Friday, June 28, 2019

Will it Be Facebook Vs. The Central Banks?

The news that Facebook will launch its own version of a coin called Libra has prompted a lot of press coverage and created a lot of "buzz" in the crypto currency community. Perhaps there are two levels to cover related to this news. 


On one level, you have all the technophiles trying assess exactly what the technology behind this new project is and will end up being over time. Also, you wonder how this business plan will turn out given the credibility hurdles Facebook is challenged with at this time. So plenty of people will be watching to see how those things turn out.


Here, our focus is more on a different level. We might call it the macro level. The big question for us is: Will this project actually grow big enough in user adoption to actually impact the existing global monetary system that is currently heavily based on the US dollar? On this level it's not just curious techies and the typical Facebook users who will be watching this closely. On this level governments and central banks will be involved. 


With that focus in mind, below are some excerpts from an interesting article that appeared recently in Hackernoon.com. This article does take a dive into the macro picture and offers up some interesting observations. Following the excerpts below are some added comments.

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"Facebook finally took the wraps off their long-awaited digital currency platform, called Libra."

. . . .

"Nearly every luminary in the crypto community chimed in right after the announcement. The initial reactions were cautiously optimistic."

. . . .

"But now that the knee-jerk reactions are in, more detailed and nuanced analysis is starting to appear. At first, I thought I might stay above the fray. With everyone commenting, what else was there to say? There was plenty of press out there. I was too late.


But the more I dug into the write-ups and hot-takes, the more I realized how many folks were missing the real threats and possibilities of this big announcement. People had the tech details down but they missed the grand picture."

. . . .

"A few years ago the idea that a major corporation would release a cryptocurrency was laughable, much less a consortium of gigantic multinationals releasing one, including stalwarts of the old world financial system like Visa and MasterCard.

But it’s bigger than that. It’s a turning point in monetary history.

It’s an ELE, an Extinction Level Event for the old financial world order. When historians look back they may just point to this moment as the catalyst. But what does the future look like? How does it all play out?"
. . . .

"Come with me as I show you a brave new world of digital currencies and an all-out war between the titans of industry and the massive nation-states of the modern world."


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Expert reaction to this article

One of the experts I hear from that has worked directly in this arena with both central banks and major private corportations offered me these comments after reading the article posted above:

"They don't know what they're talking about when they talk of Extinction Level Events.

The real work, moves awfully slower than this..... I suppose they look at Kodak, the British Empire, Roman Empire, etc, and all the things that fail slowly, until they fail quickly... 

The thing to look for, is if BASEL agrees to recognise Libra as a reserve asset. If that happens, then it's like China being promoted to SDR...  it won't really make a big impact.

Or like American Treasury Bills being downgraded from AAA to AA+ or so.  Remember the fuss they made about EU bond rates going negative, or the Y2K bug, or when the UK's intervention in Suez got vetoed... Nothing really, but a milestone..."

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My added comments: This article is looking at this launch by Facebook from the point of view of those who believe that cryptocurrencies should challenge the status quo system run by the central banks issuing state sponsored fiat currencies. The article suggests that Project Libra really does have the potential to disrupt the present monetary system and to challenge the institutions that preside over the current system. However, the author does not view Libra as a victory for those looking for alternatives to the present state sponsored system. I recommend reading the full article to see why the author believes this to be true.

The article presents Project Libra as a future war zone between this private sector funded project and the governments and central banks that run things now. We know that there have been all kinds of similar projects in the last few years with this same ambition, but so far none have gained enough public adoption to become serious threats to the existing system. So what might make Project Libra any different? The obvious answer is the enormous user base Facebook starts out with and then also the huge capital investment that is coming in behind this project. That alone is reason enough to view this as potentially different and why we need to cover it here over time.

So, will Project Libra emerge as a genuine threat to the existing system and the institutions that run it? Our view here is that it is too early to tell. Project Libra is not even projected to go live until 2020. The release of the white paper instantly triggered all kinds of reaction from various nations and central banks, mostly talking about the need to regulate this and for Facebook to explain its intentions for this project before various governmental bodiesThe expert I quoted above thinks this project will be much more complicated than Facebook would realize at this stage of its progression.


A lot can happen by the time this project attempts to go live assuming the technology to make it work is actually in place and has been real world tested. We'll assume that as a given and then list these issues to keep an eye to get a feel for how much impact this is going to have.

