Banconomics and the Wisconsin Bankers Association have received a few questions from elected officials and bankers about Facebook Libra. The following article is based on some research, and conversations with Wisconsin bankers. Judge for yourself. Your thoughts are welcome! Please shoot me an email.
The Wall Street Journal called the ambition "grand" in its report on Facebook's desire to "Reinvent money. Transform the global economy. So people everywhere can live better lives." However, what Facebook actually is attempting with its potential new offering is to complicate the global economy with two services, called Calibra and Libra. Calibra is a digital wallet and Libra is the cryptocurrency that the wallet stores.
SPOILER ALERT: This whole article boils down to "Don't do it!" and "Would the government please take a close look at what's going on here?!" You'll want to keep reading...
The social media company heralded its own product as "a simple global currency and financial infrastructure that empowers billions of people." If fully launched, Libra would allow Facebook users to buy and sell goods and services around the world and across borders using a digital cryptocurrency governed by a collective in Switzerland. It would be linked to—but distinct from—the dollar, the euro, and other currencies and maintained not by a government but by the behemoth tech company.
Facebook has not implemented the wallet and currency, just announced its intent around the two initiatives. This seems to be a prudent course of action as distrust of Facebook and other tech firms is a real factor, at least for now.
The History Lesson
In the United States, the Free Banking Era lasted between 1837 and 1866, when almost anyone could issue paper money. During this time there was minimal regulation of banks and every bank was able to issue its own currency. States, municipalities, private banks, railroad and construction companies, stores, restaurants, churches, and individuals printed an estimated 8,000 different types of money by 1860. At one point there was a book passed around the Americas that listed every bank's currency and its exchange value (generally a discount against the "real" dollar), based loosely on an assessment of that bank's book of loans.
If an issuer of said currency went bankrupt, closed, left town, or otherwise went out of business, the note would be worthless. Such organizations earned the nickname of "wildcat banks" for a reputation of unreliability; they were often situated in remote, unpopulated locales said to be inhabited more by wildcats than by people. This caused to a lot of strife in the affected communities, and was a contributing factor in the 1861 Milwaukee Bank Riots. The National Bank Act of 1863 ended the "wildcat bank."
With Facebook putting some of its weight behind Libra, the world might be entering a new free banking era, except Facebook is bigger than these 19th-century banks... and has the potential to cause even more damage.
Remember, cryptocurrencies as we now think of them are only about 10 years old. Today, there are over 40 cryptocurrency exchanges up and running. That's about double the number of cryptocurrencies currently in existence (that we know of). Who's regulating all of this? The SEC? Homeland Security? The FDA?
Editor's note: Why do I always think of the following picture when I hear "Facebook Libra"? I'm going to start calling it the Libre.
Facebook Continues to Fill the Swamp
If President Trump keeps using the term "drain the swamp" to get rid of lobbyists and bureaucrats, what's the opposite? Fill it?
(FYI, lobbyists from Madison and Washington are quick to note that that you should not use the term "swamp" anymore. That's because swamps are now called wetlands, and wetlands are valuable to the environment. Ask anyone.)
Facebook got politically serious about its Libra endeavor in early August by filling the swamp—er... "enhancing our national wetlands"-by hiring lobbyist Susan Zook to its team, as national news announced. Zook is a former aide to Sen. Mike Crapo (R-Idaho), the chairman of the U.S. Senate Banking Committee. Yes, that United States Senate Banking Committee, how convenient. Interestingly, the multi-billion-dollar tech company spent $7.5 million in Washington on lobbying so far this year.
News outlet Politico reported on Aug. 5 that Zook had been hired onto Facebook's team of lobbyists working to win lawmakers over to Libra. In the report was part of an email indicating she will focus her work at the company on lobbying Republican senators. (I wonder who was assigned to lobby Elizabeth Warren?)
What are Elected/Appointed Officials saying?
Elected officials are leery, and reactions from governments around the world have been negative. In the U.S., President Trump tweeted his objections to cryptocurrencies, "whose value is highly volatile and based on thin air. Unregulated Crypto Assets can facilitate unlawful behavior, including drug trade and other illegal activity." Then he tweeted something about liking nachos. (Not really, but you wouldn't be surprised.) In addition, both the Senate and House held hearings to prove to they are aware of the gravity surrounding this issue.
During the House hearing, Rep. Maxine Waters (D-CA), the chairwoman of the House Financial Services Committee, questioned Federal Reserve Chairman Jerome Powell about oversite of the new currency: "Does the Federal Reserve have authority to supervise, regulate what could be the world's largest payment system? Does Federal Reserve have concerns about monetary policy with regard to Libra?"
Powell's response is probably not what Facebook hoped to hear: "Libre raises many serious concerns regarding privacy, money laundering, consumer protection, financial stability. These are concerns should be thoroughly, publicly addressed before proceeding." While Powell did say the Fed supports "responsible innovation" in the financial services industry, he also said the process of evaluating and addressing concerns around Libra "should be a patient and careful one, not a sprint."
U.S. Senator Sherrod Brown of Ohio pointed out that Facebook has "proved over and over that they cannot be trusted." Brown also stated that Facebook intends to undermine the U.S. dollar and payment systems, trying to pass it all off as innovation. A fair assessment as Facebook is one of the leading contenders for becoming a real Skynet.
The French government also took issue, but instead of their usual tactic of building a barricade they came out with verbal fastballs. "My determination to make sure that Facebook's…Libra project does not become a sovereign currency that could compete with the currency of states is…absolute. Because I will never accept that corporations could become private states," said France's finance minister, Bruno Le Maire.
Are bankers taking this seriously?
Yes. We're talking about the combination of a new currency and the payment system. It makes the Fed's announcement about real time payments in 2023 laughable in some ways.
Are bankers losing sleep over the issue?
Bankers have bigger fish to fry right now, and they'd have to boil the ocean to tackle this one. Further, most banking experts don't think they should (lose sleep). Right now, bankers are hoping to inform lawmakers and regulators and then watch to see who gets oversight.
Just don't do it.
History tells us it isn't such a great idea to combine these rails of the economy without serious oversight, even if the lines between them have been getting blurred over the past two decades. Maybe in 2023 bankers can pass a new National Banking Act. After all, once you get past 160 years old, it's all downhill.
Editor's Note: I'm going to adopt the "Mike" as my official currency. I've asked WBA to pay me in "Mikes" and informed WBA President and CEO Rose Oswald Poels that the value is appreciating greatly compared to the dollar. I've also encouraged WBA to consider investing in the "Mike." I've got my own enigma machine to determine the value. What could go wrong?