Facebook’s great monetary revolution

Chris Berg, Jason Potts and I had an op-ed in the AFR this morning.

~+~

With its new digital money, Libra, a Facebook-led global consortium has created the world’s first private international reserve currency.

Announced Wednesday, this is no small thing. For the first time since the collapse of the Bretton Woods system there is a clear competitor to the US dollar for global dominance in the currency market.

For simplicity’s sake think of Libra as a return to the global gold standard. But rather than governments setting the rules and exchange rates, with gold being the underlying store of value, we’re seeing a private organisation setting the rules and a portfolio of relatively risk-free assets playing the role of gold.

To be clear – Libra is not a cryptocurrency like, say, Bitcoin; but it has many Bitcoin-like characteristics. It is a private money. It is not government money – ultimately fiat is backed only by the taxing powers of the state. Libra will be backed by tangible assets.

Rather than Bitcoin, Libra is more like PayPal, or WeChat Pay, on steroids – a payment gateway and a new money system all rolled into one.

This is perhaps a good halfway house to introduce the world to the concept of non-government digital money. The technical skills to operate a Bitcoin wallet are non-trivial. Almost anyone can operate Facebook and sent a text.

The implications are huge. Facebook has disrupted digital money in a way central banks and the commercial banking system never could. Facebook has brand recognition that even the global banks must envy.

For those consumers who may baulk at using Facebook to transact, other large tech companies cannot be far behind with their own products. So what now?

We predict a large uptake in these digital money products. Largely because consumers tend to emphasise convenience. Libra will very quickly achieve global acceptance among consumers and merchants. If that prediction comes true, many other firms will launch their own competing monetary systems. In short, there is going to be a lot of competition in this space in the very near future.

The short-term consequences include the immediate disruption of the remittance market. Those companies charging exorbitant fees to move money around the world will see their rivers of gold drying up. Debit cards will also quickly become redundant – accelerating the move to phone-based tap and pay systems. The world’s ‘unbanked’ will quickly become ‘banked’.

There are other immediate practical concerns. Within the next year, both Australian consumers and merchants will be wanting to use Libra. How will this be done? How will it be taxed? Will it be taxed? No doubt the government has views. But any work that has been done so far on these questions has come in the context of Bitcoin and cryptocurrency – an extremely niche market. A general use private money has simply not been on the radar.

Those central banks that tolerate high rates of inflation will see disintermediation. Governments that pursue irresponsible fiscal policies will see even greater capital flight. Ironically the presence of a convenient, sound and private digital money will provide incentives to institutionally challenged governments to lift their game or lose total control over their domestic policy environments.

Every country in the world faces policy challenges from a viable private international reserve currency. Control over the monetary system lies at the heart of the modern economy. A viable alternative to fiat currency, with international mobility, undermines both the conduct of monetary policy and fiscal policy.

No doubt governments and their regulators will be looking very closely at Libra. They may treat it as a threat. But it is an opportunity for a forward-thinking government. It should come as no surprise that Libra is being set up in Switzerland. They have sensible laws relating to financial matters. The question we should be asking is why Australia isn’t being considered as a location for these products?

Australia should consider becoming a currency haven. Not only should a suite of policies be developed that facilitates the use of a private international reserve currency within Australia, a suite of policies that attracts the providers of such currencies to Australia should be considered. The use of Australian markets to purchase the underlying assets should encouraged and especially the inclusion of Australian assets in those portfolios should be encouraged.

With the announcement of Libra on 18 July 2019, the global monetary system – and arguably the structures of global financial capitalism – changed irreversibly. And just ten years after the invention of Bitcoin and blockchain technology. The rate of disruptive innovation is only going to accelerate.

How well Australia adapts to this change will be determined over the next six months. Libra is coming in 2020. Regulatory obstruction is simply not an option.

Chris Berg, Sinclair Davidson, and Jason Potts are with the RMIT Blockchain Innovation Hub at RMIT University.

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45 Responses to Facebook’s great monetary revolution

  1. BrettW

    Despite being around for apparently 10 years Bitcoin and block chain totally not a thing amongst people I know. Simply never mentioned.

  2. Nob

    Regulatory obstruction is simply not an option.

    Really?

    I must admit I thought that about Uber and Air B&B.

