularly if it were to enter into pro-active lending and investment activities paid for with self-created Libras, much as banks do by paying for their assets acquired from bon-banks with self-created bankmoney. The Libra, Libra Reserve and Libra Association would then, however, become subject to banking regulation.
At the beginning, the Libra consortium wants to provide just payment services, offering quick and cheap domestic and cross-border payments in as many countries as possible. Facebook’s Messenger app or WhatsApp can be used for this purpose. A special Lira app is announced to follow. The Libra system claims a processing capacity of 1,000 transactions per second. In comparison, Bitcoin’s performance of 4–7 transactions looks rather uncompetitive. Visa is said to manage something between 1,700 and 4,400 transactions.
Cross-border transactions normally take a hefty share of 4–12% of the amounts remitted. Transaction fees for Libra users are announced to be very low or even zero. That promise apparently rests on gains from investing the paid-in Libra money base into financial assets on the open market. The return from these investments can be shared with the users by way of low or even no transaction fees, rather than paying deposit interest on Libra balances which will not be offered. Instead, the Libra Reserve wants to offer interest-bearing saving schemes. The Libra Association is conceived of as a not-for-profit organisation; the Libra Reserve, however, is certainly supposed to be a profitable enterprise to the benefit of all member companies.
To persuade firms to accept Libra payments, the consortium plans to put much of the 10 million dollar entrance contributions into incentives, or say, subsidies, for collaborating firms.
Why Facebook? Mission and purpose
What is Facebook’s interest in launching a global private currency? Among the reasons given in the White Book is the ‘belief that the world needs a global, digitally native currency that brings together the attributes of the world’s best currencies: stability, low inflation, wide global acceptance and fungibility’.
To Facebook, this is also a step towards general financial inclusion by offering digital payment services to the world’s 1.7 billion people who, according to the World Bank, are without access to a bank account. Libra would give them, as to all other money users across the globe, an easy-to-use alternative to solid cash and bank accounts. Furthermore, Libra would shield the purchasing power of their money from the typically higher inflation rates in developing countries.
But why would Facebook be doing this, a corporation which so far has centred around online media and data mining? Because that’s it. Banking and finance, too, have become highly IT-intensive industries, storing and analysing vast amounts of data about their customers. From the Association members’ point of view, payment services, finance and technology industries are a promising match. WeChat, Facebook’s Chinese rival, already offers a payment service. Facebook will certainly not want to lag behind its competition.
There is still more to it than that. Launching a general means of payment and even a currency of your own holds out the prospect of acquiring the mesmerising privilege of money creation, historically the sovereign prerogative of feudal rulers and modern nation-states. Today, it has become the privilege of the banking industry, in tandem supported by the central banks – a privilege much too tempting for new finance and technology corporations to ignore (over 2,000 would-be crypto princes are already crowding the field).
The present Libra plan does not aim at setting up a quasi-sovereign currency in its own right. On the contrary, Libra will use a basket of sovereign currencies as a base upon which to set up the Libra as a cryptographic blend of investment fund share and e-money. For a start, however, and on a global scale, this encompasses a lot. It even includes additional money creation – creation of Libras adding to the money supply – to the extent to which Libras will be used and the related currency reserves will not stay idle but be invested and thus kept in active circulation.
Apart from immediate financial interests, some commentators have suspected Facebook of wanting to gain control over setting the standards for the global digital identity of persons and institutions – which is another prerogative of sovereign administrations (as is, by the way, the censorship of internet content to eliminate malpractice). Facebook’s interest in setting digital identity standards is certainly not far-fetched and fits seamlessly with financial interests.
Will the Libra work and be successful? Questions and problems
For the Libra to become a serious challenge to sovereign currencies and vested interests in banking, the Libra will first have to enter the market successfully. The business proposition of the Libra which the Association hopes will be appealing to potential users, is easy, instant, safe and cheap handling of money and payments, including cross-border payments. The latter is currently a considerable advantage of cryptocurrencies, given the leisurely pace and high cost of present conventional international retail transfers.
