Facing up to Libra

Libra is the name that Facebook, the global social network company, is calling its planned international digital currency.  What is Facebook’s purpose with this planned new currency?

According to Facebook, Libra is “a simple global currency and financial infrastructure that empowers billions of people”. In its statement, the company says that: “The world truly needs a reliable digital currency and infrastructure that together can deliver on the promise of “the internet of money.” Securing your financial assets on your mobile device should be simple and intuitive. Moving money around globally should be as easy and cost-effective as—and even more safe and secure than—sending a text message or sharing a photo, no matter where you live, what you do, or how much you earn. New product innovation and additional entrants to the ecosystem will enable the lowering of barriers to access and cost of capital for everyone and facilitate frictionless payments for more people.”

So the professed aim is to provide a currency for everybody using the internet to buy and sell goods and services to each other across the world, seamlessly and with near-zero transaction costs.  International banks and national currencies would be by-passed and all their costs and fees would be avoided.  Moreover, all transactions would be private and not viewable by the authorities or banks.  And supposedly over one and half billion people without bank accounts would be able to carry out transactions globally on their phones and laptops, not using cash.

Libra’s setup may make international transactions a little faster, but actually not nearly as fast as traditional payments processors. It looks like Libra can do about 1,000 transactions per second. A traditional payments processor like Visa can do about 3,000 transactions per second.

In principle, any digital currency ought to make payments for goods and services simpler and cheaper so that people do not need to carry wads of cash about (eg flying to country with a suitcase).  A digital currency seems the way to go in the 21st century – but it immediately poses issues.  Who controls this currency and what about people who want to hold cash and do not want to be forced to have a bank account or a Libra ‘wallet’ to buy things?

Facebook is not a pioneer here – already a digital payments service operates in China with WeChat and Alipay.  The issue here is the sheer size of Libra’s global grasp, with the billions of Facebook users and also the number of large multinationals that have pledged to back and take the new currency.

Libra is the latin word for pound in weight of silver or gold.  It was a universal measure of value in Roman times.  But Facebook’s Libra will be no such thing. It is not the future people’s currency controlled by the people.  It is a privatized currency for commercial gain for Facebook and its investment backers. It will be owned and controlled by a board of multi-national corporate investors who will pledge capital to get it going.

The US dollar currency is owned by the US government.  This is the same for other national currencies.  As such, there are regulations and laws on how national currencies are issued.  None of that will apply to Libra.  Holders of Libra will have to trust Facebook and the investing board, not any government, that nothing will go wrong with their money.

Facebook says it will be using blockchain technology, the decentralized digital settlement system that is behind such so-called cryptocurrencies, like bitcoin.  Cryptocurrencies aim to eliminate the need for financial intermediaries by offering direct peer-to-peer (P2P) online payments. Blockchain is a ‘ledger’ containing all transactions for every single unit of currency. It differs from existing (physical or digital) ledgers in that it is decentralized, i.e., there is no central authority verifying the validity of transactions. Instead, it employs verification based on cryptographic proof, where various members of the network verify “blocks” of transactions approximately every 10 minutes. The incentive for this is compensation in the form of newly “minted” cryptocurrency for the first member to provide the verification.

The purpose of money in a capitalist economy is first as a universal means of payment, then as a store of value and finally as a unit of account in balance sheets.  Cryptocurrencies are nowhere meeting these three criteria.  Their function as a unit of account and store of value are greatly impaired by their speculative nature. The value of bitcoin is very volatile because it is really only bought and sold by speculators and not used by the general public or corporations for transactions or savings.

Libra does not even have the ambition of bitcoin to be a universal decentralized digital currency for people.  It will be a private currency designed to extend Facebook’s control over the purchasing power of its 4bn users and make money.

Libra is really, in financial jargon, an exchange traded fund (ETF), where the value of Libra is based on a ‘basket’ of five national currencies (dollars, euros, yen, sterling and Swiss franc) according to a weighted ratio. Libra is not a true international digital currency in its own right but dependent on the value of these major national currencies.  It’s a private currency for Facebook users. It will be similar to the Special Drawing Rights (SDR) used by the IMF for the settlement of contributions and payments by national governments to the IMF. SDRs are also tied to the value of national currencies like the dollar.