    But I underestimated the tenacity of vested interests.

  3. Tel

    I understand that trademark law isolates different spheres of endeavour such that two different businesses can use the same name providing no confusion is generated. However … do you really think the association with feminine hygiene is likely to be helpful here?

    We predict a large uptake in these digital money products. Largely because consumers tend to emphasise convenience. Libra will very quickly achieve global acceptance among consumers and merchants. If that prediction comes true, many other firms will launch their own competing monetary systems. In short, there is going to be a lot of competition in this space in the very near future.

    I agree to some extent, but mostly I disagree. Facebook is pretty convenient for showing pictures of your cat or talking about which meal is your favourite, but the question is whether it can leverage popularity out of the general chit chat space, into people being willing to trust them with real money and their financial history.

    Thing is there are ALREADY heaps of payment options out there, starting from the most obviously well known PayPal but Google has been doing it about 10 years (give or take), then there’s obscure things like Flywire, Transferwise and even trusty old BPay that’s often not as exciting but keeps on working there in the background.

    So what makes a new Facebook parments more interesting? Only the big audience and perhaps the well known brand … but is it well known because of high trust and strong security? Putting this another way: do the economic principles of “Division of Labour” and “Comparative Advantage” apply to corporations like they apply to individuals, or nations? Can a corporation be good at everything … or should they focus on one job only? Personally, I would rather a bank be very, very good at being a bank, and not attempt to simultaneously be anything else … especially I don’t want it to be EVERYTHING else. Just be a bank, that’s fine thank you.

    Thus, it’s pointless to predict that there will be a whole bunch of online payment options out there … because that’s already happened … and it’s also pointless to predict that digital money will become acceptable, because that’s also already happened … who ever pays a bill in person anymore? Heck, not so many years ago I remember paying rent over the counter in cash every week. OK, it might have been a large number of years ago, but within living memory. No one, absolutely no one in Australia does that anymore. Online payments have already won the game!

    But I do predict that more competition will come to the market and more new types of payment system. I don’t expect that Facebook has any particular advantage in this market. I just don’t see enough connection between what they do now, and where they need to be in order to provide a banking service.

  4. Nob

    BrettW
    #3047772, posted on June 20, 2019 at 10:10 pm
    Despite being around for apparently 10 years Bitcoin and block chain totally not a thing amongst people I know. Simply never mentioned.

    Houston HQ told me some months ago that someone had been in presenting to them on blockchain.
    “It’s like a procurement system we’re all gonna have to be part of” he said.
    He thought it was like SAP or something.

    Gawd knows wtf is going on.

  5. Chris M

    there is a clear competitor to the US dollar for global dominance in the currency market.

    Hahaha it’s Facebook! The business of lizard boy who (like Joyce) is in decline, has no friends and is trusted by nobody.

  6. Texas Jack

    Imagine how fucked up the world will be with Mark Zuckerberg as Global Central Bank Governor? It’s as dumb an idea as the EUR has proved. Ask any European living south of Lake Como.

  7. duncanm

    The question we should be asking is why Australia isn’t being considered as a location for these products?

    .. because we’d find a way to regulate it, tax it, and sovereign-risk it so much it would fail to survive.

  8. JohnA

    Tel, yes, there are many payment METHODS out there, but the last challenge to the US dollar as the world default reserve CURRENCY came from the Euro, and was beaten off.

    Mind you, I didn’t think it was a serious contender, given the fractious nature of the EU as it’s backer. Even Sterling would be better than the Euro and Brexit wasn’t even a word then.

    I agree the current image of FB is not going to help but hinder. Now if EBay/PayPal had invented Libras, I would sit up and take notice. The next question is: what exchange rate/s?

  9. Scott Osmond

    What happens if you fall afoul of faeces-book’s thought police? Account locked? Several digital platforms have shown themselves as reliable as a third world state. Why would anyone put their business or money anywhere near such an unstable platform?

  10. None

    paypal has ridiculous fees and you can now send and receive os currencies instantly (almost) and free via bank transfer. Aussies like gov guarantees for their money. I am not thinking big uptake on this. Might be great for terrorist funding though.

