Let Facebook's New Currency Come to Market
San Francisco / June 23, 2019
I'm excited by Facebook's new currency, Libra (link). Regulators are skeptical. The Bank of International Settlements just issued a warning about Libra (link). I encourage regulators to let Facebook bring Libra to market.
Regulators should think about the legitimate and distinctive use cases of Libra before they constrain the project. Remember how people in Venezuela flocked to Bitcoin (link)? That use case will be more pronounced with Libra. Other cryptocurrencies (e.g., Bitcoin, Ether) are not backed by real reserves. The value of those cryptocurrencies is very unstable. Libra is different because it will be backed 1-for-1 by real reserves. When the Libra organization wants to issue $100 of new Libra coin, that organization must purchase $100 of assets and transfer those assets to the reserve. The Libra organization will purchase a mixture of US bonds, Euros, and other stable currency. Libra's price will be more predictable as a result. Libra's price will probably track close to the US dollar.
I predict it will be difficult for governments to impose the types of capital controls on Libra that they now impose on the US dollar. When governments in economically unstable markets want more US dollars to manage their financial ledger, those governments often seize dollar-denominated assets. For example, they will stop consumers from withdrawing US dollars from local bank accounts, even if the consumer deposited US dollars into the account. Facebook can structure Libra to make it far more difficult for governments to impose this type of capital control.
Regulators around the world have important questions about Libra. Mark Zuckerberg wants to replicate Tencent's WeChat Pay strategy. The ambition is mind boggling. I don't think regulators should block plans and projects if they will increase the market power of a dominant player. That cannot be the test. Regulators should explore the practical use cases for consumers and ask if Libra could actually improve the lives of normal people around the world. I hope David Marcus gets the opportunity before the US Senate (link) to share examples of how Libra could help people in financially unstable environments. These use cases must be part of the regulator's cost-benefit analysis.