And here is the rub.  If you buy some Libra and hold it in your Facebook Libra ‘wallet’ for future purchases, you won’t get any interest as you would if you held dollar deposits in a bank. But this Libra sitting in wallets around the world will be invested by the multi-national board in financial assets to make money for them.  In effect, all interest goes to the owners of this private currency – it’s a form of seignorage, previously only available to national governments and central banks for the use of their currencies.  As the white paper puts it: “Interest on the reserve assets will be used to cover the costs of the system, ensure low transaction fees, pay dividends to investors who provided capital to jump-start the ecosystem, and support further growth and adoption…..Users of Libra do not receive a return from the reserve.”

Indeed, the huge amounts of Libra that build up in Facebook users ‘wallets’ would become available for the board to speculate in financial assets globally, thus adding a new dimension to the possibility of credit bubbles and financial crashes that could come back to hit billions of Libra users.  The regulation of the banks and other financial institutions has not worked, as the global financial crash proved.  And the huge rise of private sector debt continues alongside the rise in public sector debt that mushroomed to bail out the global banking system. With a successful Libra, there would be another new layer of credit-fuelled debt created, with repercussions for billions of people and this time without any deposit insurance from governments!

What is worrying from global capital’s view is that if a large section of a country’s population were to use Libra instead of the sovereign currency, central banks could be left powerless or unable to stop the rapid conversion of currency into Libra during periods of financial distress.  Now you might say that’s good news for people, if not for capital.  People need to break away from the control of central banks, commercial banks and governments and ‘free up’ the currency and reduce the cost of our transactions.

But Libra will not deliver on this aim.  Libra’s claim that the currency will be designed and operated “as a public good” with “decentralised governance” is hard to tally with an operating structure comprised of unaccountable and highly-centralised global corporations such as Facebook, Uber and Paypal.  With cash use increasingly restricted, we’re already reliant on a handful of big banks to manage our money and make payments, while Visa and Mastercard have achieved almost total dominance of the card market. Visa now accounts for 98% of debit cards issued in the UK.  Libra is really a corporate attempt to assert even greater control over our money.

What we really want from a digital currency is transparency in its operations and privacy with your data – Facebook’s Libra is the mirror opposite of that.  What it does show is the bureaucratic, inefficient and autocratic control of our money by the state and its institutions is now under threat from mega-global tech companies using their control of social media.  This is ironic just when the supporters of Modern Monetary Theory are telling us that it is the state that controls and creates money so we can use the state to get employment and incomes for all.  Now it seems the state will be challenged by mega private monopolies for the control of our money.

What we really need is democratic control of financial institutions and the take over of mega-tech companies like Facebook, Google and Amazon.  Governments should then use technological innovation to develop an international digital currency controlled and run in the public interest.  But such a public digital currency would require common ownership and control of financial institutions and digital monopolies.  In the meantime it will be the US dollar or Libra… maybe.

12 Responses to “Facing up to Libra”

  1. Eddie O'Sullivan Says:

    Ideally, individuals should be entirely free to interact with others in a situation where the physical and social infrastructure is built and operated on a zero-profit basis, which could be by the state. The system used to make and receive payments should therefore be publicly-owned and controlled. Financial institutions providing advice should not be allowed to hold financial assets. Their income would be derived exclusively from performance-related fees, preferably paid after a transaction is completed. The other element of the reformed monetary system is that the ability of corporations to own and create intangible assets (from financial instruments to intellectual property rights) should be severely restricted or prohibited.All this can be achieved through legislation. Such an arrangement would remove the need for central banks since the flow of payments would pass exclusively through a state-owned system.

  2. rojaspedro1959 Says:

    We are afraid of our shadow.

    We are afraid of money because we do not have a monetary theory that tells us how we are robbed and how they manipulate us.

    The “pound” is as risky as Visa and MasterCard but just as dangerous. If the “pound” is very large, central banks can not drop it.

    What does it matter who is our master? What does it matter if the master is Facebook or Visa?

    We need an economic theory to free ourselves from our teachers … and it’s not Marxism, it’s not MMT.

  3. ucanbpolitical Says:

    There are only two forms of money in a capitalist system, either metallic or state backed. There is no third form of money such as digital money. This is a desperate Facebook trying to reinvent itself now that the growth of digital advertising has screeched to a halt.

  4. Don Sutherland Says:

    Reblogged this on Solidarity Dynamics and commented:
    Thanks again, Michael. Very useful.