  11. AH

    Facebook’s currency is going to be pegged to a basket of currencies. Which means it can never be a reserve currency. It can never be a bastion against monetary inflation because it will inflate and deflate together with the currencies it is pegged against. This is the critical failure of their plan. It may, however, allow for cheap international funds transfers with the big caveat that you have to remain within Facebook’s platform, much like a PayPal wallet. No doubt, transferring from ‘Libra’ to AUD will be expensive.

  12. None

    Apart from using a product named after female sanitary napkins you can transfer money internationally at spot rates with no fees through your bank.

  13. Makka

    This is the critical failure of their plan.

    It won’t be a Reserve Currency until Crude, Treasury Bonds and Gold trade in Libra.

  14. Mark A

    None
    #3047830, posted on June 20, 2019 at 11:21 pm

    paypal has ridiculous fees and you can now send and receive os currencies instantly (almost) and free via bank transfer.

    Tell me how?

    I transfer often and banks not only are not free but very expensive and offer lousy exchange rates.
    That’s why I never use them.
    Transferwise is my choice and the cheapest.

  15. Jannie

    Good old Facebook doing stuff for us, what a nice man mr Zuckerberg is. What could go wrong?

  16. Bad Samaritan

    OK, so yesterday morning my internet was not working. After much to-ing and fro-ing it turned out that the local Optus tower was having a small upgrade, and after a few hours everything was OK again. One guy stopped thousands of people from doing “vital” transactions by flipping a single switch. Also, a few years ago I was disconnected accidentally by another ISP and that was that for three days.. Then, two years ago a cyclone stopped all electrical /electronic stuff for a week in my neck of the woods. Everything was instantly rather digital-transaction-free…..unfortunately

    Now I’m told that cash-in-hand or gold bars will soon be replaced by new money totally dependent on a tower which anybody can switch off at will, or a cable or a power-line or any number of connecting bits and pieces….which leaves me totally “broke” on a whim or a mistake? Maybe forever?

    Tell ya what….next time Visa or Mastercard or whoever has an “outage”; or the Woolies network is hacked, all you crypto-bozos can get on down to the shops and petrol-stations and marvel at the chaos and anger as the hooting and hollering reach fever-pitch. As hard as it is to imagine, there are still places where you can buy a number of items; the person behind the counter can add the prices together in their heads…and they can make change by pressing the cash-register release, if you have liquid loot at your disposal. Is there any kind of fall back for crypto-tragics when they can’t access the net?

    BTW: A corollary……my small depot of real fuel in jerry-cans gives me a lot more confidence in my freedom of movement than transferring my life to the vagaries of a fallen or cut power-cable stopping my electric vehicle stone-dead would. Crytos are for gullibles and shonks only.

  17. Nob

    Mark A, I also use TransferWise, OFX, and I have UK Revolut and Monzo accounts.
    The regular banks cost way more for ForEx.

  18. Howard Hill

    Why is it that libertarians pedal bullshit like there’s no tomorrow?
    Are their taxpayer funded jobs so demanding they can’t even keep up with current trends?

    Facebook is in decline and will most probably be broken up by the US gov in the not distant future, if it doesn’t lose half it’s user base before that. Not to mention that there isn’t a week goes by that zukerfuck isn’t in the news regarding his slimy business practices and lack of concern for users privacy.( “They trust me — dumb fucks” ) There’s a concerted effort by many around the world to bring him down. Once that ball starts rolling and I’m pretty sure it already has, the end is near. Same goes for that other slimy piece of rainbow coloured (Do no evil ) crap, stupid people still use.

    I’ve already read a hundred articles referring to this as a stepping stone to One World Government, One World Currency; most digital currencies are being viewed that way.
    Now don’t go screaming conspiracy nut job and all that shit but it’s what a majority of everyday people are thinking and screaming about, which will go a long to putting a huge damper on his deluded dreams of world domination of his STUPID users minds.

    Call these people stupid, smart, or whatever you like, but this isn’t going anywhere, even if libertarians are creaming their pants at a potential means of free exchange of money!
    The whole world is waking up to this piece of crap human being!
    Farecbook money hehhehe, what a joke. Do some more research!

  19. rickw

    The least trusted brand in the world is getting into finance with the brand name of a female sanitary product. A definite winner.

  20. Bruce of Newcastle

    Johannes Leak’s cartoon this morning is perfect for this thread.

