The day Facebook became a bank
Today the world learned that Facebook wants to become a bank.
Facebook didn’t actually say as much.
But I suspect that’s the case.
Overnight, Facebook announced it will create its own cryptocurrency called Libra. And this new money will live in a digital wallet called Calibra.
Will Facebook liberate us from the tyranny of the banking system?
Or is this just an evil plot to suck us further into the social media digital hole?
Let’s break it down.
Libra: New tech backed by old money
Libra will be using blockchain technology, just as other cryptocurrencies do.
The difference is that Libra will be backed by basket fiat currencies.
Although it won’t just be tied to the US dollar. Facebook hasn’t stated exactly how the currency will determine its value. But it’s highly likely that it will draw its value from a weighted basket of ‘stable currencies’ such as the US dollar, the euro, the yen and the pound sterling, alongside deposits and a couple of other banking products…
Ah, yes. There’s nothing like proposing a new form of money and then being completely vague about how its worth will be decided.
But I digress…
The first stage of Libra will be about helping people send money to each other in real time — no matter which currency they’re using or where they are in the world.
At the same time, Libra will be encouraging e-retailers to sign up to the platform.
The ultimate goal, however, is turning Libra into a quasi-bank…and lending money to people.
Facebook can’t share this
Of course, before we even get to the stage of using Libra, we need to trust it.
And given that Facebook has completely eroded any sense of trust in the company (sharing customer data to third parties without their permission will do that), building trust is paramount.
That’s why Facebook isn’t launching Libra on its own.
Calibra chief David Marcus has been quick to reassure the world that Libra can be trusted, telling The Australian Financial Review this morning: ‘Facebook will not have access to financial data that is on Calibra.’
‘From the very early conversations with Mark [Zuckerberg], it was very clear to us that for a network with this potential importance in the future, we wouldn’t want to be in control of the network or the currency, nor should any other company. I believe that if it was directly controlled by Facebook, it wouldn’t stand a chance.
‘It needs to be owned and controlled as a public good, not by one entity but rather by a decentralised group of global organisations that will look after the ecosystem and ensure it is a vibrant one over a long period of time.’
Perhaps in a bid to make the entire project appear more trustworthy, there’s an ‘association’ behind Libra…with some 28 founding partners.
A number of big names have jumped on board, including Vodafone, Visa, PayPal, Ribbit Capital and eBay, to name just a few.
Obviously, those 28 partners will be keen to offer existing customers the option of paying with Libra early on. Plus, rumour has it there’ll be a whole bunch of incentives thrown at customers to help Libra take off.
Then, Libra becomes another credit machine by lending money out. Which, of course, means a whole new bunch of regulatory hurdles to jump over.
To lend money, central banks across the world will need to authorise its use. That would be easier if the global Financial Stability Board (FSB) give it the thumbs-up.
Once those two things happen, individual regulators across the world will need to agree to it. And then create a bunch of rules for its use.
In other words, a lot needs to happen before we can start taking out Libra loans with our Libra money…but I have no doubt it will happen.
Is this good or bad?
They’re the bones of the Libra plan.
Given I’m a doom-and-gloom gold bug, surely the first thing I’m going to do is demonise it, right?
Well, not so.
As I was reading about it this morning, I found myself thinking of lots of good things in relation to this.
For starters, this could make international payments to non-retailers much easier.
Sending money to international bank accounts is a pain in the backside. Not to mention the ridiculously high fees that banks charge.
I have no doubt this payment system will reduce the foreign exchange costs we currently pay.
Australian banks charge absurdly high clip rates on international transactions, which is disgraceful when the majority of these transactions are digital. They get away with it because it’s not a daily cost we’re lumped with, meaning we’re more likely to ignore the fees.
To boot, banks have been slow to act on digital innovation.
Australian banks are particularly bad. The UK has had real-time bank-to-bank transactions for years. Australia may see that technology rolled out this year.
In one move, Facebook, Libra and all their associated entities are taking on the most archaic and controlled industry in the world — run by a select few.
Private, non-bank lenders taking on our local banking cartel? Where do I sign?
There is the bad…
Trapped in the digital system
It’s about here my instinctive scepticism kicks in.
The end game for Libra doesn’t stop at creating a more user-friendly cryptocurrency for online shopping. This isn’t a feel-good bedtime story about taking on the big banks.
It’s about money. Lending money and making money. Just like the banks do.
And why wouldn’t Libra want some of that?
The creation of debt has made banks and their CEOs around the world extremely wealthy. Lending money to people is big business.
And Facebook becoming a lender will no doubt bring large profits to the founders.
More to the point, there are questions about how the fiat money backing the new cryptocurrency will be held. A Libra whitepaper says it will held by ‘a network of custodians’. And early critics of Libra have said they need to be ‘reputable’.
Well, here’s the thing with that.
Today’s ‘reputable custodian’ may very well be tomorrow’s banking disaster.
Reputable banks fall with alarming regularity.
Commercial investment banks Bear Sterns and Lehman Brothers were bought out for cents on the dollar in 2008.
Retail banks (the sort that hold customer deposits) like Northern Rock also collapsed during the GFC.
Closer to home, Australia saw the Pyramid Building Society collapse in 1990.
So any regulatory gobbledegook about ‘reputable custodians’ should be taken with a grain of salt.
Banks fail. And it’s people like you and me who find out last.
But my final doubt about Libra is less about Libra and more about the banking system overall.
It’s the further entrapment into the digital financial system.
It’s another incentive to reduce the use of cash.
It’s another way to lure what money we do have into digitally controlled assets.
It’s another way to have every cent you spend tracked by a third party.
It’s another financial system that requires trust to operate.
And finally, it further distorts our views of and connection to what ‘real’ money looks like.
Now, I haven’t read the Libra whitepaper that I mentioned earlier. But if that’s your jam, head over here to read it.
I’m not a crypto expert. So I’m not overly interested in the inner workings, security or potential value of the cryptocurrency.
It’s the further entrapment into a digital payment system that concerns me.
Until next time,