  5. antonio Says:

    One more off-topic. The last one, I promise.
    On K-waves and revolutionary cycles I said in the blog on 06/22:

    “Yes, it will be in the depths of Kondratiev’s winter when a revolution can take place. But, the revolutions exist, but I do not have anything sure of the existence of the K-Waves ”
    All right. Minimal consultations (I am not a professional economist and I have little time for it) about the existing literature, this conclusion is reached: if the K-Waves exist and they are revolutionary cycles’ surprise! The K-Waves are the cycles constitutive revolutionaries of the capitalist mode of production.
    Some clues and ideas are:
    1.- The 2 start dates of the 2 cycles identified by Kondratiev in the 19th century are 1,879 and 1,848. These dates are the beginning of the main liberal revolutions of the late XVIII and XIX. That is to say, the French Revolution and the wave of European liberal revolutions (Germany, France, Austria, Italy, etc …) 2.- The French Revolution is ‘Freedom, equality and fraternity … and free enterprise’. French revolutionaries enact several laws decreeing the end of the privileges of feudal lords for the creation of companies, freedom of creation of existing businesses and liberalization of the entire population, although, finally, only bourgeois would take advantage of that freedom. Without legal capacity and policy of incorporation of companies, there are no private companies. Private equal to different from individual and with more than 1 partner, with more than 1 owner, expanding the individual companies of Feudalism. Without private companies there is no capitalism. And that is the force of capitalism: the expansion of ownership of the means of production. That is the same force of socialism, that in which … we are almost. I do not know the exact data, but in those dates after 1789 and 1849 there must have been an explosion in the constitution of abominable, limited societies and other private mercantile societies in European countries. A documented and real explosion of societies that existed in England after the English Glorious (up to 1688).
    2.- The start date (1.814) of the phase of economic decline of the 1st cycle is the start date of the European Restoration (Santa Alianza included).
    3.- Industrial Revolutions. Only in a very synthetic way: The 2 industrial revolutions of the 19th century come AFTER the political revolutions and their corresponding extensions of the economic and industrial rights (relations of production) and extensions in the ownership of productive capital (the mercantile societies). I insist, without private companies (not feudal) there is no capitalism, without capitalism in competition (not the current capitalism) there are no technological innovations, etc …
    4.- The Impulse as a current scientific paradigm explaining economic fluctuations. The Impulse (with advance and retreat) has been established by Ragnar Frisch (before) and today is the dominant paradigm. In politics he has defined it, brief but forceful, Rosa Luxemburg. The political schoks are of a higher social level and level (they integrate and affect the other areas) to the schoks of supply and demand as creators of impulses. An economic cycle, a revolutionary cycle is an impulse. The impulses cause cycles: a phase of progress, of growth (if it is a social impulse we are talking about growth of property and rights over wealth towards society as a whole) and a phase of regression. Withdrawal whose actors are the economic agents harmed by the advance phase. Recoil caused by the defenders of the previous status quo: Kings and their feudal lords in the nineteenth century and capitalist entrepreneurs in the XX and XXI.
    5.- Some interesting literature (which I have not read yet): 1.- Ernesto Screpanti ” Long economic cycles and recurrent proletarian insurrections ” 2.- B. Silver Class struggle and Kondratieff waves, 1870 to the present
    6.- Provoking (just a little and kindly) the action of Mr. Roberts: the theory of the revolutionary cycle, in my opinion, is superior (but does not rule it out, but includes and integrates it) to “his” theory and evidence of the Law of the Decreasing Profit Rate as explanatory theory of the capitalist model. It not only explains the capitalist mode but also explains ALL modes of production.
    Sincerely

  6. rogeriomaestri Says:

