Anyone who uses cash today may in future resort to the crypto currency Libra. The electronic payment system launched by Facebook can plow the financial sector and make the world a freer place.
In everyday life, when money is exchanged for goods, people are hardly aware of the advantages of notes and coins: these transactions are inexpensive and anonymous. Even the smallest exchange is not prevented, and nobody, no credit card company, no bank and above all not the state, can find out what I am spending my money on. The transactions are implicitly based on the assumption that the monetary value will be the same tomorrow as it is today. This stability of value is guaranteed by a guarantor, in the case of the Swiss franc by the Swiss economy. Ultimately, it must stand up for the francs in circulation in the form of goods. This could become truly significant, for example, if the foreign stocks and bonds acquired by the Swiss National Bank to issue new money were to lose massive value in the event of a crash or rise in interest rates
If the elements of the transaction take place spatially and/or temporally separately, a physical delivery of central bank money is not possible. In this case, account-holding (correspondent) banks are required for both sides of the market, which are often expensive in international payment transactions. And for more than 1.5 billion adults worldwide who do not have a bank account, money transfer agents are needed to physically hand over the money. Even such companies, which often charge over 10 percent fees, are based on account-keeping banks and correspondent banks. For several billion people, who often have a hard time defending themselves, these fees are a great nuisance.
Alternatively, one can imagine that a cryptographically secured, decentralised, anonymous and broad-based electronic means of payment that is independent of central banks and can be accessed by all participants can assume comparable functions in payment transactions. The crypto currency Bitcoin, which is based on the blockchain, comes closest to this idea today. Bitcoin is technically reliable, anonymous and cost-effective. There is no guarantor. However, Bitcoin is subject to large fluctuations in value and is not really scalable. A widespread use as payment or value storage means is not to be expected within the framework of today’s organisation.
Power Shift to the West
Facebook announced a few days ago that it would found the non-profit Libra Association, based in Geneva, together with payment companies (Mastercard, Visa, Paypal, etc.), marketplaces (Ebay, Uber, etc.), telecommunications companies (Vodafone, etc.), blockchain companies, venture capital companies and non-profit and academic institutions. The aim of the association is to launch a so-called ecosystem with a new, decentralized, open source blockchain and a smart contract platform in order to issue a crypto currency with small price fluctuations under the name Libra (see https://libra.org/en-US/white-paper). Geneva was chosen because of Switzerland’s neutrality and because of its support for financial innovations, including blockchain technology. It remains to be seen whether the project, in which more than a hundred partners are to invest more than one billion Swiss francs, will be successful.
From the point of view of people without a bank account, perhaps many others, there is much that speaks for the success of this project: Libra can be bought anonymously and used anonymously for payments. The transaction costs should be so small that even amounts in the centime range can still be processed. The crypto money that can be sent anonymously with Whatsapp or Messenger is not under the control of Facebook and, according to the White Paper, should not be associated with personal Facebook data. Libra can be purchased at “exchange offices” against convertible currencies. The value paid in is invested in a currency basket in Swiss francs, euros, pounds sterling, Japanese yen and US dollars in the form of sight deposits and short-term government securities.
In other words, Libra is a means of payment comparable to the International Monetary Fund’s Special Drawing Rights and should be just as stable. But Libra is not independent. Competition in international payment transactions is becoming considerably weaker, but prices, especially of the money transfer agents would collapse, many would give up business. The governance rules of the Libra Association are appropriate to the importance of the project: Every member has one vote; Facebook is not dominant, misuse of payment information is excluded.
Questions and problems arise where the benefits of the new means of payment are to arise: in countries with weak institutions and weak banks. The more successful Libra becomes, the more likely it is that the local currencies, and probably also the local banks, will lose their importance. And the governments of these countries will be deprived of the means of monetary policy as more and more people use Libra.
All in all, this project should contribute to a significant strengthening of the individual freedom and prosperity of a large part of the world’s population. But the shift of economic and political power towards the West and towards large and successful enterprises is obvious.
Original article was published in german on 26.06.2019 in Weltwoche. It has been translated with DeepL.
Martin Janssen is Professor Emeritus of Financial Market Economics at the University of Zurich and founder and owner of the consulting and software company Ecofin. Between 1997 and 1999 this company, together with Credit Suisse, issued the first cryptographic money in Europe, based on the patents of the cryptologist David Chaum.