OPINION:
Facebook recently announced it plans to launch a digital currency — Libra. It could deliver on Bitcoin’s failed promise to create digital money that supplants many of the international functions of the dollar and the monopolies the Federal Reserve and other central banks enjoy creating and controlling widely accepted means of exchange and stores of wealth.
The White Paper and accompanying documentation presents an impressive list of corporate backers. However, it leaves out many details about how its infrastructure will work and be safe against criminals and rogue regimes, like the drug cartels and North Korea, that use Bitcoin to move money around shielded from the eyes of law enforcement.
Facebook CEO Zuckerberg’s mammoth credibility problems don’t help either. His insular personality and track record for abusing the personal information caused the announcement of Libra to set off immediate unrest in Congress, which is planning investigations and hearings.
Like Bitcoin, Libra will enable computer payments via block chain technology. Consumers will buy Libra with dollars and other currencies. Facebook’s 2.4 billion users give it unrivaled potential for broad acceptance by merchants and governments for tax payments—especially in developing countries where many lack access to reliable banking.
What really sets Libra apart from Bitcoin is that it would be backed by strong companies and genuine assets.
The initial sponsors include financial giants — notably MasterCard, Visa and PayPal — significant e-commerce and telecommunications companies and venture capitalists. Each is putting up $10 million for an initial tranche of Libra.
The Libra Association, headquartered in Switzerland, will use those investments to set up the payments infrastructure. Along with funds from the sale of Libra to ordinary consumers, the association will purchase a basket of national currencies like the dollar, euro and yen and invest in government securities.
Consequently, Libra will be backed by reserves just like the fiat money issued by governments. Only the greenback, as the ultimate reserve currency, has no substantial backing other than a limited amount of gold and foreign currencies and the full faith and credit of the U.S. government.
The values of national currencies, including the dollar, fluctuate a lot against one another. With so many goods purchased on global markets, misguided monetary, fiscal and trade policies, recessions and political upheavals can diminish the purchasing power of any of them, including the dollar. The Libra has the potential to mitigate this problem by being pegged to a diversified basket of national currencies and could provide ordinary folks in developing nations a better alternative to local currencies and the dollar to store wealth and invest. It could be immune to capital controls.
Bitcoins are created mostly by users solving complex mathematical problems, are backed by nothing but a promise, have no international institution to protect the integrity of its payment system against hackers and fraudsters — users have taken big losses. It fluctuates widely in value.
Bitcoin is easily copied and a plethora of similarly flawed cryptocurrencies have emerged. Libra should benefit from the network effect — it will pay for merchants and consumers to gravitate to one digital platform. If Libra’s backers don’t get it right, others will follow — if governments let them.
A cashless economy should be inevitable. Digital money is cheaper and safer than paper money for merchants and consumers — and for authorities to track. So far, the Federal Reserve has limited access to digital money to banks, hedge funds and money managers that run investment funds. And it pays them interest to help subsidized super star 8-digit compensation packages for executives of rather ordinary talent.
Local politicians increasingly block merchants from accepting only credit and debit cards and eschewing cash.
U.S. regulators have squelched Bitcoin by treating it as property for tax purposes. When consumers purchase a cup of coffee with Bitcoin they must record the difference in the Bitcoin-dollar exchange rate at the time of the transaction and report the capital gain or loss according to the difference from the exchange that prevailed at the time of their Bitcoin purchase. Consequently, Bitcoin is not widely used for payments and is just a speculative asset.
Consumers don’t have to do that with the euro or any other currency. If government regulators permit Libra to flourish by treating it as a currency then ordinary folks could have something the Federal Reserve only permits fat bankers to enjoy — genuine, stable digital money.
• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.
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