    Who benefits from the crime?
    Before beginning to analyze any of these modern inventions it is necessary to ask who will benefit from the crime. A naive would ask, why Crime? But just where the idea of this new invention came from is the answer to the mega capital, which is always thinking of getting bigger and more powerful. As for them to get bigger and more powerful, someone has to lose, and in that case it will be us! So let’s calculate the losses.
    First: The source of income of normal people is the remuneration of work. Nothing new. But will these people be willing to receive a salary that could lose the value by 30% to 40% in a few daysAnyone who has lived, like me, a hyperinflationary economy knows what happens to money that can be worth 5% to 10% in a single day. Those who earn very low income, leave in the race for the first supermarket to buy at the price offered basic necessities. Here we have the first losers, because they are going to buy not what they need, but what they have to buy and that they can stock for a few weeks, who does not, or loses or wins according to the wishes of the coin managers.
    Second: Those who earn a little more, and do not need to go directly to the market to make subsistence purchases, will have to go to the banking sector to put in any income that protects them from market oscillations. They will be the second losers, because the banking sector will be left with the rates of administration of the salary of each one.
    Third: Small traders or manufacturers will have to have a “financial management sector” (the son or the wife), which should be constantly on alert to check the value of the floating currency.
    Fourth: Small manufacturers, when they sell to larger ones, will have guaranteed fixed prices, which must be maintained through the acquisition of derivatives in order to maintain delivery. Again they will have to enter the market of this type of derivative: Bank wins, labor loses.
    It could continue with the fifth, sixth, seventh, ….. but always with the same result, who works lose who has the bank wins.
    Since I am only making a comment and the article is not mine I will be around.
    But for anyone who is a Marxist, he must always have a vision of class struggle first, then try to see where the big capital robbers are, for they are always present.

  7. rogeriomaestri Says:

    Who benefits from the crime?
    .
    Before beginning to analyze any of these modern inventions it is necessary to ask who will benefit from the crime. A naive would ask, why Crime? But just where the idea of this new invention came from is the answer to the mega capital, which is always thinking of getting bigger and more powerful. As for them to get bigger and more powerful, someone has to lose, and in that case it will be us! So let’s calculate the losses.
    .
    First: The source of income of normal people is the remuneration of work. Nothing new. But will these people be willing to receive a salary that could lose the value by 30% to 40% in a few daysAnyone who has lived, like me, a hyperinflationary economy knows what happens to money that can be worth 5% to 10% in a single day. Those who earn very low income, leave in the race for the first supermarket to buy at the price offered basic necessities. Here we have the first losers, because they are going to buy not what they need, but what they have to buy and that they can stock for a few weeks, who does not, or loses or wins according to the wishes of the coin managers.
    .
    Second: Those who earn a little more, and do not need to go directly to the market to make subsistence purchases, will have to go to the banking sector to put in any income that protects them from market oscillations. They will be the second losers, because the banking sector will be left with the rates of administration of the salary of each one.
    .
    Third: Small traders or manufacturers will have to have a “financial management sector” (the son or the wife), which should be constantly on alert to check the value of the floating currency.
    .
    Fourth: Small manufacturers, when they sell to larger ones, will have guaranteed fixed prices, which must be maintained through the acquisition of derivatives in order to maintain delivery. Again they will have to enter the market of this type of derivative: Bank wins, labor loses.
    .
    It could continue with the fifth, sixth, seventh, ….. but always with the same result, who works lose who has the bank wins.
    .
    Since I am only making a comment and the article is not mine I will be around.
    .
    But for anyone who is a Marxist, he must always have a vision of class struggle first, then try to see where the big capital robbers are, for they are always present.
    .
    Greetings from someone in the third world in crisis.

  8. Roberto Says:

    >>”This is ironic just when the supporters of Modern Monetary Theory are telling us that it is the state that controls and creates money so we can use the state to get employment and incomes for all. Now it seems the state will be challenged by mega private monopolies for the control of our money.”

    From the point of view of MMT, taxes, are what creates demand for the official currency. None of these crypto-currencies are a thread for the state. Taxes are pay for any transaction inside the economy, and taxes can only be pay in the official currency, so, demand for it is granted.

    Why somebody in, let’s say, Japan, should use ‘Libra’ (or dollars) instead of Yens?

    In my opinion, MMT show clearly that, at the end of the day, what support a currency is the state’s monopoly of force inside a territory.

    That means, again in my opinion, that the economy is inseparable of politics, and not politics last minute detail like neo-liberals try to tell us. I though Marxists would agree with that.

  9. Braiden C Says:

    Any good sources on the history and contemporary role of SDR’s? Maybe a future post on them?

  10. Mark Szlazak Says:

    Good video on underlying technology and where it is heading.

  11. ZC Says:

    Good article.

    One of the other political economy blogs I follow, critiqueofcrisistheory, holds that only gold is money. Could you do an article on the difference between this theory and your own or just on money in general.

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