Facebook has announced that it aims to launch a digital currency, Libra, which will be available to users worldwide. Given Facebook’s place in the lives of more than 2 billion people, that ambition must be taken seriously. While Libra makes sense — it could give millions of people access to e-commerce and reduce the price of money transfers — it also poses real concerns and dangers. National and global regulators must study this proposal closely and, if they approve it, ensure that Facebook transforms its business practices to protect the privacy of its users and national security. The company’s record inspires little confidence on either count.
Libra, a “global, digitally native, reserve-backed cryptocurrency built on the foundation of blockchain technology,” is expected to go live within a year. The blockchain ledger, which records transactions and vouchsafes the system, will be operated by a network of validator nodes, and the entire structure will be overseen by Founding Members of the Libra Association, each of which will have made an initial investment of at least $10 million.
Significantly, Libra will be backed by a basket of real-world currencies and assets, which is supposed to make its value more stable and will distinguish it from virtually all other cryptocurrencies, whose value is purely speculative. Facebook has said that it will make the currency even more stable by investing in those currencies via a reserve fund and profits from those investments will be returned to investors in the Libra Foundation.
Libra would liberate millions of people who do not have access to credit or bank accounts. The program’s partners — which include Visa, Uber, Paypal and eBay, among others — could use the network to facilitate online commerce, reducing transaction costs as well. A currency that is liberated from governments would also help those impoverished by incompetent policymakers.
The response to Libra has been restrained. There are three primary objections. The first is that a financial service of this size demands the utmost security and protection of its users’ privacy. Facebook’s record in this area is appalling. The company has been rocked by one scandal after another over users’ data. Japan’s Personal Information Protection Commission last year requested that Facebook do more to protect users’ privacy. Equally concerning is whether Facebook will use that data to maximize its own revenues. The optics forced Facebook head Mark Zuckerberg to announce earlier this year a “privacy focused vision” for the company. The jury is still out on the meaning of that commitment.
The second problem is the other side of that coin, namely the government need to ensure that financial transactions are transparent. Governments want to track money for legitimate reasons: to ensure that criminals or other bad actors are denied funds; to be able to tax transactions; to be able to control a domestic economy. Libra could undercut each of those objectives. French Finance Minister Bruno Le Maire explained the opposition that Libra, or any similar project, would encounter when he noted that only governments can issue sovereign currencies. Facebook must ensure that Libra won’t hurt consumers or be used for illegal activities, he said, adding that “We will demand guarantees that such transactions cannot be diverted, for example for financing terrorism.”
A third concern is the power that such a project would give Facebook. The social media platform is already a behemoth and while Libra will be a collaborative effort, the overwhelming majority of the funding will come from Facebook. Most observers believe that Zuckerberg wants to emulate WeChat, the Chinese platform that combines networking, messaging and payment in a single app, and has transformed the way the Chinese do business and consume. Observers and regulators are already concerned that Facebook is already too big and there are discussions underway to more closely regulate and perhaps even break it up.
Japan should be concerned about Libra. While it is estimated that there are about 22.6 million Facebook users in Japan — a number that is expected to reach 26.9 million in 2023 — only 5.5 percent of Japanese are active users. That will likely change if Libra becomes available. And, of course, Japan has its interests in monitoring financial transactions — ensuring that sanctions against North Korea are honored is especially important — and in collecting tax revenue given mounting fiscal burdens created by an aging and shrinking population.
The Group of 20 meeting of finance ministers this month in Fukuoka addressed some of these concerns. They declared that they would “remain vigilant” about cryptocurrency risks and tasked the Financial Stability Board and other international institutions to monitor those risks. The G20 leaders need to underscore the importance of those efforts as the digital economy assumes still greater importance.