Whether Libra transfers will be as safe as bank transfers remains to be seen. Regarding the ease and speed of payments, the banking competition has not been ignorant. Real-time transfer of bankmoney in domestic currency is currently becoming available to everyone. Foreign transfers, too, need not all be carried out via Global Transaction Banking (SWIFT) and international clearinghouses (IPFA). Many banks now use the cryptocoin Ripple for making international payments. Payment service providers may use TransferWise. And why would it be interesting to lessors, utility companies and supermarkets in developed countries to add an additional payment system to their operations? Significantly lower costs are certainly an argument, and the credit card companies and payment services of the Libra consortium might come up with integrated dual-use features, that is, easy selection between making a payment conventionally or with Libra.
Managing money and payments digitally and on a global scale is a complex task – technically, commercially and legally. Some commentators have raised doubts about Facebook’s ability to be up to the task. The Libra project, though, is carried by the Libra consortium. The knowhow of the credit, payment and other financial institutions in the consortium is certainly up to the task.
Irrespectively, Facebook has a problem with trustworthiness and respectability. If many people think that Facebook cannot be trusted with their personal data, why would they trust the firm with their money and related data? The White Paper promises to keep financial data separate from social data. How reliable that is remains to be seen. Every payment, after all, comes from someone and goes to someone. Facebook’s credibility problem has certainly been another reason for setting up the Libra consortium, in which the Facebook subsidiary Calibra is just one company among others. These other members, however, cannot take it for granted that the public will see Libra as their project rather than just a Facebook initiative.
To establish a network effect of its own, the Libra will have to break through the gravity of incumbent infrastructures and practices. In contrast to previous cryptocoins the odds are actually not bad. Facebook alone has 2.4 billion users worldwide. The large credit card companies have customers on a similar scale. The Association’s other members for their part have hundreds of millions customers more, to a degree overlapping each other. A fraction of all these people, firms and organisations is likely to be enough to get the Libra project off the ground, potentially being of global reach similar to that of the US dollar, and perhaps also including some part of those 1.7 billion hitherto unbanked.
A related, and entirely unclear, question is that of legal frames and regulations. For the Libra to succeed and be widely accepted, it will have to comply with national and international regulations. This applies in particular to know-your-customer requirements, anti-money laundering and anti-terror practices. Should the Libra Association be reluctant to comply with national regulations, it would soon be perceived as an alien and hostile force, not tolerated officially – adding to cryptocoins’ problem of being attractive to corrupts, criminals, darkdealers, terrorists and money launderers. If, however, the Libra Association is willing to comply with national rules, it is likely to lose some of its appeal, possibly also including some cutbacks in easy use and affordability.
Then there is the question of the Libra’s exchange rate. The Libra is conceived of as a stablecoin. This does not mean it has a fixed exchange rate; rather, it has a fixed peg to the exchange rate of the underlying currency basket. But all currencies in the basket, although not wildly volatile, have variable exchange values. The Libra’s purchasing power will fluctuate accordingly. Libra users thus take a certain, even if normally rather low, foreign exchange risk. By contrast, Libra users in countries with generally devaluing currencies will be put at an advantage (thereby likely to weaken their domestic currency all the more).
What will this entail in everyday payment practices? Will all items need to be priced in two currencies, day after day or fluctuating even intra-day like petrol prices? Will Libra users need to have a currency converter to hand? Or might the Libra even become the predominant currency, depending on the country? Having two different units of account simultaneously and in one place is feasible as shown by tourist centres and border towns in many places. But comfortable it isn’t, and where such a situation occurs, this is most often due to a long-term crisis of the official currency.
Libra and Banking
Should the Libra be successful, it will be a challenge to conventional banking. It is telling to see the different kinds of companies among the Association members, including a number of payment services and non-monetary credit providers, but not a single conventional bank. Do banks not want to participate (because they are preparing similar coin launches of their own making), or do Facebook and its associates not want them to participate?
Banking has four main fields of activities:
1. management of money, payment services, and currency exchange
2. financing by extending loans (= creating bankmoney for non-banks)
3. financing by making investments (= ditto), including organising and facilitating investment activities of various kinds for customers
4. wealth management, that is, portfolio management of proprietary and customer assets, including brokerage services.