  21. Facebook, the most trusted entity in the world.

  22. nfw

    The great laugh is that it, similar to bitcoin and the other crypto “currencies” this great leap forward in profits for facebook, which is losing customers wising up to its antics, will be defined in value relative to the US dollar. That makes the trading just another commercial activity, the profits of which must be taxed just as every other commercial activity is. Even barter must be declared and this just seems another way to evade tax.

  23. bespoke

    Howard Hill
    #3047868, posted on June 21, 2019 at 3:30 am
    Why is it that libertarians pedal bullshit like there’s no tomorrow?

    Because for some corporatism is God, fee speech and privacy are irreverent.

  24. Ellen of Tasmania

    we’re seeing a private organisation setting the rules and a portfolio of relatively risk-free assets playing the role of gold

    says Sinc.

    Facebook’s currency is going to be pegged to a basket of currencies.

    says AH.

    So, which is it? I don’t call a basket of fiat currencies ‘relatively risk-free assets playing the role of gold’. Nor can one think of the internet as a relatively risk-free zone.

    You can go straight to the 5 min. mark and watch for a minute, or view the whole thing:

  25. thefrollickingmole

    Right now Im partially separated from my dough by being required to keep it in a bank (at least for payday).
    In addition with the new “one touch payroll” the government has all my “explainable” income under constant surveillance.
    I hate it, but inch by inch its become the governments income with me getting what they deign to leave me.

    or
    The next step is to get me “trusting” Zuckerbergs mob not to screw up or deliberately cripple my access to “credits’.

    Because everyone knows our government betters wouldnt sign onto a “social credit” system like Chinas after another “port Arthur” or similar, because its for the chiiiiiildren.

  26. Percy Popinjay

    Spacechook is introducing a digital currency

    And I won’t be touching it with a barge pole.

    Suckers – there’s one born every minute.

    A fool and his money are soon parted.

    What could possibly go wrong?

    Etc.

  27. None

    Mark I use the international fund transfer facility with my non Big 4 Bank. I think some of the background infrastructure may be provided by someone else – I don’t know – but I’ve never paid a fee. I am a long-standing customer and I suggest that if you are too you should ask your bank for a much better deal then you are getting. Otherwise take your business elsewhere.

  28. Mitchell Porter

    I was going to scoff at the idea that Libra is “a clear competitor to the US dollar for global dominance in the currency market”, but several people beat me to it. Was this written by actual economists? I have never owned an investment in my life, and my bank balance has usually been three figures in size, and I still feel like I have a better grasp on the ‘global currency market’ than is exhibited by this statement.

    The dominance of the US dollar is backed by the fact that it’s issued by a continental great power whose navies control the world’s oceans. What on earth would back the dominance of the Libra coin – Mark Zuckerberg’s security detail, with a million cat videos as the underlying store of value?

    This claim seems to be of a piece with the most delusional claims about Bitcoin’s future – that the world’s fiat currencies are all destined to evaporate in a burst of universal hyperinflation, leaving holders of the humble satoshi (100-millionth of a bitcoin) to rule the Mad Max hellscape of the post-statist future. Only this time, rather than a hundred thousand unemployed gamers and web developers, the new economic overlords are going to be some slippery coalition of Swiss bankers, venture capitalists, and IT moguls.

    Well, those are real power players, big enough that one should perhaps view the proposal with concern rather than mockery. But let’s review the argument for why Bitcoin would never become “dominant in the currency market”. On the day that a national currency becomes worthless, the proles and middle class aren’t going to line up like Babylonian captives outside the homes of the Bitcoin holders, wailing “Make us your slaves, but feed us”. Instead, you’re going to have a state of emergency in which police, armed forces, and civic-minded militias and vigilantes, cooperate to maintain order while the economy devolves to barter and central planning, until trusted forms of money have reappeared.

    But perhaps the concept here is not that national currencies will disappear, but rather Libra could become a universal intermediary. But why would you need that, when you can just trade dollars for yen directly? Libra sounds like a euro-like dream for the remaining globalist liberals, the universal currency of their borderless fantasy world. It’s almost too easy to envisage: climate change prefugees (that’s a preemptive refugee, who sets out for a better life even before their old one turns bad), accessing their Libra basic income through UN-issued Huandroid phones, riding the Belt and Road into a new life negotiated by Green new dealmakers…

  29. Diogenes

    Me+ anything facebook realted/endorsed/owned :

    over.my.dead.body !!!!!

