For a clear example of the lengths to which governments will go to try to shore up their currencies and manage their economies, consider the plight of Argentina.
Less than two months before the nation’s October 2019 presidential election—with the peso plummeting, inflation running rampant, and debt soaring—then-President Mauricio Macri imposed restrictions limiting the amount of foreign currency Argentines could buy to no more than $10,000 a month.
Immediately after the election, when Macri was ousted by left-wing challenger Alberto Fernández, Argentine’s central bank slashed those limits to a maximum of just $200 a month in a desperate effort to stanch the hemorrhaging of reserves. And as 2019 ended, the new government enacted a law imposing a 30 percent tax on foreign currency purchases that will remain in effect for five years.
While Argentina is certainly an extreme example, governments around the world, to lesser and greater degrees, use their currencies as a powerful tool to manage their economies.
Now, imagine a world in which a standardized currency used by billions of people across the globe is controlled, not by any government, but by a huge, multinational technology corporation. That’s the world Facebook envisions with its cryptocurrency, Libra.
So it’s easy to understand why there has been an immediate and fierce regulatory backlash against the idea from governments worldwide. In developing its own cryptocurrency, the social media giant, which now has 2.5 billion users worldwide, and its partners in the Libra Association are challenging the primacy of sovereign currencies backed by specific governments.
At a time when some question whether tech giants such as Facebook, Google, and Amazon already have accumulated too much power, what happens if one of them becomes a major player in the global markets competing with currencies issued by sovereign countries?
When currency is backed by the government that issued it, as is the case with the dollar in the United States, the yuan in China, and the euro in the European Union, as well as many other major world currencies, it provides a certain sense of security for most people.
So what would be behind Facebook’s cryptocurrency? Unlike other cryptocurrencies, such as Bitcoin, which have no assets backing them up, Libra will have a reserve of stable and liquid assets, such as government bonds, which in effect means it will be backed by sovereign currencies from other nations.
What happens, then, if Libra becomes a huge force in the bond markets and Facebook’s interests become contrary to the interests of the Federal Reserve in the U.S., or other countries’ interests, in terms of their approach to buying and selling bonds? It could make it much more difficult for governments to be able to use those markets to manage their own economies.
The rapid rise of big tech companies and their expansion into other domains raises some interesting questions:
The Yellow Vest protests in France that virtually shut down public transportation several times over the past year to demonstrate opposition to increases in gas taxes and changes to the pension system are just one example of citizens directly challenging their government. Whose side would citizens be on if their government decided to ban Facebook or Google or another major tech company for refusing to comply with regulations? I’m not sure we know the answer.
And since Libra is a standardized, global currency, it will have assets from every major nation in its reserves. So potentially, there could be one major player who would have an outsized influence not just on any one country’s market, but across global markets.
The potential appeal of Libra for consumers is also easy to understand. In an increasingly global economy, having one currency that has a stable value and is accepted in any country would have obvious benefits.
And going back to the Argentina example, the reason the government is able to tightly control the exchange of plummeting pesos for stable dollars is because it controls the banks. But no bank account would be needed for the Libra cryptocurrency, which would make it difficult once again for governments to control the flow of money.
And at a time when fintech has already caused significant disruption in the banking industry, a universal, stable cryptocurrency would deal banks another major blow.
There are numerous other questions surrounding Libra, and they aren’t likely to be resolved soon. Facebook’s ambitious cryptocurrency won’t make its public launch in the first half of this year, as the company hoped, because of the widespread regulatory backlash. That backlash is fueled in part by the more general antipathy toward Facebook in light of its data collection and elections controversies, but more fundamentally, by the reluctance of the U.S. and other nation states to relinquish this ability to control currencies.
The barriers to a global currency such as Libra are political, not technological. The technology now exists for a cryptocurrency like Libra to become a reality. That means the time to carefully consider the implications for individuals, governments, and the global economy is also now.