The Libra will start its foray into the first field of banking, already including one element of the second and one of the third. It will be (1) a payment service, manage holdings of Libras and convert other currencies into Libra or the reverse. The Libra circuit will then (2) offer a savings facility, and (3) it will invest a bigger or smaller part of the Libra currency base in sovereign bonds and other securities. It is not difficult to imagine how this would develop into ever more far-reaching banking activities, fitting the broader picture of extensive growth of shadow banking and non-monetary financial institutions in general. The likes of Blackrock manage bigger volumes of money and capital than most large banks do. The Libra might accomplish something comparatively big, starting from payments and establishing itself as a private and supranational new de-facto currency base.
The central question: Is Libra an assault on sovereign currencies, central banks and the monetary sovereignty of nation-states?
The Libra consortium, as mentioned before, states it has no intention of replacing sovereign currencies, rather that it will rely on a selection of them, using these as a value anchoring and trust base. This would undoubtedly be the case during the initial stages. The picture would be different in the longer run. To the extent that the Libra will be a challenge to conventional banking, it will in consequence also be a challenge to central banks and their monetary policies. Contrary to outer appearances, the power of central banks is of a specialised and limited nature, and in the course of their crisis interventions since 2007/08 they have manoeuvred themselves into a weak position anyway.
Today, the monetary prerogative of money creation has for the most part devolved upon the banking industry, including the seigniorage-like privilege of being able to avoid refinancing costs thanks to the extreme fractionality of the reserves base which banks still need to cash out or transfer deposits. By its origin and nature, bank deposit money (aka sight or demand deposits, or simply bankmoney) is a private money surrogate, a substitute for sovereign money or central bank money, basically not that different from new money surrogates today. Over time, since the 1960/70s at the latest, bankmoney has become the predominant and system-defining means of payment. By comparison, solid cash in public use and central-bank reserves in interbank use count for very little now. Banks’ cash reserves are about 1.4% of bankmoney, and the need for central-bank liquid reserves is between 0.x–1% of bankmoney. Minimum reserve requirements stand at 1% of bankmoney in the Eurosystem. In the UK and other countries they don’t exist at all. In the US, there is a 10% minimum reserve requirement, but because of a number of deductions and exceptions, that requirement is in fact reduced to the residual need for cash.
The decline in the central banks’ share of the money supply has dramatically reduced the quantity lever of central-bank base rate policies, resulting in a far-reaching loss of conventional policy effectiveness and monetary control. Central banks have become willing anytime refinancers of the banks, re-actively servicing the facts pro-actively created by the banking industry, and doing this the more so in times of crisis. Should existing trends persist – the much reduced role of central bank money and loss of monetary control, the relatively decreasing importance of conventional banking due to the increasing importance of shadow banking and new money surrogates such as the Libra – it looks as if central banks are to become a sort of King Lackland. The sovereign currencies would still exist, but were mere units of account with no real monetary clout behind them, like an empty shell. For the Libra, and further such corporate finance contenders still to come, this opens favourable prospects.
For once, however, most experts, central bankers and politicians have spontaneously dismissed the Libra upon its presentation. Among the many voices were Benoît Cœuré of the ECB Board, Bruno Le Maire, the French finance minister, and the economist Nouriel Roubini. Quite a number of US Democrats and Republicans have raised concerns. Congressional leaders have announced a draft Act to ban technology companies from issuing digital currencies. Such an Act, as mentioned above, already exists but would perhaps need another amendment. This would not directly apply to a Geneva-based organisation, but the Libra member companies might be subjected to various adversities in and outside the United States. Among the reasons why reactions from among US politicians were in part so strong is probably not only concern for the dollar hegemony, but also the associated ability to enforce international compliance with US sanctions.
Anyway, a wake-up call was long overdue. Most central bankers still tend to play down problems with out-of-control bankmoney and other money surrogates, complacently believing they remain in control of what is going on by way of base rate policies. The far-reaching loss of monetary control to the banking sector is whitewashed, the monetary relevance of MMF shares has been ignored except, maybe, for statistics, and the large number of cryptocoins were attributed technical, but no monetary relevance. Now that has come what was to be expected since several years, which is that globally active finance and technology corporations are going to set up cryptocurrencies of their own, one seems to forefeel the monetarily disruptive nature of a private currency of global reach and the potential real threat it poses to the monetary sovereignty of nation-states, or community of nation-states such as the euro union.