    & you can quote me !

  30. Sinclair Davidson

    From the Libra whitepaper:

    … it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.

  31. None

    So all you’re doing is quoting a white paper without any further investigation or evidence, they say it will but who knows it probably won’t. Were you paid to write this? They don’t call it Fakebook for nothing you know.

  32. Sinclair Davidson

    FFS – you’re going to tell me about the faked moon landing next?

  33. Jock

    Facebook Can take me down any time for being conservative. Why would I trust my money to an organisation that has made money reselling people’s details to corporates and advertisers. Why trust a company that is anti free speech. Why trust a company where you can have your funds removed, or disappeared?

  34. Jock

    It sounds like a dollar fund but with a different name.

  35. max

    let the best money win .

    We’ve All Been Warned (the Cyprus “Bail-In” Model is coming to a Country Near You)

  36. Craig Mc

    Gosh, what could possibly go wrong with currency controlled by corporate boards infested with SJWs?

    Sure, let’s combine the accountability and transparency of the social media industry with the trust, stability and established processes of crypto-currency. It can only be a winner.

    Bitcoin suddenly seems attractive.

  37. Tim Neilson

    … it will be backed by a collection of low-volatility assets, such as bank deposits and short-term government securities in currencies from stable and reputable central banks.

    So it will be no better than the fiat currency investments that back it. Why allow Zuckerberg to clip the ticket? Why not just deal direct in the currencies that back his fairy dust?

  38. flyingduk

    Hopefully Facebook coin will act as a gateway drug to the real thing, Bitcoin.

  39. Empire 5:5

    Success will require trust. FB is a low trust outfit subject to impending class actions for egregious privacy breaches. Probability of success? Low.

  40. Rohan

    Scott Osmond
    #3047829, posted on June 20, 2019 at 11:17 pm
    What happens if you fall afoul of faeces-book’s thought police? Account locked? Several digital platforms have shown themselves as reliable as a third world state. Why would anyone put their business or money anywhere near such an unstable platform?

    Precisely. If they can’t be trusted with free speech, data breeches etc, they can’t be trusted with your money.

  41. Currencies are social contracts based on trust.
    Currencies are floated to smooth out the inevitable ups and downs of economies.
    Countries like Greece, Cyprus et al have suffered more and longer than they should because they gave up their currencies. They gave up the flexibility of a local, floating currency.

    A global currency, be it the Libra or Bitcoin or anything else, would open a pandora’s box. The unrest and upheaval would be epic.
    What you want is lots of currencies. The more localised these currencies the better.

    p.s. Liberty Rule #1 Never give control of social contracts to people with no social skills (like perfessers and bureaucrats).

  42. I sometimes wonder whether Sinc does this to stir the pot. Or does he really believe in this crap? Either way, it doesn’t make him look good.

  43. JohnJJJ

    A few years ago Uganda decided to abolish its currency. People were hoarding it in their houses. So the Government simple printed new notes which could be exchanged for the old notes – but only a limited amount. Everyone had two weeks to do this. It was pandemonium. It took quite a bit of work by the Government.
    Facebook could do it with a tiny algorithm. Hakuna Matata

  44. Empire 5:5

    The criticism of Doomlord is unfounded. The concept of currency competition is sound, I just can’t see FB successfully disrupting.

    What neither status quo camp dares mention is the domination of central bankers and the “winners” of their dominance, financiers, global corporations and state-enforced monopolies / cartels. (The losers are of course the rest of us: tax donkeys, debt-serfs, wage slaves, the restive crowd demanding more bread and circuses, etc.)

    The political moment when the “losers” connect their discontent and decline with central bankers is approaching. Perhaps the wires will arc in 2020, or maybe it will be 2025; but whatever the timing turns out to be, the all-powerful Cargo Cult of the central bankers will be swept away in a global political convulsion unlike any in memory.

    https://washingtonsblog.com/2019/06/dear-central-bankers-prepare-to-be-swept-away-in-the-next-wave-of-populism.html

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