- How do governments react? Do they signal the intent to massively regulate this and put all kinds of hoops to jump through in place?

- How do banks react? Do they lobby for protection from governments? Do they "switch sides" and try to become members of the Libra Foundation? (If you can't beat em, join em?). Right now, no banks are on board with Libra as far as we know.

- How do central banks react? Do they push for tight regulation? Do they speed up their own efforts to try and offer central bank digital currencies?  (right now there is no sense of urgency for CBDC's)

I suspect the answers to these kinds of questions will depend a lot on whether governments and central banks view the Libra as a serious threat to their own power structure or not. If they don't, perhaps they just ignore it as they have mostly done with similar less well supported projects that would attempt to create monetary alternatives to state sponsored money. If they do view it as a threat, watch for some fireworks. If there is one thing we know from watching these kinds of issues over the years, it is that the US takes attacks on the US dollar very seriously if they view them as legitimate threats (Is Libra a potential attack on the US dollar?). Russia and China would likely do the same in their spheres of influence. How India may react is unknown at this time.

On the other hand, will some of these institutions see this as an opportunity to partner up with Project Libra? Will the Libra Foundation attempt to avoid confrontation and offer incentives to governments and central banks to join with them? What incentives you ask? Well, perhaps Project Libra will be in a position to offer all kinds of interesting user data and information that governments and central banks might love to get their hands on? So perhaps instead of fighting, they reach some kind of mutual agreement viewed as beneficial to both parties? 

One thing we know for sure. The Libra will face the same challenge as anything that wants to be viewed as money. It will have to gain the trust of a broad base of the population to become a significant factor at the macro level. If Facebook gets 50 million people globally to adopt the Libra, that may be enough for it to be a successful business venture. However, it's not near enough adoption to significantly impact the present monetary system. However, if they get 500 million people to adopt it, then we have something to talk about.

As with all these proposed money projects, time will give us the answers and we will keep an eye on it to see what actually happens.


Added notes: The Bank for International Settlements releases it's new report on "Big Tech and Finance" on 6-23-19. Readers who want a really detailed dive into how the BIS views things like Facebook Libra may want to take a look at the detailed report. Here is an extract from the intro to the paper:

"Technology firms such as Alibaba, Amazon, Facebook, Google and Tencent have grown rapidly over the last two decades. The business model of these "big techs" rests on enabling direct interactions among a large number of users. An essential by-product of their business is the large stock of user data which are utilised as input to offer a range of services that exploit natural network effects, generating further user activity. Increased user activity then completes the circle, as it generates yet more data."

"Building on the advantages of the reinforcing nature of the data-network-activities loop, some big techs have ventured into financial services, including payments, money management, insurance and lending. As yet, financial services are only a small part of their business globally. But given their size and customer reach, big techs' entry into finance has the potential to spark rapid change in the industry."
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One expert we hear from now and then sent this Letter to the Editor to The Washington Post in regards to the Facebook and Libra Project. He suggested they should model the currency basket for the Libra after the SDR basket used by the IMF.

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Additional added note: Former Fed nominee Stephen Moore is now plunging into cryptocurrencies per this article in Fox Business. Here is an extract from that article:

"Moore has joined a group of entrepreneurs who are starting what they describe as a new type of central bank they believe will stabilize cryptocurrencies like bitcoin and its myriad of imitators, according to an investor pitch deck obtained by FOX Business and interviews with people associated with the effort."

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Additional article links related to this topic sent to me by readers:

Rabaobank article (requires registration to read)  - (review of this artice in Zero Hedge)

Wall Street Journal  (requires subscription to read)

2 comments:

  1. At WSJ review book on the meaning of money, its relation to sovereignty:

    ‘Digital Cash’ Review: Bitcoin and Beyond
    The pioneers of digital cash were guided by philosophical and social commitments on authority, sovereignty and value.

    By Philip Delves Broughton
    June 23, 2019 3:16 pm ET

    The philosopher Walter Benjamin endured Germany’s economy after World War I and observed that when financial disaster strikes and inflation runs rampant, “all close relationships are lit up by an almost intolerable, piercing clarity in which they are scarcely able to survive. . . . Money [as the means of exchange into goods and services] stands ruinously at the center of every vital interest.”

    ReplyDelete
  2. Thanks for the comment. That appears to be the start of the WSJ article I linked to in the article. More than one reader has told me that is a good article on this topic.

    ReplyDelete