Americans, from a US dollar perspective, would seem to have more reason to take a self-assuring attitude than do governments and central banks in other currency areas. The Libra and the US dollar might get along much better than would appear at first glance. Ultimately, however, all sovereign currencies are at stake to the degree to which the stock of money denominated in a respective currency (bankmoney, solid cash and central bank reserves) would lose out to private currencies. For a currency that does not belong to the circle of major international reserve currencies (such as the US dollar, euro, yen, British pound and the Chinese renminbi) and which is rated as a rather weak one, it is difficult to shield itself from foreign monetary developments. Seen like this, Libra’s intention to bring payment services to the hitherto unbanked in developing countries is highly ambivalent. A useful service it might be, but it might equally be a disservice to their countries that risk losing out on monetary sovereignty, especially if they have higher inflation rates than the Libra.
In consequence, should the Libra (or another such contender) really be widely adopted everywhere, it has a good chance of becoming a world currency, albeit not immediately the dominant one. Sovereign currencies would be left untouched, but would be like those empty shells if central banks continue to fail taking measures to regain monetary control by massively re-expanding the sovereign money base in public use while containing private money surrogates.
Among the latter are not only MMF shares and possibly the Libras to be launched next year, but also bankmoney which is a privately issued means of payment and does, rightly so, not have the status of legal tender. Over time, however, from one crisis to the next, it has acquired a para-state status by being denominated in a country’s official currency, by being increasingly supported by the national central banks as anytime refinancers of last resort and by being warranted by the government as bankmoney guarantor of last instance. The development was considered normal, as it were, not really worrying from aspects of constitutional law and economic (dis-)functionality. In actual fact, however, the bankmoney regime is exceedingly problematic under these aspects and what is now imminent in the form of the Libra currency is but the logical continuation of what has started with bankmoney.
Will we have to stand bail one day for the Libra consortium’s shadow dollars? Possibly Yes. If things continue along the present path, governments and central banks will sooner or later be embarrassed by having to stand bail for Libras, much in the same way they have had to save MMF shares on top of bankmoney since the 2007/08 crisis by quantitative easing (ultra-loose monetising of debt) and additional public debt to prevent a general standstill of transactions and thus a crash of the entire economy. In the hierarchy of monies, no means of payment is immune to crises. Third-level money surrogates such as MMF shares and private cryptocurrencies have a lower status than second-level bankmoney, which in turn has a lower status than sovereign money, that is, central bank base money in whatever form. In the event of a crisis, a run on Libras is as likely as are runs on bankmoney. Even if the Libra would still have 100% asset coverage, the Libra Reserve would have to make distress sales on a large scale, causing chain reactions on the financial markets.
The more a money surrogate like the Libra is in widespread general use, the more it is systemically relevant as a matter of fact and thus much too important to be ignored and abandoned to its fate. At the beginning, the Libra will have no reserve insurance (as an equivalent to bank deposit insurance), no central-bank refinancer and no factual government bail-out guarantee. The degree to which public bodies would accept Libra payments is unclear. Should the Libra be successful, however, it would soon be granted such elements of privileged state support because of its systemic relevance it will have achieved.
Having let monetary matters drift to the point they are now reveals a disturbing lack of understanding of monetary sovereignty as a prerogative of constitutional importance. The functional necessities of other such prerogatives – legislation, jurisdiction, public administration and the monopolies of taxation and the use of force – are normally understood much better. They are indispensable for any rule of law, particularly a liberal and democratic one, and they include the sovereign monetary prerogatives of defining the currency, creating the money and benefitting from the seigniorage. Projects like the Libra represent the run-wild antonym to a sovereign money system.
*Since 1992 Joseph Huber is the chair of economic and environmental sociology at Martin Luther University of Halle-Wittenberg, Germany. Until 1995 he was also director of the University Centre for Environmental Sciences. He is known widely also as one of the founders of ecological modernization theory.